[1983] 54 COMP. CAS. 723 (BOM.)

HIGH COURT OF BOMBAY

Unit Trust of India

v.

Om Prakash Berlia

M.N. CHANDURKAR AND B.C. GADGIL JJ.

APPEAL NOS. 390-393 OF 1982 IN SUIT NO. 1108 OF 1981

MAY 3, 1983

F.S. Narinan, D.R. Dhanuka, R.A. Dada, R.F. Narinan, T.R. Andhyarujina and G.E. Vahanuati for the Appellant.

K.S. Cooper, S.D. Parekh, Ashok Mody, V.C. Kotwal, D.M. Shah, Monica Pujara, T.R. Andhyarujina, G.E. Vahanuati, F.S. Narainan, R.A. Dada and D.R. Dhanuka for the Respondent.

JUDGMENT

Gadgil J. —These four appeals arise out of a decree in Suit No. 1108 of 1981 of the file of the original side of this court wherein the learned single judge has passed a decree directing that the register of members of defendant No. 8-company, that is, the National Rayon Corporation Limited, be rectified by deleting therefrom the names of defendants Nos. 1 to 7 as holders of shares as mentioned below:

Names of the Institution	Equity shares held	Distinctive numbers
	on 5-6-1979
Unit Trust of India Defendant	31,250	500365 to 531614
No. 1)
General Insurance Corporation of India (Defendant No. 2)	1,250	537865 to 539114
Oriental Fire and General	1,250	541615 to 542864
Insurance Co. Ltd. (Defendant No. 3)
United India Insurance Co. Ltd.	1,250	542865 to 544114
(Defendant No 4)
National Insurance Co. Ltd.	1,250	539115 to 540364
(Defendant No. 5)
New India Assurance Company	1,250	540365 to 541614
Limited (Defendant No. 6)
Industrial Credit and Investment Corporation of India	6,250	531615 to 537864
(Defendant No. 7)

Four different appeals have been filed by the defendants. Appeal No. 390 of 1982 is filed by original defendant No. 1, namely, The Unit Trust of India (hereinafter referred to as "UTI"). Appeal No. 391 of 1982 is by defendant No. 7, i.e., The Industrial Credit and Investment Corporation of India (hereinafter referred to as "ICICI"). Appeal No. 392 of 1982 is filed by defendants Nos. 2 to 6, namely, The General Insurance Corporation of India (hereinafter referred to as "GIC"). The Oriental Fire and General Insurance Co. Ltd. (hereinafter referred to as "OFGI"), The United India Insurance Co. Ltd. (hereinafter referred to as "UI"). The National Insurance Co. Ltd. (hereinafter referred to as "NIC") and The New India Assurance Co. Ltd. (hereinafter referred to as "NIA"). Appeal No. 393 of 1982 is filed by defendant No. 8, i.e., The National Rayon Corporation Ltd. (hereinafter referred to as "NRC"). Whenever defendants Nos. 1 to 7 are to be referred to collectively, they would be referred to as "financial institutions". As the appellant in one appeal is the respondent in the other, it would also be convenient to refer to the parties not as appellants and respondents but as plaintiffs and defendants.

As observed in the judgment of the learned single judge, the plaint is verbose and argumentative. It runs into 270 pages including the annexures of about 1000 pages. The written statements are also equally lengthy. There are separate written statements of defendants Nos. 1,7 and 8. In addition defendants Nos. 2 to 6 have also filed another written statement. In substance, the plaintiff's case is that the allotment of shares as mentioned in paragraph 1 above is illegal. Defendants Nos. 1 to 7 have advanced the following loans to defendant No. 8:

	Rs.
Defendant No. 1	250 lakhs
Defendant No. 2	10 lakhs
Defendant No. 3	10 lakhs
Defendant No. 4	10 lakhs
Defendant No. 5	10 lakhs
Defendant No. 6	10 lakhs
Defendant No. 7	50 lakhs

These loans were given on the basis that there would be debentures in respect thereof. A debenture trust deed was executed by the company in favour of the trustee, namely, The Bank of Baroda. 20 per cent, of the debenture loan of each of these defendants was, at the option of the respective financial institutions, convertible into equity shares. Defendants Nos. 1 to 7 were to pay Rs. 160 per share including the premium amount of Rs. 60. It is in this way that the NCR as per the said option has issued shares in favour of the said financial institutions. According to the plaintiffs, the said transactions were not transactions of debentures with an option clause of converting part of the debentures into shares. The plaintiffs contend that the transactions were really that of taking a loan of 80 per cent as loan amount and the issue of shares for the remaining 20 per cent, of the amount. When the plaintiffs purchased shares in the open market, defendant No. 8 refused to register and transfer the shares in the name of the plaintiffs. This was done with a view to deprive or prevent the plaintiffs from acquiring voting strength. The plaintiffs further contend that side by side the financial institutions increased their voting strength on the basis of the impugned conversion of debentures and thus acquired additional voting power to the extent of 51,000 shares. This litigation pertains to 43,750 shares while there is another Suit No. 1110 of 1981 regarding 7,250 shares which is stilt pending. This later suit is about the issue of shares on the basis of the loan of Rs. 58 lakhs by ICICI. The learned single judge negatived practically all the contentions of the plaintiffs. However, the suit was decreed only on one ground. The agreement between the financial institutions and the company was that the financial institutions would give one month's notice while exercising the option of converting 20 per cent, of the debentures into shares. The NRC waived this period of notice and allotted the shares. This was done within a few days from the date of notice. The learned single judge came to the conclusion that this waiver of notice on the part of defendant No. 8 was mala fide and as such the consequent allotment of shares in favour of the financial institutions was bad. It is in this way that the suit was decreed and the defendants have filed these appeals. The plaintiffs have filed their cross-objections challenging the findings of the learned single judge that are recorded against them.

During the course of the hearing, some statements have been made by Mr. Cooper giving up certain points. In addition some other points were not pressed before the learned single judge. Hence, we do not propose to give the detailed and verbose averments in the plaint and consequent detailed denials of these allegations. The appeal memos and the cross-objections are equally lengthy and contain many grounds. In this background we propose to follow the procedure of referring only to those relevant points that are argued before us and at that time, if necessary, we would give the concerned details of the pleadings.

Both the plaintiffs had no concern with NRC at any time before April, 1977. It is in this month that plaintiff No. 1 became a holder of 2,736 shares of NRC. It seems that before April,] 977, the affairs of NRC were being conducted in a manner prejudicial to the interest of the company and also of the members. Hence, on 11th July, 1977, the company law board passed an order (Exhibit B, Part II-A, page 1202 of the paper-book) under s. 408(1) of the Companies Act, appointing eight directors for a period of three years. Shri R.K. Talwar was named as the chairman. However, as he declined to accept the appointment, Shri B.R. Patel was appoined as the chairman in his place on 5th August, 1977.

It seems that the company was in financial difficulties and was in need of loans. There is no dispute that loans to the extent of Rs. 408 lakhs were advanced by the financial institutions. In this case, we are concerned with the loan of Rs. 350 lakhs. The contention of the plaintiffs is that the true and real nature of the transaction was of a grant of loan of 80 per cent, of Rs. 350 lakhs and the allotment of shares for the remaining 20 per cent, of the loan amount. It is contended that such allotment is bad. As against this the defendants' case is that the transaction is that of debentures with an option to convert 20 per cent, of the debentures into equity shares and that this is permissible under s. 81(3) without any prior resolution of the company. It would be convenient to reproduce s. 81. It reads as follows:

"81. Further issue oj capital. —(1) Where at any time after the expiry of two years from the formation of a company or at any time after the expiry of one year from the allotment of shares in that company made for the first time after its formation, whichever is earlier, it is proposed to increase the subscribed capital of the company by allotment of further shares, then,

(a) such further shares shall be offered to the persons who, at the date of the offer, are holders of the equity shares of the company, in proportion, as nearly as circumstances admit, to the capital paid up on those shares at that date ;

(b) the offer aforesaid shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days from the date of the offer within which the offer, if not accepted, will be deemed to have been declined;

(c) unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisiable by the person concerned to renounce the shares offered to him or any of them in favour of any other person ; and the notice referred to in clause (b) shall contain a statement of this right;

(d) after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the board of directors may dispose of them in such manner as they think most beneficial to the company.

Explanation. —In this sub-section, 'equity share capital' and 'equity shares' have the same meaning as in section 85.

(1A) Notwithstanding anything contained in sub-section (1), the further shares aforesaid may be offered to any persons whether or not those persons include the persons referred to in clause (a) of sub-section (1) in any manner whatsoever—

(a) if a special resolution to that effect is passed by the company in general meeting, or

(b) where no such special resolution is passed, if the votes cast (whether on a show of hands, or on a poll, as the case may be) in favour of the proposal contained in the resolution moved in that general meeting (including the casting vote, if any, of the chairman) by members who, being entitled so to do, vote in person, or where proxies are allowed, by proxy, exceed the votes, if any, cast against the proposal by members so entitled and voting and the Central Government is satisfied, on an application made by the board of directors in this behalf, that the proposal is most beneficial to the company.

(2) Nothing in clause (c) of sub-section (1) shall be deemed—

(a) to extend the time within which the offer should be accepted, or

(b) to authorise any person to exercise the right of renunciation for a second time, on the ground that the person in whose favour the renunciation was first made has declined to take the shares comprised in the renunciation.

(3) Nothing in this section shall apply—

(a) to a private company; or

(b) to the increase of the subscribed capital of a public company caused by the exercise of an option attached to debentures issued or loans raised by the company—

(i) to convert such debentures or loans into shares in the company, or

(ii) to subscribe for shares in the company :

Provided that the terms of issue of such debentures or the terms of such loans include a term providing for such option and such term—

(a) either has been approved by the Central Government before the issue of debentures or the raising of the loans, or is in conformity with the rules, if any, made by that Government in this behalf; and

(b) in the case of debentures or loans other than debentures issued to, or loans obtained from, the Government or any institution specified by the Central Government in this behalf, has also been approved by a special resolution passed by the company in general meeting before the issue of the debentures or the raising of the loans...."

Sub-section (1) is not relevant for our purpose. It is clear that under sub-s. (1A) the company can allot shares in favour of anybody provided there is a special resolution to that effect. In the absence of such resolution, there should be an ordinary resolution but in the latter case the Central Government must be satisfied that the proposal is beneficial to the company. Sub-s. (3) permits another mode of allotment of shares. This can be done by exercise of the option to convert the debentures into shares. However, the terms providing such option must be approved by the Central Govt. Financial institutions (namely, defendants Nos. 1 to 7) are the specified institutions as contemplated by prov. (4) to sub-s. (3) and hence there is no need of having any resolution of the company. This prov. (4) has been challenged by the plaintiffs as ultra vires the Constitution. But that aspect can be conveniently kept aside for the present. There is no dispute that if the suit transaction is a mere allotment of shares of 20 per cent, of loan, it falls under sub-s. (1A) and the allotment of shares would be bad because there is no special resolution and there is no ordinary resolution coupled with the approval of the Central Govt. Similarly, the allotment of shares in favour of defendants Nos. 1 to 7 would be good if the allotment 'complies with the provisions of sub-s. (3). It is in this background that the plaintiffs have contended that the true and real nature of the transactions is straight allotment of shares while the defendants contend that the allotment was in exercise of the option in debentures.

However, before considering this aspect we would like to state the initial objection of Mr. Nariman that though the plaint is verbose and vague still there is no pleading that the real nature of the transaction is of direct allotment of shares. As stated earlier, the plaintiffs have given up certain contentions either before the recording of the evidence or at the time of the arguments. The pleading as to the nature of the transaction appears in para. 73A. Under the Capital Issues (Control) Act there is a provision that no company shall, except by the consent of the Central Govt., make an issue of capital. Issue of debentures is covered by this provision. However, on account of the Capital Issues (Exemption) Order, 1969, issue of convertible debentures with an option to convert part of the debentures into equity shares does not require any such consent if the debentures are taken up by certain specified institutions and those institutions include financial institutions, namely, defendants Nos. 1 to 7. After referring to this legal provision the plaintiffs have stated that though the shares were already agreed to be allotted a mere show of issue of debentures in question was made so as to avoid the provisions of s. 81(1)(a) or s. 81(1A) of the Companies Act. The grievance of Mr. Nariman is that the pleading about the nature of the transaction is really a bald plea without pleading material facts on which that plea is based. The relevant plea reads as follows (page 135 of the paper-book):

"The plaintiffs submit that what is covered by the exemption order is a genuine issue of debentures with a conversion clause. The plaintiffs submit that in the instant case the issue was not of debentures with a conversion clause so as to be within clause 4(iv) of the exemption order. The issue in reality was an issue of shares by allotment and of debentures but was deliberately termed as an issue of debentures. The plaintiffs say that in the instant case the alleged option was such as to be exercisable simultaneously with the issue of debentures and was a mere cloak... within the clutches of section 81(1)(a), 81(1A) of the Companies Act and section 3(2) and section 4(2) of the Capital Issues (Control) Act."

It was submitted that the various circumstances or facts on which the plaintiffs want to rely for the purpose of contending that the transaction in question is of direct allotment of shares and not of convertible debentures are required to be pleaded in the plaint and that in the absence of such a pleading the plaintiffs would not be entitled to urge anything about the nature of the transaction. It is true that there is the above lacuna in the plaint. However, we do not propose to reject the contention of the plaintiffs on this ground alone as the matter has been argued before us at great length on the basis of the documents that are available on record. We think that it will be appropriate to discuss the merits or otherwise of the plaintiffs' contentions about the nature of the transaction.

Mr. Cooper contended that it is necessary to consider all the correspondence and the surrounding circumstances while deciding upon the nature of the transaction. He relied upon a few decisions for this proposition. For example, the Supreme Court in the case of 5. Chattanatha Karayalar v. Central Bank of India Ltd. [1965] 35 Comp Cas 610; AIR 1965 SC 1856, has held that where a transaction between the same parties is contained in more than one document, they must be read and interpreted together and they have the same legal effect for all purposes as if they are one document. In that case, three defendants executed a promissory note and in the suit filed to enforce it, one of the defendants contended that his liability was not as a principal debtor but as a surety. The Supreme Court took into account the promissory note as well as certain other connected documents, namely, the letters and the hypothecation agreement and held that the said defendant was only a surety. The Supreme Court, while deciding this case considered the decision in the case of Manks v. Whiteley reported in [1912] 1 Ch D 735, and more particularly the portion of the judgment at page 754 by Moulton L.J., wherein it is observed as follows:

"Where several deeds form part of one transaction and are contemporaneously executed they have the same effect for all purposes such as are relevant to this case as if they were one deed. Each is executed on the faith of all the others being executed also and is intended to speak only as part of the one transaction, and if one is seeking to make equities apply to the parties they must be equities arising out of the transaction as a whole."

In the case of N. Pattay Gounder v. P.L. Bapuswami, AIR 1961 Mad 276, the Madras High Court had to decide the nature of a document, namely, whether it was a mortgage by conditional sale or a sale with a condition of repurchase. The court held that apart from the terms appearing in the deed itself, the surrounding circumstances are also relevant. Mr. Cooper also relied upon the decision of the Supreme Court in the case of Sundaram Finance Ltd. v. State of Kerala [1966] 17 STC 489; AIR 1966 SC 1178. In that case, the question was as to whether the agreement in question was a hire purchase agreement or a loan transaction. The Supreme Court held that the nature of a transaction may be determined from the terms of the agreement considered in the light of the surrounding circumstances.

Mr. Nariman, however, urged that the principles enunciated in the abovementioned decisions would not be applicable when we have to construe the transaction evidenced by formal documents such as agreements, conveyance, etc. He relied upon the decision of the Privy Council in the case of Bomanji Ardeshir Wadia v. Secretary of Slate for India in Council [1929] 56 IA 51; AIR 1929 PC 34. The question arose as to whether antecedent correspondence can be considered in construing a particular deed and on pages 56 and 57, the Privy Council has observed as follows (at p. 36 of AIR 1929 PC):

"The learned trial judge examined with great care the correspondence which took place between the parties before the deed of 1847 was granted, and he came to his opinion on the true meaning of the deed, as he puts it himself, after a careful consideration of the deed in the light of the correspondence.' Their Lordships must say at once that this way of approaching the true construction of the deed is quite illegitimate. The learned judge in another passage says that because the correspondence is referred to in the deed, that makes it part and parcel of it. The only reference to the correspondence is in the narrative in the preamble of the deed that there had been such correspondence, but it is a vital mistake to suppose that that introduces the correspondence as a part of the deed. Nothing is better settled than that when parties have entered into a formal contract that contract must be construed according to its own terms and not be explained or interpreted by the antecedent communings which led up to it. This is especially true of a conveyance. There, even if there has been a formal antecedent contract, that contract cannot be looked at to control the terms of the conveyance; much less can mere communings which could only show what parties meant to do but cannot show what they did."

A similar view has been expressed in para. 1480 of Halsbury's Laws of England, Vol. XII. It will thus be seen that primarily, the documents and the terms thereof would be decisive. Of course, the surrounding circumstances would be relevant if the meaning of the contents of the document is vague or uncertain. Similarly, such circumstances would be relevant if those circumstances are incompatible with the terms of the document.

Bearing in mind this principle, we would consider the nature of the transaction.

The NRC was in financial difficulties and was thus in need of loans. There is correspondence between NRC and the financial institutions about these loans and both the parties relied upon that very correspondence for the purpose of making their submissions about the nature of the transaction. Of course, the plaintiffs have laid much stress on a particular part of the correspondence while the defendants relied more particularly on some other part of the correspondence. In this background, we think that we will have to consider all the correspondence together in order to find out the exact nature of the transaction.

On 20th December, 1977, ICICI wrote a letter (Exhibit H, part II-A, p. 1410 of the paper-book) agreeing to provide the defendants a rupee term loan of Rs. 58 lakhs to meet a part of the cost of the Nylon Tyre Cord Project on certain terms and conditions. The NRC was informed by ICICI that they (ICICI) would have an option of converting a part of the loan into equity shares of NRC on terms to be decided later on. On 8th February, 1978, there was a bridging loan agreement (Exhibit L, part II-A, p. 1432 of the paper-book) as a part of the this transaction under which ICICI advanced Rs. 40 lakhs out of the loan amount of Rs. 58 lakhs. On 8th March, 1978, ICICI sent a letter (Exhibit M-1, part II-A, pages 1437, 1438 of the paper-book along with a draft of the final loan agreement for the entire amount of Rs. 58 lakhs which was to be executed by the company. This draft also includes the term that ICICI would have a right to convert at their option a part of the loan amount into fully paid up equity shares.

On 17th January, 1978, UTI also agreed to advance Rs. 50 lakhs on debentures and one of the terms was that the UTI would have an option to convert a portion of the amount into equity shares on terms and conditions to be decided later. The letter is at Exhibit I (part II-A, page 1415 of the paper-book). On 27th March, 1978, UTI handed over a cheque for Rs. 50 lakhs(Exhibit Q, part II-A, page 1555 of the paper-book) as advance deposit against subscription to the private debentures. These two loans 6f Rs. 58 lakhs and Rs. 50 lakhs were to be utilized for the Nylon Tyre Cord Project and the said project was completed by about April, 1978, though the documents, namely, the loan agreement in favour of ICICI and the debentures in favour of UTI had remained to be executed. Mr. Nariman relied upon the contents of the above correspondence which supports the defendant's allegation that the parties intended to have an option to convert a part of the loan into shares.

The annual general meeting (AGM) was fixed on 29th June, 1978, and a notice of that meeting was issued to its shareholders on 28th April, 1978 (vide Exhibit 16(2), part II-D, page 3531 of the paper-book). Section 293(1)(a) of the Companies Act provides that the whole or substantial transfer of the company's properties by sale, mortgage or otherwise is not permissible unless the company passes a resolution in that respect. In this notice a draft resolution was included for creating a charge in favour of ICICI for the loan amount of Rs. 58 lakhs and for issuing debenture to UTI. An explanatory statement annexed to the notice has also referred to two letters dated 20th December, 1977, and 17th January, 1978, of ICICI and UTI, respectively. As stated earlier, these letters have made a mention that the two financial institutions would have an option of converting a part of the loan into equity shares.

The various proposals pending with the financial institutions are considered in the Senior Executive Meeting (known as SEM). These two proposals of ICICI and UTI for loan of Rs. 58 lakhs and Rs. 50 lakhs were considered in such a SEM on 19th May, 1978 (Exhibit Z-68, part II-C, page 2716 of the paper-book). The agenda of that meeting mentioned that these proposals contemplate 20% conversion into equity shares at the ratio of Rs. 180 per share, that is, with a premium of Rs. 80 per share. The SEM approved this proposal. Thus, the SEM also supports the defendants' case of conversion of a part of the debentures into equity shares.

On 17th May, 1978, NRC wrote a letter (Exhibit Z-49 (1), part II-B, page 2564 of the paper-book) to UTI intimating that the consortium of banks was also providing additional term loan of Rs. 1 crore to meet the company's capital requirements and that there would be a charge of this loan on the company's asssets. The UTI by its letter dated 19th May, 1978 (Exhibit Z-49 (2), part II-B, page 2566 of the paper-book) wrote to NRC that the finances through banks would be costly and that it was necessary for NRC to conserve its resources for getting out of the mess created by the previous management and also for diversification programme. The UTI informed NRC that they (UTI) were ready to advance an additional loan of Rs. 1 crore on the strength of debentures to be issued by the company. In that letter the UTI also informed NRC that there would be an option for conversion into equity shares of 20 per cent, of the face value of the said debentures. This again indicates that the UTI wanted to have a transaction of debentures with consequent option of conversion.

On 29th May, 1978, NRC wrote a letter (Exhibit V, part II-A, page 1581 with note page 1583 of the paper-book) to UTI informing' that the board of directors of NRC has considered the above proposal and it was felt that the offer of UTI of a loan of Rs. 1 crore should be accepted as additional assistance instead of an alternative for the consortium term loan from the bank. In that letter NRC informed UTI that NRC had in mind a modernisation programme which would cost about Rs. 408 lakhs and that the capital expenditure of that programme in the first phase would cost about Rs. 300 lakhs. NRC made a query as to whether UTI would be able to give this additional term loan on the basis of debentures to be issued on usual terms and conditions. Along with this letter NRC also sent a note on the said modernisation programme. It appears that the figures given in the letter were tentative and the exact amount was to be worked out. On 31st May, 1978 UTI studied the proposal of NRC for the modernisation programme. The note of such study (Exhibit Z-66, part II-C, page 2702 of the paper-book) was prepared for being placed before the Inter-Institutional Meeting (known as IIM). In the note it was recommended that an amount of Rs. 200 lakhs be sanctioned. The financial institutions held IIM in order to scrutinize and sanction the various proposals for financial assistance. The IIM was held on that very day, that is, on 31st May, 1978. In that meeting proposals of various companies were considered. The minutes of the meeting are at Exhibit-6, part-II-D at pages 3474 and 3475 of the paper-book. The IIM came to the conclusion that Rs. 300 lakhs should be sanctioned by UTI on the basis of debentures on normal terms and conditions with an option to convert 20 per cent, of the debentures into equity shares. The premium to be paid was Rs. 60 per share of Rs. 100. This was, of course, subject to Government approval. The option was to be exercisable during the period from 15th June, 1978, and 14th June, 1980. The letter of NRC dated 28th May, 1979, and the IIM resolution are consistent with the defendants' case.

But the plaintiffs rely upon the following correspondence which followed in June, 1978,for suggesting that the contemplated transaction was really one under sub-s. (1A), i.e., allotment of shares directly and not of debentures with the exercise of the option for converting debentures into shares.

The UTI wrote a letter (Exhibit Z, part II-A, page 1588 of the paper-book) dated 1st June, 1978, to NRC informing NRC that UTI was agreeable to render financial assistance of Rs. 300 lakhs as a part of the expenses of the modernisation programme. The letter states that the said assistance would be in the form of subscription to debentures. The understanding amongst the financial institutions is that whenever such assistance is sanctioned, the other financial institutions also participate in that assistance and hence UTI informed NRC that the assistance of UTI of Rs. 300 lakhs would be reduced to the extent the other financial institutions would indicate their willingness to participate. The assistance was agreed to be given on certain terms and conditions. Mr. Cooper relied upon condition No. 7 and hence we intend to reproduce it verbatim. It reads as follows:

"Condition No. 7. The company should agree to vest in Unit trust of India and other financial institutions the option to acquire in lieu of conversion equity shares of Rs. 60 lakhs inclusive of premium and constitutes 20 per cent, of the assistance of Rs. 300 lakhs the trust has agreed to provide. The shares will be acquired at a price on payment of Rs. 160 per share of Rs. 100 (i.e., at Rs. 60 premium) or at such premium as may be approved by Controller of Capital Issues. The period of conversion would be 15th June, 1978, to 14th June, 1980. The company should approach the Controller of Capital Issues—Government of India for necessary approval."

According to the plaintiffs, the abovementioned underlined portion "to acquire in lieu of conversion" would mean that the parties agreed that in the said transaction there would be direct allotment of shares of Rs. 60 lakhs and that there was no question of debentures with an option to convert debentures worth Rs. 60 lakhs into equity shares. The plaintiffs contend that it is in this way that the parties really intended to directly allot shares and that instead of having a transaction of such an allotment, the parties made a show that they agreed to have debentures with a convertibility clause.

We have already observed that UTI has agreed by its letter dated 17th January, 1978, to give financial assistance of Rs. 50 lakhs for Nylon Tyre Cord Project. On 6th June, 1978, UTI wrote a letter (Ex. Z-3, Pt. II-A, page 1604 of the paper book) giving a notice to NRC of the intention of UTI to acquire fully paid up shares in lieu of conversion for the amount of Rs. 10 lakhs at the rate of Rs. 100 per share with a premium of Rs. 60 per share. In the letter, it is stated that NRC should get the debenture trust executed for the remaining amount of Rs. 40 lakhs. UTI wrote a similar letter dated 8th June, 1978, (Ex. Z-5, Pt. II-A, page 1612 of the paper book, so far as the acquisition of shares of Rs. 60 lakhs (from out of the transaction of Rs. 300 lakhs). It is not necessary to give the contents of this letter as it is worded practically in terms of the letter dated 6th June, 1978. Mr. Cooper relied upon the contents of these letters and urged that the UTI really wanted immediately shares of Rs. 10 lakhs from the loan amount of Rs. 50 lakhs. Similarly, UTI had informed its dealer to get shares of Rs. 60 lakhs from out of the loan of Rs. 300 lakhs. He argued that all this would mean that UTI was keen in getting shares straightaway and that there was no question of conversion of debentures into equity shares as contemplated by s. 81(3) of the Companies Act. No doubt, the letters dated 1st June, 1978, 6th June, 1978, and 8th June, 1978, can convey such a meaning. However, these letters will have to be construed and understood along with the various surrounding factors.

As already observed, the letter dated 17th January, 1978, completely supports the defendants. By that letter UTI has offered a financial assistance of Rs. 50 lakhs. This letter gives the various terms and conditions of the said offer. It is not necessary to reproduce all the various terms. Suffice it so say that the tenor of he letter is to render financial assistance on the basis of the private debentures. Condition No. 4 says that the commitment under the letter shall be deemed to have been fully discharged on the UTI making an application for the debentures of Rs. 50 lakhs. There are some terms dealing with the rate of interest and the mode of redemption of the debentures. This was to be decided later. Condition No. 8 reads as follows:

"Condition No.8: The company should agree to vest in the Unit Trust of India the option of converting a portion of debentures into equity capital on terms and conditions to be decided by the Trust in consultation with other financial institutions. This will be advised to the company in due course."

While under condition No.17, it is provided that the draft trust deed should be submitted for the approval of the UTI for being finalised, the letter is closed with a statement that the offer by that letter should not be treated as binding unless the debenture trust deed is executed by the company in such form as may be required by the UTI. Thus, the plaintiffs would not be able to make use of any of the contents of this letter in support of their contention.

Now, let us read the letter dated 1st June, 1978, in its entirety. The offer of the UTI for the assistance of Rs. 300 lakhs is contained in the letter dated 1st June, 1978. We have already observed above that Mr. Cooper relies upon condition No. 7 in that letter. The said condition is reproduced in paragraph No. 17. That condition says that the option was to acquire in lieu of conversion equity shares of Rs. 60 lakhs inclusive of premium. The term "in lieu of" would normally mean "by substitution of" and it is in this way that Mr. Cooper urged that there was not to be any conversion at all but what was agreed was the allotment of shares in substitution of the conversion clause. It is true that condition No. 7 read by itself would convey this meaning but what is urged by Mr. Nariman is that the rest of the contents of the latter should also be taken into account for the purpose of deciding as to what was the overall intention of the UTI when it wrote the letter. Before mentioning the various conditions, UTI has informed NRC that the financial assistance from the UTI would be in the form of subscription to the privately placed debentures of Rs. 300 lakhs. It then states that those debentures will be on the conditions that follow. Condition No. 1 states that the offer to subscribe for such debentures will be open during the end of November, 1978, or such extended period. According to condition No. 3, the commitment of UTI shall be deemed to have been discharged as soon as the application for Rs. 300 lakhs face value on debentures would be made. As per condition No. 8, it is provided that the NRC should agree to the free transfer of the shares obtained by the trust through conversion. Under condition No. 15, the debenture trust is required to be submitted to the UTI for approval before completing it and any alterations or changes suggested or indicated by UTI are required to be incorporated therein. Condition No. 24 provides that the company should obtain the necessary consent, approval, etc., from the Government authorities for the issue of requisite debentures. The letter is wound up by saying that the offer will not be binding unless the debenture trust is executed by the company in such form as may be required by UTI. UTI asked NRC to confirm the terms and conditions mentioned in the letter for subscription by UTI to the debentures are acceptable. It is thus clear that except condition No. 7, all the rest of the conditions and other parts of the letter are consistent with the defendants' version that what was really contemplated was the convertible debentures and not direct allotment of shares. The offer was to have debentures of Rs. 300 lakhs and this connotes that initially the entire loan was of Rs. 300 lakhs debentures. Similarly, it was specifically provided that the debenture trust has got to be approved by UTI before it was executed by the company. Mr. Cooper is right when he contends that condition No. 7 read by itself may support the plaintiffs' case. At the same time Mr. Nariman is also right when he urges that all that the rest of the letter indicates is that the parties wanted to have the usual convertible debentures. As to how such a type of document has to be construed is considered by the Supreme Court in the case of Delhi Development Authority v. Durga Chand Kaushish, AIR 1973 SC 2609. It was a case dealing with the construction of a document of lease. Though the document intended to create a lease of 90 years, still there were certain clauses which conveyed a meaning that the lease was to be for 20 years. The Supreme Court considered that particular provision, which carried such a meaning, in the background of the rest of the contents of the document and has held that such a clause should not be torn off from the context. This is what the Supreme Court has held in para. 18 at page 2613:

"The difficulty in tearing the few words in the proviso away from the context of the rest of the covenant as well as from all other parts of the deed is that it would, if that were done, override not merely the words of demise, giving the duration of the initial lease as 90 years but would also conflict with the contents of covenant 9 itself."

The Supreme Court held that in the context of the rest of the document, the deed was of 90 years. The Supreme Court has also considered the aspect as to what is to be done if there are inconsistent or conflicting clauses in the same document. We would like to reproduce the relevant headnote:

"In construing a document one must have regard, not to the presumed intention of the parties, but to the meaning of the words they have used. If two interpretations of the document are possible, the one which would give effect and meaning to all its parts should be adopted and for the purpose, the words creating uncertainty in the document can be ignored."

It would also be convenient to see how this letter dated 1st June, 1978, was read and understood by the other financial institutions who decided to participate in the financial assistance of Rs. 300 lakhs. ICICI has agreed to participate in the transaction of Rs. 300 lakhs to the extent of Rs. 50 lakhs. ICICI also wrote a letter (Exhibit Z-4, part-II -A, page 1608 of the paper-book). This letter mentions about the debentures and the right of ICICI to exercise the option to convert debenture of Rs. 10 lakhs into equity shares at the rate of Rs. 160 per share. GIC and its subsidiaries had also agreed to participate in the transaction of Rs. 50 lakhs. Hence GIC wrote a letter dated 19th June, 1978 (Exhibit Z-14, part II-A, page 1707, of the paper-book). In this letter, there is a reference to the debenture without any mention of asking shares immediately. On 16th October, 1978, GIC wrote another letter (Exhibt Z-19A, Part II, page 1889 of the paper-book) stating therein that the participation of Rs. 50 lakhs would be divided into five portions of Rs. 10 lakhs each to be contributed by GIC, NIC, NIA, OFGI and UI. In this letter there is a mention that there would be an option to acquire in lieu of conversion equity shares of Rs. 10 lakhs (from out of the participation amount of Rs. 50 lakhs) at the rate of Rs. 160 per share. The letter is wound up with an observation that the said offer would be subject to the condition that the debenture trust deed would be finalised in the manner as may be approved by GIC and its subsidiaries. There are also letters from NIA, NIC, OFGI and UI to the NRC agreeing to participate to the extent of Rs. 10 lakhs. All these subsidiaries except NIA have stated that the advance would be on the terms and conditions already intimated by GIC. The letter from NIA is dated 25th October, 1978 (Exhibit Z-19-C, part II-A, page 1901 of the paper-book). Though in this letter there is a mention of the GIC letter dated 16th October, 1978, there is also an additional statement that NIA was agreeable to contribute Rs. 10 lakhs on the basis of debentures subject to the condition that NIA will have a right to convert 20% of the debentures (i.e., Rs. 2 lakh debentures) into equity shares. Thus, the other financial institutions (participating in the financial assistance in question) namely, ICICI and NIA have written that the transaction would be on the basis of debentures with the usual option. They have not asked for immediate allotment of shares. As against this, the GIC has stated that it would get the shares in lieu of conversion. But it has not asked for allotment of shares immediately. The other subsidiaries of GIC (except NIA) have only stated that they were ready to participate on terms proposed by GIC. As the transaction of Rs. 350 lakhs is pleaded by the plaintiffs as one composite transaction, the fact that ICICI and NIA wanted to have a transaction of usual debentures with option to convert a part into shares, will also be relevant. In this background, it will be very difficult for Mr. Cooper to contend that the letter dated 1st June, 1978, should be interpreted in favour of the plaintiffs for assessing the exact nature of the transaction.

The three letters dated 1st June, 1978, 6th June, 1978, and 8th June, 1978, were written after the matter was processed by the UTI and IIM. Exhibit 7, part II-D, p. 3481 is a note prepared by the secretary of the UTI for the circular resolution to be approved by the executive committee. The note clearly states that the financial assistance would be in the form of privately placed debentures and that the trust would exercise its rights to convert Rs. 60 lakhs, (20% of the proposed assistance) into equity shares. This can be seen at pp. 3489 and 3490. The secretary has requested the members of the executive committee to approve the proposal. The resolution appears below this note (p. 3491) and the resolution is of the approval of the proposal for subscribing the privately placed debentures up to Rs. 300 lakhs.

It would also be convenient to consider the subsequent happenings which resulted in the finalisation of the transaction. On 17th June, 1978, the government has passed an order (vide Exh. 27, part II, p. 1616) under s. 108D of the Companies Act. We would later consider the circumstances under which this order was passed, as some grievance has been made by Mr. Cooper, but, for the present, suffice it to say, that the net result of the freezing order was that the plaintiffs were prevented from exercising their right to vote on the basis of the shares held by them and also on the basis of the proxies which they would secure from the shareholders. The plaintiffs filed writ petition No. MP-1904 of 1978, challenging this order. This writ petition came for hearing before the court on 28th June, 1978, and the court stayed the operation of the freezing order subject to the plaintiffs giving an undertaking to vote for the amended item No. 4. It is material to note that the original item No. 4 was with respect to the resolution under section 293 of the Companies Act, for the loan of Rs. 108 lakhs (i.e., loan of Rs. 58 lakhs by ICICI and debentures loan of Rs. 50 lakhs to UTI). By the amendment, the proposed resolution was to sanction not only the loan of Rs. 108 lakhs but also the additional loan of Rs. 300 lakhs. The amended resolution made a mention that from out of the total transaction of Rs. 408 lakhs, there was to be a loan of Rs. 58 lakhs and the remaining amount was to be subscribed on the basis of the debentures, i.e., debentures of Rs. 250 lakhs by UTI, Rs. 50 lakhs by ICICI, Rs. 50 lakhs and Rs. 50 lakhs by GIC and its subsidiaries. In terms of the orders passed in Writ. Pet. No. 1904 of 1978, plaintiffs voted for this amended resolution, which covered the entire transaction of Rs. 408 lakhs. If the parties intended to have direct allotment of shares of Rs. 70 lakhs and the loan of Rs. 280 lakhs these resolutions would have been necessary only with respect to Rs. 280 lakhs, as there could not have been any question of AGM granting sanction under s. 293(1)(a) for Rs. 70 lakhs. On the contrary, for any direct allotment of shares there should have been a specific resolution under s. 81(1A) and the company would have to move the Central Govt. for the approval under that very sub-section for such direct allotment. It is common ground that no resolution under s. 81(1A) was passed and no approval of government was sought. On the contrary, sanction of the government under s. 81(3) was asked for. This conduct is again consistent with the defendant's case that the parties intended to have convertible debentures with usual option. Later on, the CLB was informed about the participation by other financial institutions. The approvals have been accordingly amended and the last such amendment is dated 6th February, 1978. By 6th February, 1978, the approvals under s. 81(3) of the Companies Act, were available. Thus the fact that the NRC applied to the Central Govt. for approval of the option clause also indicates that the intention of the parties was to proceed under s. 81(3) and not under s. 81(1A).

As stated in para. 15 above, the request of the NRC dated 29th May, 1978, was based on tentative figures. The actual payment of Rs. 300 lakhs as sanctioned by IIM was possible only after the matter was processed in detail. Hence, on 18th October, 1978, the NRC submitted modernisation proposals and ICICI which was the lead institute, has made a detailed appraisal of that proposal in November, 1978. The permission under Urban Land (Ceiling and Regulations) Act was granted on 7th May, 1979. Thus by that date, all permissions, sanctions and approvals including the permission dated 7th May, 1978,. under the Urban Land (Ceiling and Regulations) Act were there and hence, on 18th May, 1979, ICICI sent a letter to the NRC (Exh. 2-29, part II-A, p. 1940) requesting the NRC to pass the necessary resolution of the board of directors in connection with the execution of the debenture trust for Rs. 350 lakhs and documents in respect of the loan of Rs. 58 lakhs. The proposed resolutions are annexures to this letter and they mention the issue of 35,000-11% debentures of Rs. 1,000 each. The draft resolution further states that each of the financial institutions would have an option to convert a part of the debenture loan into equity shares. The resolution also mentions that such conversion should be to the extent of 31,250 shares each of Rs. 100 in favour of the UTI and 6,250 shares each of Rs. 100 in favour of ICICI and 1,250 shares each of Rs. 100 in favour of GIC and its four subsidiaries. It appears that, accordingly, the board of directors passed an appropriate resolution and though the resolutions themselves are not on record, the plaint para. 72 (relevant portion appears on pp. 117 to 121 of the paper-book) has reproduced in verbatim the resolution so passed. The passing of those resolutions is again consistent with the defendants' case that the transaction was to be of convertible debentures.

Messrs. Amarchand Mangaldas Hirachand and Co. (who were the common attorneys for the financial institutions and the NRC), addressed a letter dated 29th May, 1979 (Exh. Z-3, part II-A, p. 1949) to the financial institutions, the NRC, as also to the Bank of Baroda. The letter is based on the earlier discussions which took place among the parties when it was decided that the transaction was to be completed on 31st May, 1979. The attorneys informed that the debenture trust deed is being lodged for adjudication. A short note on the various points for the completion of the above transaction was prepared and enclosed with that letter. Accordingly, on 31st May, 1979, the debenture trust deed (Ex. Z-33, part II-B, p. 2038) was executed. We may refer to some portion of the preamble of the debenture trust deed. In cl. (3), there is a statement that UTI, ICICI, GIC, NIC, OFGI, NIA and UI have agreed to subscribe for privately placed debentures of the normal value of Rs. 250 lakhs, Rs. 50 lakhs, Rs. 10 lakhs, Rs. 10 lakhs, Rs. 10 lakhs, Rs. 10 lakhs and Rs. 10 lakhs, respectively.

Clause (6) mentions certain prior correspondence to the various financial institutions. We would like to reproduce in verbatim sub-cl. (a):

"By letters bearing No. UT/9598/RS(N-14)-77, dated 17th January, 1978, and UT/14973/RS(N-14)-78, dated 1st day of June, 1978, issued by UTI and accepted by the company (hereinafter collectively referred to as ' UTI loan agreements '), UTI has agreed to subscribe for privately placed debentures of the nominal value of Rs. 2,50,00,000 (two hundred and fifty lakhs) to be issued by the company to UTI upon the terms and conditions therein mentioned. "

The rest of the sub-cls. (b), (c), (d), (e), (f) and (g) are with respect to similar loan agreements and the various letters written by the other financial institutions (to which reference has already been made by us earlier) were treated as the loan agreements. It is material to note that two letters dated 6th June, 1978, and 8th June, 1978, find no place when the parties decided to narrate the various loan agreements and Mr. Nariman laid much stress on this fact for the purpose of contending that at the time of finalising the transaction, these two letters and the statements made therein were not at all taken into consideration and the transaction was settled without these letters. There is much substance in this contention. Before going to the other clauses of the preamble, we may like to add that each of these sub-clauses of cl. (6) makes mention of the debenture, the total of which (so far as the suit transaction is concerned) comes to Rs. 350 lakhs. Clause (11) of the preamble refers to the resolution passed by the company on 29th June, 1978. That resolution is reproduced verbatim and we have already observed that the said resolution is with respect to the debentures of Rs. 350 lakhs. Clause (16) says about the issue of 35,000-11% convertible debentures of Rs. 1,000 each.

Clause (20) recites the resolution of the board meeting of the NRC dated 24th May, 1979, about the issue of 35,000-11% convertible debentures of Rs. 1,000 in seven series, viz., "A" to "G" in favour of each of the financial institutions. After this preamble the recitals in the trust deed proper follow. It says that the debentures mean, the debentures issued as per series "A" to "G" and the debenture-holders would mean the "holders so entered in the register of the debentures". Clause (2) then deals about the issue of 35,000-11% convertible debentures (series "A to G") of the nominal value of Rs. 1,000 each in favour of each of the financial institutions. Clause (3) has made a provision as to how the amount of "A" series debentures totalling Rs. 250 lakhs is to be repaid and the debentures should be redeemed. The period of redemption is spread over from 1982 to 1988, but the important factor is that this clause contemplates a contingency of redemption of all the debentures. The clause also provides about the need for redemption of lesser number of debentures if the amount of debentures after conversion into equity shares is less than Rs. 250 lakhs. Similar provision about redemption of the remaining series of the debentures is made in that very clause. Clause (4)(a) provides the exercise of option by UTI to convert the debentures of the nominal value of Rs. 50 lakhs into equity shares. That clause reads as follows:

"UTI as the registered holder of the series 'A' debentures shall at any time and from time to time between the 15th day of June, 1978, and 14th day of June, 1980, have the right to convert series 'A' debentures of the nominal amount not exceeding Rs. 50,00,000 (Rupees fifty lakhs) into fully paid up equity shares of the company at a premium of Rs. 68 per share of a face value of Rs. 100 and shall be entitled as such registered holder to call for allotment of 31,250 fully paid up equity shares of Rs. 100 each of the company at a premium of Rs. 60 per share or pro-rata of an equivalent nominal value in respect of such series 'A' debentures for which the right is so exercised by UTI in the manner set out in the form of debentures in Part I of the Fifth Schedule hereunder written."

The remaining sub-cls. (b) to (g) have made a similar provision about the conversion of 20% of the debentures (b), (c), (d), (e), (f) and (g) that were to be executed in favour of ICICI, GIC, NIC, NIA, OFGI and UI. Clause (5) says that the principal money secured by the said debenture trust would be of Rs. 350 lakhs. Under cl. (23) of the said deed, the debenture-holders are required to surrender those debentures in respect of which an option to convert into equity shares has been exercised, cl. (36)(c) provides that the company (NRC) shall duly observe and perform all the terms, conditions, covenants and stipulations contained in the loan agreement of the financial institutions. The Vth Schedule to this debenture trust gives the form of the debentures to be executed in favour of the financial institutions. Clause (5)(i) of that form reads as follows:

"UTI as the registered holder of the series 'A' debentures of the aggregate nominal value of Rs. 2,50,00,000 (Rupees two hundred and fifty lakhs) shall to the extent of such series 'A' debentures of the nominal value of Rs. 50,00,000 (rupees fifty lakhs) at any time and from time to time between the 15th day of June, 1978, and 14th day of June, 1980, (both days inclusive), by notice in writing of not less than one month given either before or during the said period of conversion and delivered at the registered office of the company accompanied by the relative debenture certificate have the right of conversion conferred under the trust deed and shall be entitled to call for the allotment to UTI as the registered holder of 31,250 fully paid up equity shares of the company of the face value of Rs. 100 each at a premium of Rs. 60 per share or pro rata of an equivalent nominal value in respect of such series 'A' debentures so intended to be converted and to be applied towards the nominal value of each such equity share and to require the company to apply the nominal value of such converted series 'A' debentures in full payment of such equity shares inclusive of premium and the company shall allot to UTI in satisfaction of the amount of such converted series 'A' debentures such equity shares as aforesaid credited as fully paid up and ranking for dividend from the date of allotment of such equity shares and shall pay to UTI interest in respect of such converted series 'A' debentures up to the date of allotment aforesaid."

That form also contemplates the execution of a contract for the allotment of equity shares on conversion.

All these various recitals in the debenture trust deed show as to how the parties understood the previous correspondence between them and how they treated that transaction as of the convertible debentures of Rs. 350 lakhs and not that of direct allotment of shares to the tune of Rs. 70 lakhs and the debentures of Rs. 280 lakhs. The loan agreements mentioned in the debenture trust deed are in fact the correspondence between the parties and this correspondence has been treated by the parties in a particular fashion. It will be very difficult to accept the contention of Mr. Cooper that though the parties intended to construe certain correspondence in a particular manner, still the court should interpret it in another manner. This is more so when the surrounding circumstances including the various actions taken by the parties in further finalisation of the matter are consistent with the transaction being that of convertible debentures.

On the very day, i.e., 31st May, 1979, the following further events have taken place. It appears that the financial institutions gave letters for subscription of the respective debentures in their favour. The letters of allotment of debentures were issued. This fact is admitted in para. 73(d) of the plaint. Mr. Cooper, learned counsel for the plaintiffs, wanted to get over this admission by reference to the recitals at some other place. However, the admission is so clear that it would not be possible to accept the submission. Each of the financial institutions gave a notice exercising the option to convert 20% of its debentures into equity shares. These notices are at (Ex. Z-34 to Z-41, part II-B, pp. 2388 to 2499). The notices are similarly worded and it would be sufficient if we make a mention to the contents of one of those notices. For example, in the notice issued by UTI (Ex. Z-34), there is a reference to the correspondence dated 31st January and 1st June, 1978, and to cl. (4)(a) of the debenture trust. The notice then states that in terms thereof, the UTI is entitled to call for an allotment of 31,250 fully paid up shares and that, therefore, the UTI was giving a notice to convert with immediate effect 5000 debentures from "A" series into 31,250 fully paid up equity shares. There is a minor change in other notices so far as the number of shares that were to be demanded on such conversion. On 5th June, 1979, the NRC passed necessary resolution for the allotment of shares on such conversion and this allotment is of 43,750 shares (so far as this litigation is concerned) as detailed in para. 1 above. Section 75 of the Companies Act, 1956, requires filing of the returns with the Registrar of Companies for the allotment of such shares and the said return has been filed on 27th June, 1979 (vide Ex. 17, part II-D, p. 3578). All this is again consistent with the defendants' case.

As stated above on May 31, 1979, a number of events have taken place. The debenture trust deed was executed. The financial institutions sent letters of subscription to the privately placed debentures. On the same day, the company issued letters of allotment of debentures. The financial institutions then issued notices of converting 20% of debentures into equity shares. These transactions were preceded by letter dated May 29, 1979, from Amarchand Mangaldas, the common attorney of the financial institutions and the company that the transaction has been decided to be completed on May 31, 1979. A note attached to the letter also indicates as to various actions to be taken for completing the transaction and these actions included the execution of the trust deed, applications for debentures, issue of allotment letters and issue of conversion notice. Mr. Cooper contended that the various happenings of May 31, 1979, would indicate that the parties had predetermined that on the date of the debenture trust deed itself, the necessary consequential documents including conversion notice should be completed. He also argued that the term "option" contemplates that the concerned party should have a choice and if there is no scope of such a choice on account of the pre-determination of the course of action, the transaction would be not of debentures with a conversion clause. In our opinion, these, circumstances would not indicate that the nature of the transaction was that of an allotment of shares. A party which intends to have a conversion clause in the debentures can very well take a prior decision that it would exercise the option of conversion and if such a decision is taken, such a party would necessarily act in the manner in which the financial institutions have acted here. Hence, the fact that various documents came into existence on May 31, 1979, cannot be construed in favour of the plaintiffs. The trust deed dated May 31, 1979, provides for the exercise of the option within two years from June 15, 1978, to June 14, 1980. This covers the period even prior to the execution of the trust deed, i.e., a period from June 15, 1978, to May 31, 1979. It is true that two years period of option mentioned in the debenture trust deed also covers a part of the period earlier to the execution of the documents. However, Naresh-chandra Singhal, who is working with ICICI for a number of years, has made the position clear. The witness was cross-examined in order to find out as to whether there were any instances where the documents had provided the period of conversion so as to include some period earlier to the execution of the document. The witness has stated that there were such instances. Mr. Cooper asked the witness to produce certain statements in that respect. Singhal has produced at Ex. Z-75, part II, p. 3232 onwards, such a statement. It is not necessary to go into the details thereof. Suffice it to say that at serial No. 1 in the statement there is a loan transaction of Rs. 158 lakhs which was given to Balarpur Industries Ltd., on June 15, 1981. However, the option to convert a part of the loan into equity shares was agreed to be exercised between February 1, 1979, to July 31, 1981. This means that the period of conversion had already commenced long before the loan was advanced. Similar is the case of loans to J.K. Synthetics, Rallis India Limited and Raymond Woollen Mills Ltd. The witness was also asked to produce a statement as to whether there have been instances when the option was agreed to be exercised not during the fixed period but at any time during the currency of the loan. Entry at Serial No. 2 of part II of the statement (p. 3234) shows that Rs. 11,00,000 were granted to Nagpal Petrochem on March 4, 1980, and the option was to be exercised during the currency of the loan. The option was exercised within about 10 days, i.e., on 14th March, 1980. The more important item is about the loan of Rs. 60 lakhs to Motor Industries (serial No. 3, p. 3234). On October 1, 1973, Rs. 60 lakhs were advanced on debentures. The period of conversion was stipulated to be before 3rd October, 1973, i.e., 2 days from the date of the issue of the loan. A copy of the relevant contract of the allotment of shares in this case is at p. 3237. It shows that the parties had agreed that the conversion should be exercised by giving a fortnight's notice in writing. However, the option was exercised on the very day on which the loan was advanced and the shares were also allotted on the same day. It would thus be seen that the exercise of option and the allotment of shares on the day on which the loan was advanced is not the peculiar feature of the suit transaction. Similarly, a provision of prescribing a period of conversion beginning from the date earlier to the grant of loan is not abnormal. Hence these factors are irrelevant to consider the nature of the transaction.

On 28th June, 1979, the AGM of the NRC was held. The chairman stated in the meeting about the debentures in question and also about the issue of 51,000 equity shares on the strength of the option to convert the debentures. This includes the debentures and the converted shares in question. The statement of the chairman is at (Ex.11, part II-D, p. 3503, relevant pages 3511 and 3512). Plaintiff No. 1 and his advocates were present at this meeting. On 23rd August, 1979, the NRC filed the return with the Registrar of Companies and this return contains a statement about the issue of the debentures in question and also the concerned allotment of equity shares in exercise of the option (vide Ex.18, part II-D, p. 3646, relevant pp. 3646 and 3647). It would thus be clear that all these documents do not support the plaintiff's case. On the contrary, the tenor of these documents is that the parties intended to have convertible debentures.

On March 6, 1980, the Company Law Board (hereinafter referred to as "the CLB"), approved the election and appointment of plaintiff No. 2 as a director of the NRC. The statements of accounts for the year 1979 and the directors' report were placed before the AGM held on May 25, 1980. The annual report of 1979 coupled with the balance-sheet and the statements of account, is at pages 207 to 267 of vol. 8. On p. 220 of the directors' report, there is a mention of the allotment of shares on conversion. Obviously, this conversion also included the debentures and the conversion in question. On p. 234, the share capital in the year 1978-79 is mentioned. The capital was increased in 1979 by 51,000 shares. There is also a reference to the premium on shares received in that year. Plain tiff No. 1 was present in the said meeting while the directors' report and the balance-sheet have been prepared by the board of directors, in which plaintiff No. 2 was one of them.

It would thus be clear that all the correspondance and the documents except a part of the letter dated June 1, 1978, and the two letters dated June 6, 1978, and June 8, 1978, consistently speak of the transaction being that of convertible debentures and not of the direct allotment of the shares. We may add that it is material to note that the plaintiffs have not referred to the two letters dated June 6, 1978, and June 8, 1978, in their plaint. The plaint is silent about these letters. Similarly, the trust deed also does not refer to these two letters. For all these reasons it will not be possible to hold that the parties ever intended a direct allotment of shares as contemplated by s. 81(1A) of the Act. This is more so when we look to certain guidelines issued by the Government as to how the financial institutions should behave while advancing loan to others. The plaintiffs have examined solicitor, Mr. B.K. Pandya, as their witness. The examination-in-chief is not relevant for the purpose of deciding this point about the nature of the transaction but a certain cross-examination is important. The witness was working as an attorney and solicitor for the plaintiffs till the end of 1978 and he has deposed that he is familiar with the regulations concerning the advancement of loans by the financial institutions. He has stated that the documents in this respect included a term providing for conversion of loans into equity shares. He has added that the normal percentage mentioned in the convertibility clause used to be 20% of the loan. He has produced the guidelines in the court. A copy of the guidelines is at Ex. 5, part II, p. 3433. These are government guidelines for the financial institutions and the commercial banks. Guideline No. 4 (iii) is important and it reads as follows:

"A convertibility clause should normally be written in all cases where the aggregate financial assistance exceeds Rs. 50 lakhs. If in any case the writing of convertibility clause is proposed to be waived, the financial institution or institutions concerned should make a prior reference through the Industrial Development Bank of India to the Government in the Department of Banking and obtain the Government's observation and advice before finalising the terms and conditions of financial assistance."

Clause 3(A) provides that the convertibility clause should conform to the provisions of s. 81(3) of the Companies Act. Clause 6 deals with mechanics of conversion and it provides that the concerned financial institutions should in consultation with the Industrial Development Bank determine the maximum amount of loan which can be converted into equity capital. Under cl. 8, it was decided that separate guidelines would be issued for the exercise or waiver of the option clause and that pending such guidelines, the financial institutions may take a decision in consultation with the Industrial Development Bank. It is these guidelines that were available when IIM was held on 31st May, 1978. There are further guidelines dated 17th November, 1978, dealing with the extent of option and as to how the option is to be exercised. They state that in the case of existing companies not doing very well, the period for exercising the option should be fixed after the scheme for which the financial assistance is to be extended is completed and the company is in a position to pay a reasonable dividend. The grievance of Mr. Cooper is that these guidelines of November 17, 1978, have not been properly followed as the financial institutions were allowed to exercise the option within two years, i.e., even before the modernisation programme was completed. It is this modernisation programme for which a major part of the financial assistance of Rs. 350 lakhs was sanctioned. It is very material to note that the said guidelines appear to have been framed by the financial institutions including the Industrial Development Bank. The IIM dated May 31, 1978, was attended by all the financial institutions as also by the Industrial Development Bank and it is in this meeting that the period of conversion is determined as between June 15, 1978, to June 14, 1980. In this background it will not be possible to accept the contention of Mr. Cooper that it was necessary to have a further decision about the period of conversion. Apart from that, Mr. Cooper did not contend that such alleged breach would itself make the transaction as that of direct allotment of shares. What he urged is that that the said breach is an indication that the parties intended to have the allotment of shares and not the convertible debentures. We are not able to accept this contention. Thus, here is a case where the government guidelines specifically provide that any assistance exceeding Rs. 50 lakhs must contain a convertibility clause. These financial institutions, viz., defendants 1 to 7, are expected to follow these guidelines and their contention is that they have actually followed the guidelines by entering into a transaction which contained a convertibility clause. The existence of the guidelines which makes imperative to have such a convertibility clause goes against the plaintiffs' case and it will not be possible to hold that in spite of such a clause, the parties intended to have an agreement of the direct allotment of shares when issuing the debentures in question.

Certain arguments were advanced before us by Mr. Cooper as to how the NRC and the financial institutions hurriedly processed the matter of the additional loan of Rs. 300 lakhs. We have already mentioned that when the NRC informed the UTI that the NRC intended to have a loan Rs. 1 crore from the consortium of banks, the UTI voluntarily agreed to render this assistance on the ground that the bank's assistance would be costly from the interest point of view. It was urged that UTI had no business to make such a voluntary offer. It is common ground that the UTI and certain other financial institutions were holding a number of shares in the NRC. The company was in doldrums and hence the Government has appointed its own directors in 1977. In this background, the move by the UTI to offer the loan which would be more beneficial as compared to the loan from the bank is understandable and there is nothing sinister in it. It was then urged that the matter was processed in an undue haste. On May 29, 1978, the NRC wrote to the UTI about the need of an additional assistance of Rs. 408 lakhs for the modernisation programme. A tentative note about this programme was attached to this letter and the letter states that the figures were tentative. Witness, Atmaramani, who is the Joint General Manager (Investment) of the UTI immediately prepared the note about this request of the NRC and the said note was placed before IIM held on May 31, 1979. A great deal of cross-examination of Mr. Atmaramani deals with this aspect. Certain suggestions were made that the letter dated May 29, 1978. was not in fact received on that day from the NRC but it was received later on. The inward register of the UTI shows that the letter was inwarded on 4th June, 1978, which was a Sunday. But it appears that there were also other entries in the register of that day. A comment was also made that this inward entry is not in the usual inward registers of letters but is in the inward register of documents. It is, however, material to note that this letter dated May 29, 1978, from the NRC has been referred in the report of Mr. Atmaramani. Not only that there is a reference to this letter in the subsequent correspondence between the NRC and the UTI dated June 1, 1978 (p. 1588) and dated June 2, 1978 (p. 1603). A copy of the letter was forwarded to the CLB by the NRC itself on July 6, 1978. This can be seen from p. 1714. The usual practice of sanctioning the loan by the financial institutions is to have a detailed prior appraisal of the proposal made by the applicant company. In the present case, the IIM sanctioned the loan without such an appraisal and the argument of Mr. Cooper is that this hurry would indicate that the transaction of allotment of shares in that of direct allotment of the shares. The IIM resolution specifies that the sanction is subject to the detailed appraisal. Mr. Atmaramani has given an explanation as to why the detailed appraisal was postponed to a later date. He has stated that he had discussions with Trivedi of NRC and, at that time, Mr. Atmaramani was informed that a decision about the sanction was urgently necessary so that the company could pass a resolution under s. 293 at its AGM scheduled in June, 1978. Mr. Atmaramani has also deposed that Trivedi told him that the company intended to take in hand modernisation programme immediately. Another reason for the urgency was that IIM was to be held within a couple of days and it was felt that the matter should be placed before IIM on that day. The detailed appraisal of the proposal was made in November, 1978. Mr. Cooper has cross-examined Mr. Atmaramani as regards the difference in the original tentative proposal and the final proposal which was appraised in detail. There is also certain cross-examination suggesting that Mr. Atmaramani had no concern with this proposal. It seems that some time after completing the transaction the NRC wanted to alter the mode of expenditure of loan amount. This request was accepted by ICICI as can be seen from the letter dated October 16, 1979 (vide Ex. Z-69, part II, p. 2754). By that letter, the, NRC was informed that ICICI was agreeable to the proposal of NRC to defer the expenditure of Rs. 179 lakhs for the modernisation programme and to utilise Rs. 148 lakhs for setting up some unit other than that mentioned in the original modernisation programme. In our opinion, all this cross-examination might have been relevant when issue No. 20 was to be decided by the court. This issue reads as follows:

"Whether the granting of loan on terms which included a conversion clause and the issue of debentures with such clause was mala fide and/or fraudulent as alleged in para 73(e) of the plaint?"

This issue was given up at the time of argument before the learned single judge. In that para. 73(e), it was specifically pleaded (see. p. 1517 of the paper-book) that the power to issue debentures under s. 81(3) of the Act was exercised not for the purpose of issuing debentures or raising loans but in reality was an abuse for collateral purpose, viz., for issuing and giving the voting powers to the financial institutions. It was also alleged that the power of the directors to issue debentures and to grant loans is a fiduciary power and it was abused. Of course, there is a statement in that very para, that the immediate need, if any, would have been well met by inviting the existing shareholders to subscribe to the capital. Thus in this para. No. 73(e), the plaintiffs have alleged that the NRC was not at all in need of money so as to enter into a transaction of loan and debentures and that the suit transaction was a mala fide one. When Issue No. 20 pertaining to these allegations has not been pressed at the time of the argument in the court, we are not able to see as to how all the above cross-examination of Mr. Atmaramani is relevant for deciding the nature of the transaction. It is for this reason that we do not propose to discuss in detail the various submissions made by Mr. Cooper that the company was not in any urgent need of the finances. As a matter of fact, we would like to state that at one stage of the argument Mr. Cooper did not challenge the financial need of the company. His grievance is that there was no urgent need. But this grievance falls in the background once the plaintiffs have given up their contentions in para. 73(e) of the plaint. At any rate this aspect has no bearing while considering the question as to whether the nature of the transaction is of direct allotment of shares to the extent of 20% of the loan.

Nareshchandra Singhal, who is the Chief of the Project Department of the IC1CI, has given certain details about that part of the debenture loan which has been subscribed by ICICI. He has produced the detailed notes, Exs. 2 and 3, prepared by the ICICI with respect to the earlier loan applications from the NRC. The grievance of Mr. Cooper is that these notes have been wrongly exhibited as they are not proved. We do not propose to go into this controversy as the said notes have no direct bearing when we have to consider the nature of the transaction in question and hence we are deciding the controversy without taking into account the said notes. It is not, therefore, necessary to discuss in detail the evidence of Singhal about the proof of these documents, Exs. 2 and 3.

Thus all the evidence and the circumstances discussed above do not find favour with the plaintiffs' allegations. The plaintiffs have also urged that certain events prior to the suit transaction would be relevant while considering the nature of the transaction. Those events are twofold, viz., (i) refusal by the NRC to register the shares purchased by Berlias, and (ii) the freezing order issued under s. 108D of the Companies Act. In order to find out as to whether these events would be relevant for considering the nature of the transaction, it will be necessary to give some details thereof.

Plaintiff No. 1 became a shareholder of the NRC some time in April, 1977, and by that time he was holding about 2,736 shares. Thereafter, the plaintiffs acquired some more shares and they applied for registration of the transferred shares in their name. It appears that the NRC did not take an immediate action in that respect. Both the plaintiffs, therefore, filed Civil Suit No. 6691 of 1977 against the NRC and its directors for an order of the transfer of the shares in their favour. A similar Suit No. 6692 of 1977 was filed by the plaintiff No. 2 and Gurudayal Berlia with respect to certain other shares. These two suits covered 27,183 shares and 2,450 shares respectively. The copies of the plaints are at Ex. D-1, part II-A, pp. 1267 to 1321. The allegations in both the suits are that the NRC had wrongly refused to register the transfer of shares in their favour. These suits were filed on 1 st September, 1977. Both the plaintiffs then filed Company Petition No. 607 of 1977 in respect of 27,183 shares (which were covered by Suit No. 6691/77). The petition was under s. 155 of the Companies Act, with a request that the register of the shareholders should be rectified by including the names of the plaintiffs as the shareholders of the above shares. Similar Petition No. 736 of 1977 was filed with respect to 2,450 shares which were the subject-matter of Suit No. 6692/77. The meeting of the company (NRC) was fixed on 23rd September, 1977. A question arose in Company Petition No. 677 of 1977 as to what interim orders should be passed. This court on 21st September, 1977, passed an order that the meeting as scheduled should be held. However, it was ordered that item No. 2 in the agenda, viz., the question of the election of a director in place of Dr. Rossi should not be considered or voted till the decision of the petition. These four proceedings came to an end on 8th December, 1977, as Berlias and the NRC entered into a settlement. The copy of the settlement is at Ex. Z-59, part II, p. 2673. As per this settlement, the NRC agreed to transfer the equity shares in favour of Berlias and Berlias agreed to withdraw the abovementioned suits, viz., 6691 and 6692 of 1977, as also the Company Petition No. 607 and 737 of 1977. It is needless to say that Berlias accordingly withdrew the abovementioned proceedings and the NRC transferred the shares in their favour.

Mr. Cooper for the plaintiffs made a grievance that the two letters dated 12th December, 1977, marked for identification as (X-18, p. 3890) and dated 3rd February, 1978, marked for identification as (X-1, p. 3784) have wrongly been held as not proved by the learned single judge. The corresponding office copies of these letters are also produced at (X-27 and X-19) respectively. There is one more letter dated 3rd February, 1968, written by the NRC to the CLB. A copy thereof though provided is not exhibited but marked for identification as(X-2), p. 3795. Signatures on these documents are not proved as nobody has deposed that the documents have been signed by a particular person. It was urged by Mr. Cooper that such evidence is not necessary and the execution of these letters can be proved in any other manner.

He relied upon the decision of the Supreme Court in the case of Mobarik Ali Ahmed v. State of Bombay, AIR 1957 SC 857, wherein it is held that the execution of a document can be proved by a number of methods. The evidence may be direct, viz., a person who saw the document being written or signed can give evidence in that respect. The handwriting may be proved by one of the modes provided by ss. 45 and 47 of the Indian Evidence Act. Mr. Cooper relied upon another method that was considered by the Supreme Court. The following is the discussion in para. 11(at p. 864, AIR 1957):

"It may also be proved by internal evidence afforded by the contents of the document. This last mode of proof by the contents may be of considerable value where the disputed document purports to be a link in a chain of correspondence, some links in which are proved to the satisfaction of the court. In such a situation the person who is the recipient of the document, be it either a letter or a telegram, would be in a reasonably good position both with reference to his prior knowledge of the writing or the signature of the alleged sender, limited though it may be, as also his knowledge of the subject-matter of the chain of correspondence to speak to its authorship."

It is true that a link in a chain of correspondence would be relevant while considering the authorship but the Supreme Court has observed that in case of such links, the recipient of the document is able to speak about the authorship with the help of that link. In the present case, the plaintiffs have not led any evidence of the recipient of the letters. Similarly, the plaintiffs themselves have not entered the witness box to speak anything about the link of these documents forming a chain of correspondence. It is true that Mr. Cooper relied upon some other letters for the purpose of contending that the authorship of the above-mentioned letters should be held proved. But in our opinion, the procedure sought to be adopted by Mr. Cooper is too risky and flimsy to prove the authorship, particularly on account of the absence of the evidence of the recipient of the letters. It would not, therefore, be possible for Mr. Cooper to contend that the above letters should be admitted in evidence. However, the plaintiffs are relieved of the responsibility in this respect, so far as the letter marked X-1 for identification which is similar to the letter, Ex. X-9, is concerned. During the course of his argument, Mr. Nariman made a concession that this letter may be admitted in evidence. Accordingly, the said letter is marked as Ex. Z-84 but the other two letters, namely, Exs. X-2 and X-18, cannot be admitted in evidence. The admission or otherwise of these two letters as evidence would not make any serious difference when the letter, Ex. Z-84, is there.

Exhibit Z-84, p. 3784, of the paper book is addressed to the CLB, and it gives the details as to how the company initially refused to transfer the shares in favour of Berlias and later on agreed or consented for such transfer. Mr. Cooper urged that the contents of the letter would give an indication about the adamant attitude of the NRC against Berlias-As against this, Mr. Nariman submitted that the letter would show that the NRC had certain reasonable apprehension and hence the NRC initially hesitated to transfer shares in favour of Berlias. For the appreciation of these rival contentions, we would like to give in a nutshell the sum and substance as to what the NRC had conveyed to the CLB. It proceeds with a statement that the company had applied under ss. 187C and 187D and also under s. 247 of the Companies Act, 1956, and that pending this application, the board of directors of the NRC decided on 12th September, 1977, that all pending applications should be rejected. The company has sent to the CLB a copy of the specimen of the letter addressed to the various shareholders whose applications were so rejected. The company then informed the CLB that this question was considered in the AGM held on 23rd September, 1977, and a remainder was sent to CLB in connection with the above-mentioned application for appointing inspectors. There was a sort of dissatisfaction amongst the shareholders over the blanket ban on the transfers of shares and the company has stated in the letter that in the meeting it was suggested that the transfer of the shares not linked with Berlias and Kapadias should be accepted. Hence, on 28th September, 1977, the board of directors of the NRC decided to transfer a lot of 50 shares each provided that the lot did not belong either to Kapadias or to Berlias. The matter was further reviewed as the company continued to receive representations and a decision was taken that a transfer without any limit of 50 shares should be effected except the dealings of Kapadias and Berlias were concerned. The letter further refers to the order dated 9th November, 1977, appointing an inspector as prayed for by the company. The letter also states that the advocates of the NRC were of the view that it would not be possible to sustain the refusal of transfer in favour of Berlias and it was for this reason that the company agreed to transfer shares in favour of Berlias. The company has also stated in the letter that such a decision was taken in the background that even after the transfer of the shares in favour of Berlias, their total holding would come to 68,853 and that as against the holding of 1,14,696 by the financial institutions. The company has further stated that Berlias were not to get any controlling interest of the company on account of the transfer of the shares.

It is thus clear that the NRC had taken certain decisions not to transfer the shares in favour of Berlias. Mr. Cooper urged that this attitude was a purposeful one inasmuch as the then board of directors wanted to harass Berlias. It is true that the company was avoiding to transfer shares in favour of Berlias. However, the above-mentioned letter itself shows as to how the initial decision was taken not to transfer shares of anyone and how it was later on modified from time to time. The latter also indicates that the NRC agreed to transfer shares in favour of Berlias on account of the advice given by the advocotes. We are not therefore, able to hold that the NRC was acting in any mala fide manner. It appears that the company entertained certain apprehensions against Kapadias and Berlias and hence initially it took a decision not to sanction the transfer of shares in favour of Berlias. The conduct of the NRC in applying for an appointment of an inspector and the fact that such an inspector was appointed is relevant. Taking into account all these factors, we do not think that this letter can be interpreted to mean that the NRC has taken any mala fide decision to withhold transfers in favour of Berlias. All this, however, is about the transfer application made by Berlias in 1977.

Between March and June, 1978, Berlias lodged 8,350 preference shares and 16,346 equity shares for being transferred in their favour but those shares were not transferred by the NRC. Hence, the Berlias filed Company Petition No. 702 of 1978, under s. 155 of the Act, for rectification of the share register by making necessary entry of the transfer of the above-mentioned shares. Ex. Z-18-B, part II-A, p. 1813, is a copy of that petition. Berlias filed another Company Petition No. 16 of 1979 for rectification of the share register in connection with the additional 12,000 preference shares. Exhibit Z-18-A, part II-B, p. 1759, is a copy of Company Petition No. 702 of 1978. Company Petition No. 702 of 1978 was decided on 7th December, 1979, in favour of Berlias and Ex. Z-43-A, part II-B, p. 2447, is a copy of the judgment. All these documents do show that the NRC refused to accept the transfer of certain shares in favour of Berlias and that in some cases, agreed to effect the transfer when proceedings were filed in court while in other matters, the court granted relief to Berlias by delivering judgment in their favour. Mr. Cooper is right when he contends that the NRC was avoiding the transfer of shares in favour of Berlias. However, the settlement of 1977 had given an option to NRC to consider new transfer applications on their merits. There is nothing on record to show the reasons for which the NRC had rejected the transfer application. But the absence of such reasons would not necessarily mean that the NRC wanted to act maliciously against Berlias particulary when the company had certain apprehensions as discussed above. The result therefore, is that though the NRC had refused to transfer certain shares in favour of Berlias still that fact would not be a circumstance to suggest that the NRC in conjunction with the financial institutions decided to outvote Berlias by entering into a transaction of allotment of shares in the garb of debentures with a conversional option. Before closing this discussion, we may also observe that in all these proceedings there is no allegation that the financial institutions were behind the back of the NRC in refusing the transfer of shares. In fact, the plaintiffs' solicitor, Mr. D.K. Pandya, has admitted that Berlias did not have any complaint against defendants Nos. 1 to 7 (financial institutions) in regard to the affairs of the NRC. Hence, this circumstance would not have much bearing while deciding the nature of the transaction.

Mr. Cooper also relied upon another circumstance. On 17th June, 1979, the Central Govt. issued a freezing order under section 108D of the Companies Act. A copy of the order is at Ex. Z-7, part II, p. 1616. It is not necessary to reproduce that order in detail. Suffice it to say that the Central Government directed the NRC not to give effect to any transfer of shares in favour of Berlias. Similarly, there is a direction that in the case of transfers already registered, the NRC should not permit the transferee or his nominee to exercise any voting pewer. As far as the shares the transer of which has not been registered, there is a further direction that the transferor or his proxies should not be permitted to exercise voting attached to such shares. It is material to note that this order is preceded by certain other documents. In February, 1978, the NRC had applied to the Central Government for issue of an order under s. 108D of the Act. The Central Government rejected that application on the ground that the company has not supplied adequate data for issuing such order. The government letter is at Ex. Z-51, part II, p. 2570. We have already observed that Berlias had started purchasing shares of the NRC in good number. The Department of Company Affairs became panicky as this action of Berlias was likely to be prejudicial to the company's interest. A meeting of the various officers of the said department was held on April 26, 1978, and Ex. Z-54, part II, p. 2633, are the minutes of the said meeting. The meeting was attended by the following officers:

(1) Shri P. Krishna Murti, Secretary, Department of Company Affairs.

(2) Shri A. Neela Kamalan, Joint Secretary, Department of Company Affairs.

(3) Shri S.C. Mital, Joint Secretary, Department of Company Affairs.

(4) Shri V.K. Shunglu, Director of Banking Division, Department of Economic Affairs.

(5) Shri J.P. Mukharjee, Director (Investment), Department of Economic Affairs.

(6) Shri S.P. Ganguly, Director, Department of Company Affairs; and

(7) Shri V.P. Uppal, Under Secretary, Department of Company Affairs.

The said minutes make a mention about the number of shares that have been purchased by Berlias and also state that Berlias have obtained 1,74,127 proxies for utilising them at the time of the meeting of the NRC and that as against that, the financial institutions had collected 1,08,000 proxies. The meeting came to the conclusion that it would be prejudicial to the interest of the company if Berlias would gain the controlling interest of NRC and that if they are able to have their nominees on the board of directors, they would be able to utilise all the information of the company for their own purpose and interest. The meeting, therefore, resolved that directions be issued under section 108D of the Companies Act, not to transfer any share exceeding a block of 50 shares lodged by any individual. It was also resolved that the department of Company Affairs should examine whether further directions under s. 108D should be issued. The copy of the minutes was sent to the Director of Department of Economic Affairs for taking appropriate action. This can be seen from the letter dated 5th May, 1978 (Ex. Z-54, part II, page 2632). The UTI was also informed about this meeting and it appears that its views were called. Hence, on 23rd May, 1978, the UTI wrote a letter (which is part of Ex. Z-52, part II, p. 2572) to the Director (Investment), Department of Economic Affairs, New Delhi. The UTI informed the said director that the matter is somewhat serious as the plaintiffs were hand in glove with Kapadias and they helped Kapadias to indulge in malpractices.

It may be noted that in 1977, appointments of eight directors were made by the government in view of these malpractices. The UTI, therefore, suggested that an action under s. 108D of the Act be taken and that the UTI would be ready to pay the fair value for the shares as may be decided by the Controller of Capital Issues. On 30th May, 1978, the director of the Department of Economic Affairs sent a copy of the above letter to the Director of Department of the Company Affairs. On 6th June, 1978, the UTI and GIC wrote a letter (Ex. Z-53, part II, p. 2525) making a grievance that Berlias were hand in gloves with Kapadias group, which was instrumental in indulging in a sort of malpractice and this was the reason for inducting eight new directors by the government. There was also an apprehension that if Berlias Group came to power they would not allow the NRC to probe into the past misdeeds and several crores of rupees would be lost. It is also stated in the letter that if a director is appointed or elected by Berlias Group, any action contemplated by the NRC to be taken against Kapadia Group and others would be known to these adversaries and as such no effective steps would be possible. With these observations there was a request for an order under section 108D of the Companies Act. It is this background in which the order under s. 108D was issued by the government on 17th June, 1978, as the AGM of the NRC was to be held on 29th June, 1978.

The obvious result of the said order would have been that Berlias Group would not have been able to exercise their voting power on the basis of the additional shares purchased by them from time to time or on the basis of the proxies collected by them. We have already mentioned as to how Berlias filed Writ Petition No. 994 of 1978, and how certain conditional orders of injunction were passed under which Berlias undertook to vote the amended resolution to cover the additional loan amount of Rs. 300 lakhs.

Mr. Cooper laid much stress on the letter dated June 6, 1978, written by the two financial institutions viz., the UTI and GIC and urged that the freezing order was the direct result of the move taken by these two instititutions. It is true that immediately after this letter a formal freezing order dated June 17, 1978, was issued. However, it has to be borne in mind that the Government of India, i.e., its Department of Company Affairs and the Department of Economic Affairs, had already taken a decision on June 26, 1978, that necessary action under s. 108 should be taken. In the present litigation, we are not concerned much with the correctness or otherwise of that order but we have to see as to whether that order is on account of any joint efforts of the NRC and the financial institutions. The request of the NRC for such an order was already rejected in February, 1978. Thereafter, the two concerned Departments of the Govt. of India held a meeting and took certain decisions. There is nothing on record to show that either the NRC or the financial institutions have persuaded the Govt. of India to take any particular decision in the meeting. Under these circumstances, though a freezing order just prior to the AGM of 1978 was issued, still it will be very difficult for the plaintiffs to contend that such an order was a result of any move of the NRC and the financial institutions. At any rate, even if it is assumed that the said order was at the instance of the financial institutions, still it will not be possible to connect that order with the suit transaction for the purpose of deciding the nature of the suit transaction.

These are the submissions that have been made by Mr. Cooper and Mr. Nariman as regards the nature of the transaction and we think that the learned single judge is right in holding that the transaction was not of any direct allotment of shares so as to contravene the provisions of s. 81(1)(a) or s. 31 (1A) of the Companies Act. The nature of the transaction is thus that of debentures with an option to convert 20% of them into equity shares.

It was next urged that the allotment is bad on certain other grounds. To appreciate this contention, Mr. Cooper wants to rely on certain provisions of the debenture trust deed, i.e., cl. 4(a) of the trust deed as also cl. 5 of the form of the debentures. We have already reproduced these clauses in para. 26 above. He also relied upon cl. 23 of the trust deed. Before considering the above-mentioned clauses, we may also state that the debenture trust has denned the term "debenture" to mean the debenture issued and allotted to various financial institutions and the term "holder of the debenture" means the holders for the time being as entered in the register of debentures. Mr. Cooper has submitted that for exercising the option, the following conditions are necessary:

(1) There must be debentures issued in favour of each of the financial institutions.

(2) The financial institutions must be the holders of the debentures, i.e., their names must be entered in the register of debentures.

(3) The financial institutions should identify or earmark particular debentures up to 20 per cent of the total debentures by necessary appropriation for being converted into equity shares.

(4) With respect to these earmarked debentures, the financial institutions should give a conversion notice in writing of not less than one month.

(5) After the conversion of these debentures, the financial institutions should surrender the debentures to NRC.

In the present case, only letters of allotment have been issued to the financial institutions and the debentures proper have not been issued. Thus, there were no debentures so issued and consequently no entry in the register of debentures. Mr. Cooper also contended that as the debentures were not issued, the financial institutions were not able to earmark or separately appropriate certain and. particular debentures up to 20 per cent, for conversion. The notice given by each of the financial institutions does not comply with the requirement that it should be one month's notice. It was, therefore, urged that on account of the above deficiencies, the allotment of shares is totally bad. In our opinion, all the above-mentioned requirements did not constitute a condition precedent for exercising the option. All these provisions are meant to avoid any difficulty or problem as to who are the debenture holders and which debentures are to be converted into equity shares.

The term debenture is defined in s. 2(12) of the Companies Act, 1956. It is an inclusive definition. It is true that the parties intended that debentures in the prescribed form should be issued. But the question is as to what would be the effect of omission in that respect. Our attention is drawn to the following observation on p. 146 of Palmer's Company Pre cedents, 16th edn:

"Where a company offers debentures for subscription and states the security offered, and any debentures are taken up on the faith of the prospectus, the subscribers stand in equity in the same position as if the securities had been actually granted, for equity treats that as done which ought to have been done."

In that very book it is also observed that a person having called for the debentures was in equity a holder thereof. It is true that the cases where such observations have been made arose when the company has neglected to issue debentures. The grievance of Mr. Cooper is that in the present case, there was no such neglect. He argued that, on the contrary, parties rushed through the transaction without observing the condition for issue of debentures. In our opinion, the issue of debentures though desirable, would not always be mandatory. Omission in this respect would be immaterial and innocuous particularly when the parties who are entitled to the debentures are not prejudicially affected. In the present case, the financial institutions as well as the NRC have acted in terms of the debenture trust deed. There is no grievance on the part of the financial institutions about the non-issue of the debentures. We have already observed that the letters of allotment of debentures have been issued by the NRC. Obviously, those letters make it clear as to in whose favour the debentures were to be issued. The actual issue of debentures would thus be a procedural aspect and an omission thereof would not vitiate the issue of shares on conversion.

It was next urged that as per the debenture trust no debentures could be converted into shares unless a notice of such conversion is given. The argument is that till such a notice is given there would not be any identification of those debentures which are to be converted into shares. In other words, there was no earmarking or appropriation of particular debentures for conversion. But it is material to note that the financial institutions by their notice have exercised their option up to the maximum limits, viz., 20% of the total debentures. In that background, prior earmarking or appropriation of particular debentures for conversion was not at all necessary or mandatory. The parties contemplated that there should be one month's notice for conversion. The notice given by the financial institutions is not such a type of notice. However, the case of the defendants is that the notice has been waived. Giving of one month's notice is after all a contractual provision and the company would have a right to waive it. Mr. Cooper contended that at the time of converting the debentures into shares it was necessary for the financial institutions to surrender the debentures and he argued that in the absence of the debentures there was no possibility of their surrender. Mr. Nariman submitted that all this was for the benefit of the parties and the parties would be entitled to waive them. A provision for surrender of the debentures was for the purpose of identifying which of the debentures have been converted. If there is no such dispute about the identification, the omission to surrender the debentures would be immaterial and it would not affect the legality of issue of the shares.

The Controller of Capital Issues has granted approval for the incorporation of the option clause in the debentures of the value of Rs. 70 lakhs (out of Rs. 350 lakhs). It was urged by Mr. Cooper that on account of this approval, the company should have issued two types of debentures, debentures worth Rs. 70 lakhs with an option clause and the debentures of Rs. 280 lakhs without such a clause. Instead, the debenture trust deed speaks only of the total debentures being of Rs. 350 lakhs and then a provision is made that 20% thereof can be converted. In our opinion, the omission of issuing separate debentures with the option clause does not make any difference inasmuch as the document provided conversion of 20% of the total debentures of Rs. 350 lakhs. Thus, the object and meaning contemplated by the order of the Controller of Capital Issues has been achieved and conveyed by using different words. Consequently, there is no substance in the contention of Mr. Cooper that the debentures are not issued in terms of the approval of the said authority.

There is one more submission, viz., that as per the articles of association of the company it was necessary that there should be a sanction by the general body resolution for incorporating an option clause in the debentures. Clause 15 deals with the issue of shares. That clause is practically similar to the provisions of s. 81 of the Companies Act. Clause 16 then provides that subject to the other provisions of the articles of association, the allotment of shares would be in the control of the directors. However, the sanction of the general body is necessary if issue of shares contemplates an option to call for further shares. Clause 18 deals with the powers of the company and it provides the necessary resolution as contemplated by s. 81. The clause further states that the general body may also vote for an option to call for further shares. A plain reading of cl. 18 shows that resolution of the G. M. is necessary only when at the time of allotting shares a further option for additional shares is contemplated. Clause 77 deals with borrowing powers of the directors. Such a power is given in general terms without any restrictions. Under cl. 78, a provision is made for issue of debentures while borrowing loans. Clause 79 is relevant for our purpose; it reads as follows:

"Any debentures, debenture stock or other securities may be issued at a discount, premium or otherwise and may be issued with any special privileges and conditions as to redemption, surrender, drawing and attending (but not voting) at general meetings, appointment of directors and otherwise."

Thus the debentures can contain certain privileges. Mr. Nariman contended that the word ' otherwise ' would show that the powers of the board of directors are large enough to include an option to convert a part of the debentures into equity shares. Mr. Cooper urged that the said word should be used in a restricted meaning so as to cover the privileges or conditions about redemption, surrender, etc. We do not think that such a restricted meaning to the word "otherwise" should be given. If the debentures are within the powers of the board of directors, the term of option being a part of such debentures would also be within that very power. It will not, therefore, be possible for Mr. Cooper to contend that the option clause is bad in the absence of the resolution of the general body.

The net result of the above discussion is that the transaction in question is not liable to be challenged on any of the grounds mentioned above.

Before going to certain other points raised by the plaintiffs as well as by the defendants, we would like to dispose of the contention of the plaintiffs about the constitutional invalidity of s. 81(3) of the Companies Act. In a nutshell that sub-section confers powers on the Central Government to specify certain institutions. The effect of this specification is that in the case of debentures (with option to convert into equity shares a part of the debentures) to these institutions, it is not necessary that the proposal about the debentures is to be got approved by a special resolution of the company. In the present case, defendants Nos. 2 to 7 have been accordingly specified by the Government. The argument of Mr. Cooper is that the provision in s. 81(3) which enables the government to specify such institutions, grants wide untrammelled and unguided discretion to the government and that such a power without any guidelines would be bad as being violative of articles 14 and 19. With this submission Mr. Cooper wants to contend that if the power under s. 81(3) of specifying institutions is bad, consequently, the specification of defendants Nos. 2 to 7 as the institutions under s. 81(3) would be bad. He further argued that in this background the grant of debentures with an option of conversion is itself bad. He also submitted that if the debentures are bad the conversion of a part of the debentures into shares would also be illegal. In our opinion, all these submissions are not tenable for two reasons. Mr. Cooper has made a statement during the course of the trial that the plaintiffs would not be challenging the debenture trust deed. It includes a conversion clause. The learned single judge has held that, after making such a. statement, the plaintiffs cannot be allowed to impeach the validity of any part of the debenture trust deed by challenging the above provisions of s. 81(3). We do not find anything wrong in this approach.

Secondly, the very purpose of attacking the abovementioned provisions of s. 81(3) is to challenge the legality of an order of the Central Govt. by which defendants Nos. 2 to 7 have been specified as the institutions. It will not be possible for the plaintiffs to urge that they only want quashing of the abovementioned part of s. 81(3) without actually praying that the notifications issued under the impugned part of s. 81(3) should be quashed. The notification has been issued by the Central Govt. and the Central Govt. would be interested to defend the validity of the notification by contending that no part of s. 81(3) is unconstitutional. In that suit, the Union of India is not made a party. Mr. Cooper contends that the Union of India is not at all a necessary party. According to him, once the concerned part of s. 81(3) is struck down, the notification issued by the Central Govt. would not survive. However, it would not be permissible to decide the validity or otherwise of any provision of s. 81(3) without making the Union of India a defendant when the very purpose of raising such a contention is to set at naught the notification issued by the Union of India. Mr. Cooper relied upon the provisions of O. 27A of the CPC which lays down that the notice to the Attorney General should be issued whenever in any suit it appears to the court that any question as is referred to in article 132(1) of the Constitution is involved. He submitted that the trial court has issued such a notice and that, therefore, there would not be any difficulty in deciding the question about the validity of the above-mentioned part of s. 81(3). It is true that a notice to the Attorney General is so provided. But if any notification is issued on the basis of the powers under a section which is challenged as unconstitutional, the authority which has issued the notification has every right to urge the validity of the notification on all the counts including the validity of the concerned section. It is for this reason that we told Mr. Cooper that we would not allow him to agitate this constitutional point when the Union of India is not a party to this litigation.

The learned single judge has decreed the suit on the ground that waiver of one month's notice was mala fide and that the issue of shares after such mala fide waiver was bad. This finding is challenged by Mr. Nariman, while Mr. Cooper argued that the said finding is correct. There were certain arguments advanced before us that, the plaint did not contain the plea of mala fides. However, the averments in para. 73D show that there is an averment that one month's notice was mandatory and that such a notice cannot be waived. Thereafter, it is alleged as follows:

"The plaintiffs submit that in any event the purported waiver by defendants Nos. 1 to 7 themselves and the purported acceptance thereof by the directors was wholly mala fide and an abuse of the fiduciary position, illegal and invalid."

Thus, there is a sort of pleading of mala fides in waiving the notice.

Mr. Nariman then contended that at least the plaint does not give material particulars of the mala fides. He drew our attention to the fact that in para. 72 (material portion on p. 121 of the paper-book), there is a specific plea that just before the closure of the register of members in connection with the thirty-first annual general meeting (which was held on 29th June, 1978), hectic efforts were made to complete the transaction and there was undue haste on the part of the directors in that respect. The grievance of Mr. Nariman is that there is no mention of a similar allegation so far as the meeting of 1979 is concerned. According to him, there should have been a specific mention that the waiver of notice was mala fide with a view to have additional voting strength for that meeting. Mr. Cooper replied that this would not be a correct statement inasmuch as in the same para, (on p. 129 of the paper-book), there is an averment which reads as follows:

"Defendants Nos. 1 to 7 thus acquired for themselves voting power to the extent of 51,000 votes to enable them to control the passing of the resolutions to be moved on 28-6-1979. 43,750 shares were allotted to respondents Nos. 1 to 7 as per statement hereto annexed and marked Ex. 'S' in respect of the privately placed debentures......."

Mr. Nariman, however, urged that initially the date in the above reproduced portion of the plaint was June 29, 1978, and that it was corrected on July 6, 1982. This can be seen from the order of the court at record No. 36 (vide p. 961 of the paper-book). According to him, this correction was made after the evidence was recorded and hence the defendants were at a disadvantage. According to Mr. Cooper correction was not a surprise to the defendants. He submitted that even at the time when he opened the case before the trial court (that is, before leading the evidence), he had stated that the words and figures "29th June, 1978", were a mistake and that they should read as 28th June, 1979. However, no formal amendment application was made in the trial court and the court corrected the date. the order of the court dated 6th July, 1982, reads as follows;

"Mr. Cooper, referring to para. 72(V), of the plaint, had stated in his opening that the date in the first sentence read '29th June, 1978' by mistake and that it should read '28th June, 1979'. The question now having arisen, Mr. Cooper reaffirms that statement. The date accordingly will read as ' 28th June, 1979 ', and the court has altered the date in the original plaint without formal amendment."

Thus, at the time when the parties led evidence there was a mere statement about the mistake but the plaint was not actually amended. There is, however, much substance in that contention of the defendants that the plaint is silent as to what was likely to happen in the intervening period of one month from 31st May, 1979, and how the financial institutions wanted to utilise the additional voting strength. It was rightly urged by Mr. Nariman that there should have been a specific pleading of particulars of mala fides. The absence of such a pleading is very much relevant. This is more so when Mr. Cooper submitted that an adverse inference should be drawn against the defendants as none of the directors have entered the witness box to depose as to why the notice was waived. In the first place, the plaint, as it stood at the time of evidence, did not specifically allege that the additional voting strength was to be utilised for the meeting of 1979. As stated earlier, the unamended portion of the plaint gave an indication that this additional voting strength was for the purpose of passing resolutions in the 1978 meeting It is needless to state that in fact no controversial or debatable resolution was moved in the said meeting. To a certain extent the defendants can contend that they were taken by surprise by the above amendment of the plaint after the evidence was over. However, we cannot attach too much importance to this. But the other objections of Mr. Nariman is more relevant. The plaint did not contain any particulars of mala fides by alleging that any debatable or controversial topics or resolutions were intended to be brought before the meeting of 1079 either by Berlias or by anybody else. Kaniayalal Naraindas Atmaramani is the Joint General Manager (Investments) of UTI. He has given evidence as to how the demand for additional loan of Rs. 300 lakhs was processed in 1978. He has also deposed as to how the matter was finalised in 1979. In the cross-examination, specific suggestions have been made to Atmaramani about the hurry and its purpose when processing the matter in 1978. We would like to reproduce that part of the evidence which reads as follows: (Vide pp. 910 and 911 of the paper-book).

"Q: I put it to you that the only urgency was the desire of the financial institutions and defendant No. 1 to see that they acquired more shares and increase their voting strength before the ensuing AGM of the 8th defendant to be held June, 1978?

A: It is not correct......

Q: I put it to you that the urgency to obtain shares ceased when the freezing order under section 108 was obtained?

A: It is not correct."

No specific case has been put to this witness in the cross-examination that there was particular hurry in 1978 and that the notice was waived in order to complete the transaction, maliciously and in a hurried manner. Similarly, no questions were put to Atmaramani in cross-examination that the financial institutions were in need of getting additional voting strength for the meeting of 1979. Relying upon this omission, Mr. Nariman contended that the evidence of Atmaramani as far as the happenings in 1979 remained unchallenged. He drew our attention to a decision of the Calcutta High Court in the case of A. E. G. Carapiet v. A. Y. Derderian AIR. 1961 Cal 359, wherein it is laid down that the omission to put one's case in the cross-examination should be interpreted to mean that the said party, so to say, accepts the account given by the witness earlier in the examination-in-chief. Mr. Cooper did not challenge this legal position. He, however, urged that the need for putting the case to a witness would arise only with respect to the evidence given by the witness in examination-in-chief. He further contended that it was not necessary for the plaintiffs to put the plaintiffs' case to Atmaramani about the events of 1979 when Atmaramani has not deposed anything about them in the examination-in-chief. It is true that putting up of a case would have relevancy in the background of what the witness has deposed in the examination-in-chief. However, we are not able to accept the contention of Mr. Cooper that Atmaramani has not deposed anything about the happenings of 1979. At Ex. Z-25, part II, p. 1925, of the paper book, there is a note dated April, 7, 1979, prepared by the common advocates of the defendants as to how the transaction was to be finalised. It is made on the basis of the discussions that have taken place between the advocates and the representatives of the company as also of the financial institutions. The note shows that Atmaramani was present on behalf of UTI and the note states that the financial institutions indicated that the transaction should be completed by the end of May, 1979. The note also shows as to what steps were expected to be taken for the preparation of the draft debenture trust deed and the execution thereof. Certain other facts are also included in the note. Atmaramani was present on 31st May, 1979, when the transaction was completed. He has deposed that he has signed the subscription letter which is at Ex. 9 part II, p. 3500, of the paper-book. Not only that but the notice of exercising option (Ex. Z-34, part II, p. 2388) has also been given to the company under his signature and he had deposed that he handed over that notice to the company on 31st May, 1979. He has then added that he has attended the meeting of 28th June, 1979. It will not, therefore, be correct to say that Atmaramani has not deposed anything about the transaction including the giving of notice of exercising the option. In view of this position, we will not be able to accept the contention of Mr. Cooper that there was no necessity of cross-examining Atmaramani by putting the plaintiffs' case about the alleged hurry or alleged mala fides in waiving the notice.

All the above factors will be relevant while considering the contention that Mr. Cooper urged, that an adverse inference should be drawn because none of the directors have entered the witness box. Similarly, they would have relevance while appreciating the plaintiffs' cases about the mala fides in waiving the notice.

Mr. Cooper wanted to rely upon a number of previous antecedent events for the purpose of contending that the waiver of notice was mala-fide. For example, he drew our attention to the fact that the company had refused to transfer the shares of Berlias in 1977 and 1978 and that Berlias were required to go to the court for getting reliefs. The other factor on which he wants to rely is the freezing order dated 17th June, 1978, and the correspondence pertaining thereto. We have, in the earlier part of the judgment, discussed the details thereof. Mr. Cooper has also relied upon the fact that in April, 19J8, Berlias had lodged proxies to the extent of 1,74,500 as against the financial institutions' voting strength of 1,04,000 odd. It is on the basis of these various circumstances that a submission was made that the waiver of notice was a mala fide one. The learned single judge has come to a conclusion that a prima facie case of mala fides in the waiver of notice has been made out and that it was necessary for the company to lead evidence to disprove this prima facie case. It is also observed that in the absence of such evidence, the plaintiffs would be entitled to succeed on the question of these mala fides. We have already observed the reason why the directors have not entered the witness box. But the more important question is whether, in fact, the plaintiffs have made out any case of mala fides.

In the trial court, no arguments were advanced that the shares were issued mala fide. In para. 33 above, we have already observed that in the lower court Mr. Cooper has not pressed and has given up Issue No. 20, which reads as follows:

"Whether the granting of loans on terms which included a conversion clause and the issue of debentures with such clause was mala fide and/or fraudulent as alleged in para 73(e) of the plea ?"

In addition Mr. Cooper did not advance any arguments before us to suggest that the allotment of shares is itself mala fide. The only mala fides alleged are with respect to the waiver of notice. The effect of the waiver was to accelerate the allotment of shares earlier, i.e., before the expiry of one month's notice.

It is true that by and large, the directors of the company are not expected to act maliciously or improperly and that the main idea in their mind should be the interest of the company. A number of cases were cited on behalf of both the sides and it is material to note that they all deal with the issue of shares. For an example, in the case of Nanalal Zaver v. Bombay Life Assurance Co. Ltd. [1949] 19 Comp Cas 26 (Bom), it is held that other motives of the directors would be irrelevant once it was established that the company was in need of additional funds and that fresh issue of shares is decided to make good these funds. This decision has been upheld by the Supreme Court in the case of Nanalal Zaver v. Bombay Life Assurance Co. Ltd. [1950] 20 Comp Cas 179. The Supreme Court has also considered this aspect in another case of Needle Industries (India) Ltd. v. Needle Industries Neway (India) Holding Ltd. [1981] 51 Comp Cas 743 (SC). It is held therein that what is considered objectionable is the use of such powers merely for an extraneous purpose like maintenance or acquisition of control over the affairs of the company. In Howard Smith Ltd. v. Ampol Petroleum Ltd. [1974] AC 821; [1974] All ER 1126 (PC), the facts were quite eloquent. Howard Smith Ltd. intended to purchase the shares of another company known as Millers. Such intention was expressed on 15th June. Two other companies were having majority of shares in Millers and they had issued a statement dated 27th June, that they would act jointly for rejecting any offer from Howard Smith Ltd. The directors of the company were, however, in favour of Howard Smith Ltd. Hence, in order to favour the attempt of Howard Smith Ltd. to take over the Millers Company, the directors on 6th July issued a large number of shares in favour of Howard Smith Ltd. Thus, in view of the fact that the majority shareholders did not want that Howard Smith Ltd. should take over the Millers Company, the court held that the allotment of shares to Howard Smith Ltd. was mala fide. Obviously, what was relevant was the fact that on 27 th June, the majority shareholders opposed the offer of Howard Smith Ltd. and within ten days, the directors issued shares in favour of Howard Smith Ltd. It is thus clear that there was evidence of mala fides. In the case of Piercy v. S. Mills and Co. Ltd. [1920] 1 Ch 77 (Ch D), the facts were of a similar type. The plaintiff in that case was serving as a manager in the company. Differences arose between him and the two directors of the company. The directors felt that the plaintiff was not suitable to work as manager. In the meantime, the plaintiff (the manager in the company) acquired majority shares of the company and he desired to be one of the directors of the company. In fact, on 17th September, he intimated the then directors about this desire. He also sent a notice that he wanted to nominate two persons as directors in the next general meeting. Obviously, on account of the majority shares which he held, the plaintiff would have been successful in this respect. On 17th October, the plaintiff was dismissed from service and on 18th October one of the directors wrote to the other director that the issue of additional sufficient shares to these very directors seemed to be the best way to outvote the plaintiff. Thereafter, the directors allotted certain shares to themselves and this allotment was declared as invalid. It is clear that here also mala fides were writ large, as, in the impending general meeting the plaintiff manager wanted to get himself and his two nominees elected as directors. The allotment of additional shares was thus an attempt to defeat the plaintiff by increasing the voting strength of the other side. In Punt v. Symons & Co. [1903] 2 Ch 506 (Ch D), the facts were quite different. Under the articles of association of the company, one George Green Symons was to be the governing director with power to appoint other directors. It was also provided in the articles of association that, after his death, his executors and trustees would have similar power. G.G. Symons died. The executors appointed John Jay as managing director of the company. Differences arose between the executors of G.G. Symons and another director, namely, G.R. Symons. However, the majority of the directors wanted to act against the executors and trustees of G.G. Symons. They wanted to deprive the executors and the trustees of G. G. Symons of power given to them under the articles of association. The directors, therefore, issued 11 shares to 5 shareholders and then called an extraordinary general meeting wherein a resolution was passed doing away with the rights of the executors and trustees of G. G. Symons to appoint the directors. This was challenged and the court held as follows:

"On the evidence I am quite clear that these shares were not issued bona fide for the general advantage of the company, but that they were issued with the immediate object of controlling the holders of the greater number of shares in the company, and of obtaining the necessary statutory majority for passing a special resolution while, at the same time, not conferring upon the minority the power to demand a poll."

The above-mentioned underlined portion would show that the allotment of shares was cancelled as on the evidence as was available, the immediate object was to disturb the majority for a particular sinister purpose. In Clemens v. Clemens Bros. Ltd. [1976] 2 All ER 268 (Ch D), the allotment of shares was held bad because there was evidence and circumstances to indicate that this was done for a definite purpose to have control of the company.

Two other cases were also cited before us, namely, W. M. Roith Ltd., In re [1967] 1 All ER 427 (Ch D) and Lee, Behrens & Co. Ltd., In re [1932] All ER Rep. 889. Both these cases deal with the question as to whether the grant of pension to the legal representatives of the erstwhile director of the company was a bona fide action and, on the facts that were available there, it was held that such action should not be permitted. Halsbury has discussed the powers of the directors in para. 499 of Vol. VII in following words:

"Directors in exercise of their powers are fiduciary agents for the company and they owe a duty to the company to exercise an independent judgment accordingly. Their powers of making calls and forfeiting shares, etc., must not be used to favour themselves above other shareholders or to favour particulur classes of shareholders... The exercise by the directors of discretionary powers will not be interfered with unless it is proved that they have acted from some improper motive or arbitrarily or capriciously."

In footnote No. 9 in that paragraph, it is observed as follows:

"In the absence of evidence to the contrary the court will take it for granted that they have acted reasonably and in good faith."

It is thus clear that the allotment of shares should not be made for any improper motive and if there is evidence of such motive, the allotment is liable to be struck down as bad. Mr. Cooper contended that on the same analogy the action of the directors in waiving the notice period should be scrutinised. It is true that Mr. Nariman argued that the period of notice and its waiver would be a contractual obligation and the directors would not be under any fiduciary duty similar to one while alloting shares. However, one must not forget that the directors are not expected to act with any mala fide motive and Mr. Cooper would be right when he contends that the waiver of notice would be bad if mala fides are proved.

Hence, it is necessary to decide as to whether there were any mala fides on the part of the directors when they waived the notice period. The contention of the plaintiffs is that the notice was waived with a view to grant additional voting strength to the financial institutions. It is, however, material to note that such a voting strength would have been acquired by the financial institutions even by giving one month's notice. The only thing in that case would have been that the financial institutions would have obtained that strength not earlier than the end of June, 1979. What has happened by the waiver of the notice is that the financial institutions obtained the additional voting strength by 5th June, 1979. The question is as to whether this grant of additional voting strength in an accelerated manner by waiving notice is mala fide. This would be primarily a question of fact. What has happened in 1977 and 1978 would not be decisive though it may be remotely relevant. We will have to find out as to whether there was any immediate or urgent apprehension in the mind of the company and the financial institutions that the financial institutions should require this additional voting strength in the meeting of 28th June, 1979. Was there anything to suggest that the company or the financial institutions ever thought that they would be requiring additional voting strength of 43,750 shares? None of the plaintiffs have entered the witness box to depose that he intended to raise certain objections or to put certain resolutions which would require voting. As a matter of fact nothing controversial took place in the said meeting. No resolution was moved on which there was any debate. There was thus no occasion for exercising voting power for or against any resolution. There is no evidence to suggest that the plaintiffs or any other shareholder had given prior indication to the company or the financial institutions that there was the possibility of any debatable issue being raised in the meeting. The plaint also does not allege anything in this respect. Thus, the evidence, as it stands in this case, does not prove that there was any immediate need to increase the voting strength of the financial institutions for being utilised in the meeting of 28th June, 1979. In the absence of such evidence, it will be very difficult for the plaintiffs to contend that there were any mala fides simply because the notice was waived.

The question of waiver of notice and its mala fides can also be viewed from another angle. There is no legal provision that the debenture trust deed or the debenture must contain a clause that for exercising an option for converting the debentures into shares, a notice of a particular period should be given by the debenture holder. Statute does not provide for any such notice. It is only the debenture trust deed and the debenture which has to make provision as to how the option should be exercised and there is no legal bar if a provision is made that the option should be exercised by giving a simple notice without providing that the said notice should be of a particular period. Notice of 1979 AGM was issued on 28th April, 1979. The draft of the debenture trust deed was prepared on 24th May, 1979. On that day, the parties were knowing that the next AGM was to be held on 28th June, 1979. The board of directors held the meeting on 24th May, 1979, and had passed a resolution authorising certain directors to finalise, settle and incorporate any modifications and changes in the draft debenture trust deed. The resolution also authorised the execution of the debenture trust deed with any such modifications or changes. There was nothing to prevent the board of directors to amend the draft by deleting the clause of one month's notice. This is very important as on deletion of the clause (at the time of finalisation of the draft, there would not have been any question of waiving the notice and that too with a mala fide intention. The debenture trust deed was executed on 31st May, and the financial institutions have given notice of option on that very day. This shows that the financial institutions were keen on exercising the option as soon as possible. Plaintiffs' allegation is that the financial institutions have pre-determined to exercise the option on 31st May, 1979 (that is, the date on which the debenture trust deed was executed). Mr. Nariman is right when he contends that in this background, it will be very difficult to hold that the parties to the transaction, namely, the company and the financial institutions, initially purposefully created a hurdle by providing one month's notice and thereafter they got over that hurdle by maliciously waiving the notice. There would not have been any question of malice in waiving the notice if such a notice clause was not at all provided for As discussed above, the provision for such one month's notice was not compulsory and nothing prevented the parties to provide the exercise of option without such one month's notice.

In para. 29, we have already referred to the cross-examination of Shri Nareshchandra Singhal and the statement (Ex. Z-75, part II, p. 3232, onwards), which he has produced at the instance of the plaintiffs. That statement shows that there are a number of instances when the period of option was agreed to commence even before the advancement of loan. Similarly, there are instances where the option was exercisable at any time during the currency of the loan and not on or before a particular date. The loan to motor industries was advanced on 1st October, 1973. The option was exercised and the shares were allotted on the very day, though 15 days' notice was contemplated before exercising such an option. Mr. Nariman is right when he contends that this is another indication that there was anything irregular or mala fide in getting the shares immediately. We, therefore, hold that the allotment of shares is not at all vitiated as there were no mala fides when the notice was waived. Similarly, it will not be possible for the plaintiffs to contend that adverse inference should be drawn against the defendants because they have not examined any director of the company as a witness. We have already discussed in the earlier part of the judgment this contention of the plaintiffs in detail. The net result, therefore, is that the plaintiffs fail on all the counts and the suit is liable to be dismissed.

The defendants have also raised certain defences to the suit. These defences need not be considered as the suit is liable to be dismissed in view of the above findings. However, in order to make the judgment complete, we propose to discuss and decide them as they have been urged before us. It was urged on behalf of the defendants that the suit is not maintainable and would be bad for not joining the debenture trustee, namely, the Bank of Baroda, as a party. The said debenture trust has made a provision for the issue of debentures worth Rs. 350 lakhs. It also contains a convertibility clause as discussed above. The plaintiffs case is that the conversion of 20 per cent, of the debentures is bad. On account of the conversion, the total value of debentures, was reduced to Rs. 280 lakhs. The plaintiffs' grievance is that the convertibility is bad and thus the debentures would continue to be of Rs. 350 lakhs. Mr. Nariman, therefore, urged that in this background, the trustee, namely, the Bank of Baroda, is a necessary party. In our opinion, the debenture trustee has no concern with the dispute as to whether particular debentures have been properly converted into shares or not. The trustee is entitled to take certain steps if NRC fails to repay the debenture debt and the interest thereon. The trustee is not at all concerned as to who are the debenture holders. It is a matter solely between the company and the particular debenture holder. The relief that certain debentures have been illegally or improperly converted into equity shares can be appropriately granted in the absence of the trustee as a party to this litigation. The question as to whether a particular party is necessary or not depends upon the facts of each case, namely, pleadings and the reliefs claimed. This court in the case of Vyankatesh Dhonddev Deshpande v. Sou. Kusum Dattatraya Kulkarni, AIR 1976 Bom 190, held as follows (at p 205):

"It is, however, well established that where the plaintiffs can obtain complete and effective reliefs from the court in respect of the subject-matter in dispute against a party, it is not necessary to join any other party, whether it is Government or others. In the present case, as already stated above, the contention of the plaintiffs was that the auction sale of the suit land was ultra vires, illegal, unauthorised and void and, therefore, the possession of the defendant was also illegal. The plaintiffs were entitled to a complete and effective relief by obtaining possession of the land from the defendant. They sought no relief against the Government. They were not bound to seek any relief against the Government."

In the case of Narayan Chandra Garai v. Matri Bhander Pvt. Ltd., AIR 1974 Cal 358, the Calcutta High Court held as follows (at p. 358):

"A person is not to be added as a defendant merely because be or she would be incidentally affected by the judgment. The main consideration is whether or not the presence of such a person is necessary to enable the court to effectually and completely adjudicate upon and settle the questions involved in the suit. If the question at issue between the parties can be worked out without anyone else being brought in, the stranger should not be added as a party."

Reliance is also placed on the Full Bench decision of the Rajasthan High Court in the case of Hardeva v. Ismail, AIR 1970 Raj 167. There a property was sold to the defendant by a third party. Plaintiff, who claimed ownership over the very property filed a suit against the defendant claiming possession on the strength of plaintiff's own title. The High Court held that the third party who has sold the property to the defendant was not a necessary party inasmuch as effectual decree for possession can be passed against the defendant. Certain other decisions were also cited by Mr. Cooper. We do not think it necessary to make mention thereof, as we are satisfied that the learned single judge has rightly held that the trustee, namely, the Bank of Baroda, is not a necessary party to this suit.

Another contention of Mr. Nariman is that even if the plaintiff's case is accepted in its entirety, the plaintiffs would be barred from getting any reliefs on account of acquiescence, ratification and laches. His argument is two-fold. He argued that if the transaction is of a direct allotment of shares in breach of s. 81(1) and s. 81(1A), the defendants would be barred from contending about this illegality. This submission will have to be rejected outright inasmuch as an act which is illegal from its inception, cannot become legal by applying the principle of estoppel, laches and acquiescence. The second submission of Mr. Nariman is that at least the alleged mala fide waiver of notice would not survive as the plaintiff's contention in that respect would be barred by estoppel, laches and acquiescence. The allotment of shares on account of mala fide waiver would be a voidable transaction and hence it would be necessary to consider as to whether the plaintiffs' contention would be barred as alleged by the defendants. The annual general meeting was held on 28th June, 1979. In this meeting, plaintiff No. 1 was present. The statement of the chairman in that meeting is at Ex.11, Pt. II, p. 3503, (relevant p. 3507). In paras. 9 and 10, the Chairman has stated as follows: vide at pp. 3511 and 3512 of the paper-book.

"9. FINANCE:

Your company is coming ahead with the programme of modernisation to which I had made detailed reference in my last year's statement as also in the directors' report. In this context I am happy to report that the documentation concerning financial assisstance of Rs. 300 lakhs sanctioned by the financial institutions for modernisation has been completed. Subscriptions have been received from all the institutions against the privately placed debentures issued for the purpose. Some orders have been released on vendors for supply of machinery and equipment for modernisation. Other proposals are being processed and orders will be released in the near future.

10. CAPITAL STRUCTURE:

In accordance with the terms of financial assistance sanctioned by the Institutions for financing the Nylon Phase II programme and also the modernisation programme, in all amounting to Rs. 408 lakhs, the institutions have opted to convert Rs. 81.6 lakhs into equity shares at a premium of Rs. 60 per share. Accordingly, 51,000 equity shares have been issued to UTT, ICICI and GIC and its subsidiaries. Consequently, the paid up equity share capital of the company stands increased by Rs. 51 lakhs to Rs. 551 lakhs and the reserves and surplus now stand at Rs. 696 lakhs."

On 27th June, 1979, the company had submitted a return to the Registrar of Companies showing the allotment of 51,000 shares to the financial institutions, to convert all debentures. This return is at Ex. 17, part II-7, p. 3578. The return though filed in 1979, was actually ordered to be registered on August 16, 1980. There is an annual return dated August 23, 1979, which also says about the convertible debentures dated May 31, 1979, and the allotment of shares on 5th June, 1979. This return is at Ex. 18, part II, p. 3637. Plaintiff No. 2 became a director of the company in March, 1980. The board of directors held a meeting on March 27, 1980, when plaintiff No. 2 was present. The plaintiffs have in para. 66 of the plaint made a mention of the minutes of the various meetings of the board of directors and it includes the minutes dated March 27, 1980. Along with the plaint, the plaintiffs had filed a list of documents on which they wanted to rely. This list is at p. 177 of the paper book. At serial No.13, it is mentioned that the minutes of the meetings of the board of directors held after July 11, 1971, to the filing of the suit would be the documents on which the plaintiffs would rely. The defendants offered to tender the various minutes including the one dated March 27, 1980, and the plaintiffs objected to this. This can be seen from the record No. 32, on pp. 938 and 939 of the paper-book. The learned single judge upheld the objection by observing that the plaintiffs have in para. 63 of the plaint, used the words ' crave leave to refer and rely upon '. However, the list of the documents on p. 178 clearly states that the plaintiffs wanted to rely upon this document. Another objection of Mr. Cooper was that there was no evidence that the minutes sought to be tendered were really the minutes dated March 27, 1980. The learned single judge put a query to Mr. Cooper as to whether the minutes sought to be tendered were the minutes to which a reference has been made in the plaint, and Mr. Cooper did not answer that question. This can be seen from the court's order dated 28th June, 1982, at p. 940 of the paper-book. In our opinion, the rejection of the minutes of the meeting dated March 27, 1980, was not proper, particularly when the plaintiffs themselves want to rely upon them. As contended by Mr. Nariman, it would be necessary to admit those minutes in evidence. Formal exhibiting of the document will have to be done by the office in terms of this order. The copies of the minutes are at p. 4598 onwards. Those minutes show that the plaintiff No. 2 attended the meeting. In that meeting, the board of directors considered and discussed the annual accounts of the financial year ending 31st December, 1979. Similarly, the balance-sheet and profit and loss account for the year 1979 were approved by the board of directors. The directors report was also approved with certain changes. The said directors report as well as profit and loss account are at p. 207 onwards of vol. 8. On p. 220, there is a reference to the allotment of shares in the year 1979 to the financial institutions on account of conversion. Needless to say that this includes the allotment in dispute. The profit and loss account and more particularly the position of the share capital as mentioned therein show the increase of the share capital, and this increase pertains to the disputed allotment of shares to the financial institutions. There is also a note that the debentures were issued in the year with certain option as detailed in schedule III. From p. 235, it can be seen that there is a mention of the disputed debentures and of the debenture holders having exercised their rights and converted 20% into equity shares. There is not a serious dispute that in the AGM dated May 15, 1980, plaintiff No. 1 was present and that the abovementioned directors report and the balance-sheet have been passed in the meeting. The next AGM was held on 25th June, 1981 and at that time, plaintiff No. 2 was a director. The directors' report accompanied by the profit and loss account is at p. 266 onwards of vol. 8. In para. 6 of the report (p. 275), there is a mention of the completion of the first phase of modernisation programme and increase in the share capital that took place in the earlier period is restated in the balance-sheet.

The plea of acquiescence, ratification and laches is based on the above facts. It will be appropriate to consider this question not separately under each head of estoppel, ratification, acquiescence, etc., as in our opinion, these defences are interconnected and all the points require a consolidated consideration. Mr. Cooper relied upon a decision in the case of Willmott v. Barber [1880] 15Ch 96 (Ch D), where the question of acquiescence as also estoppel is considered. The relevant observation reads as follows (at p. 105):

"It has been said that the acquiescence which will deprive a man of his legal rights must amount to fraud, and in my view that is an abbreviated statement of a very true proposition... What, then, are the elements or requisites necessary to constitute fraud of that description? In the first place, the plaintiff must have made a mistake as to his legal rights. Secondly, the plaintiff must have expended some money or must have done some act (not necessarily upon the defendant's land) on the faith of his mistaken belief. Thirdly, the defendant, the possessor of the legal right, must know of the existence of his own right which is inconsistent with the right claimed by the plaintiff. If he does not know of it he is in the same position as the plaintiff and the doctrine of acquiescence is founded upon conduct with a knowledge of your legal rights. Fourthly, the defendant, the possessor of the legal right, must know of the plaintiff's mistaken belief of his rights. If he does not, there is nothing which calls upon him to assert his own rights. Lastly, the defendant, the possessor of the legal right, must have encouraged the plaintiff in his expenditure of money or in the other acts which he has done, either directly or by abstaining from asserting his legal right. Where all these elements exist, there is fraud of such a nature as will entitle the court to restrain the possessor of the legal right from exercising it, but, in my judgment, nothing short of this will do."

It is, however, material to note that the Privy Council in the case of Sarat Chunder Dey v. Gopal Chunder Laha [1892] LR 19 IA 203, has considered this aspect in a different manner as mentioned below:

"It is quite unnecessary in order to create estoppel that the person whose acts or declarations induced another to act must have been under no mistake himself, or must have acted with in intention to mislead or deceive. Estoppel mainly results from the fact that another has. been induced, in reliance upon personal representations, acts, or omissions, to act as he otherwise would not have acted."

This court in the case of Sitabai v. Wasantrao Nana Moroba [1901] 3 Bom LR 201, has held that the concerned party in the litigation, viz., Sitabai, was estopped from challenging the transaction as her conduct induced the other side to believe that she had consented to the sale deed in question. Similarly, in the case of Canadian Pacific Rly. Co. v. King, AIR 1932 PC 108, it is observed that the party would be estopped if one party has acted upon the faith of a statement or conduct. In the case of smt. Premila Devi v. Peoples Bank of Northern India Ltd. [1939] 9 Comp Cas 1 (PC), it was held that there cannot be any ratification without an intention to ratify an illegal act and there can be no intention to ratify whithout knowledge of the illegality. Similar view has been taken in Firestone Tyre and Rubber Co. v. Synthetics and Chemicals Ltd. [1971] 41 Comp Cas 377 (Bom), where it is held that there can be no ratification except with the full khowledge of the fact. In Thakur Fatesingji v. Bamanji Ardeshir Dalai [1903] 5 Bom LR 274 (Bom.), it is decided that the estoppel by acquiescence has no application to an ex-post facto submission not amounting to ratification, and that there should be accord and satisfaction with full knowledge. In De Bussche v. Alt [1878] LR 8 Ch D 286 (CA), it is held that mere submission to the injury for any time short of the period limited by statute cannot take away such right though under the name of laches it may afford a ground for refusing relief under some particular circumstances.

It will be convenient to refer to some other decisions ; for example, in the case of Abdul Karim Babu Khan v. Sirpur Paper Mills Ltd. [1969] 39 Comp Cas 33 (AP), the question was about the correctness or otherwise of forfeiture of the shares. The following observation (in Firestone Tyre and Rubber Co's case), will show as to how the matter was considered (at p. 415 of 41 Comp Cas):

"In the present case the shareholders were never-made aware that the solicitor-director had an interest or concern in the contract of appointment of the private company for a further term or that, but for his vote, the resolution would not have been passed at the board meeting or that his vote was void. The company acting through its board of directors did not at any time place these facts before the shareholders. It is true that in the circulars which were issued by both sides the plaintiffs had mentioned that the solicitor-director was an interested director, but in the circulars issued by Ruia, Kirloskar and the solicitor-director the contrary position was taken up or in any event suggested. Thus, the shareholders had no clear indication whether the solicitor-director had any interest or concern as alleged by the plaintiffs and they could not be said to have voted in favour of the resolution approving the appointment for a further term with knowledge of the interest or concern of the solicitor-director and its consequent effect on the resolution of the board. There can be no ratification except with full knowledge of the facts and the shareholders were never asked to ratify the said resolution after the aforesaid facts were made known to them."

Mr. Nariman relied upon a decision of this court in the case of V. N. Bhajekar v. K. M. Shinkar [1934] 36 Bom LR 438 ; [1934] 4 Comp Cas 434, where the question of ratification by the general body of an action by a director was considered in the following words (at p. 443 of 4 Comp Cas):

"......a company cannot confirm or ratify anything which is beyond its powers, express or implied, in the memorandum or conferred by statute. Short of that a transaction by the directors which is beyond their own powers but within the powers of the company can be ratified by a resolution of the company in a general meeting or even by acquiescence, provided that the shareholders have knowledge of the facts relating to the transaction to be ratified or the means of knowledge are available to them....... a company may by a resolution at a subsequent meeting ratify any business which it purported to transact at a meeting informally called."

The question of knowledge is many a time relevant and this aspect is discussed by Phipson's Book on Evidence from page 169 onwards. He has observed that knowledge may be inferred circumstantially from the fact that a party had reasonable means of knowledge, that is possession of or access to documents containing the information. It is further observed that sometimes access to documents may raise presumption of knowledge. In the case of Manji Karimbhai v. Hoorbai [1910] 12 Bom LR 1910, it is observed that knowledge can be imputed to a party who has abstained from making any inquiry.

It is thus clear that initially a sort of rigid view was taken in the case of Willmoit v. Barber [1880] 15 Ch D 96 (Ch), that there must exist five conditions for invoking the applicability of the principles of acquiescence, estoppel, etc. However, that decision has not been implicitly followed in subsequent decisions. The Privy Council decision in Sarat Chunder Dey v. Gopal Chunder Laha [1892] LR 19 IA 203 (PC), specifically states that it is not necessary to have all the conditions mentioned in Willmott v. Barber [1880] 15 Ch 96 (Ch D). The matter has been recently considered in the case of Taylors Fashions Ltd. v. Liverpool Victoria Trustees Co. Ltd. and Old and Campbell Ltd. v. Liverpool Victoria Friendly Society [1981] 1 All ER 897; [1981] 2 WLR 576 (Ch D). It is a detailed and exhaustive judgment. We would like to reproduce the material headnote. It reads as follows:

"The doctrine of estoppel by acquiescence was not restricted to cases where the representor was aware both of what his strict rights were and that the representee was acting in the belief that those rights would not be enforced against him. Instead the court was required to ascertain whether in the particular circumstances it would be unconscionable for a party to be permitted to deny that which knowingly or unknowingly he had allowed or encouraged, another to assume to his detriment...... In those circumstances (which were available in the case), it would be inequitable and unconscionable for the defendants to frustrate the second plaintiff's expectations which the defendants had themselves created."

This decision has considered a number of other cases. The relevant portion of some of the decisions have been reproduced in the judgment and, in addition, the learned judge while deciding that case has also recorded certain findings. We would like to reproduce certain portions of the judgment including the observations in the earlier decisions.. After considering the case of Willmott v. Barber [1880] 15 Ch 96 (Ch D) and certain other cases it observed as follows (at p. 911 of [1981] 1 All ER and p. 588 of [1981] 2 WLR):

"Now, convenient and attractive as I find counsel's submission as a matter of argument, I am not at all sure that so orderly and tidy a theory is really deducible from the authorities—certainly from the more recent authorities which seem to me to support a much wider equitable jurisdiction to interfere in cases where the assertion of strict legal rights is found by the court to be unconscionable."

At p. 913 of [1981] 1 All ER and p. 590 of [1981] 2 WLR:

"The fact is that acquiescence or encouragement may take a variety of forms. It may take the form of standing by in silence while one party unwittingly infringes another's legal rights. It may take the form of passive or active encouragement of expenditure or alteration of legal position upon the footing of some unilateral or shared legal or factual supposition. Or it may, for example, take the form of stimulating, or not objecting to, some change of legal position on the faith of a unilateral or a shared assumption as to the future conduct of one or other party. I am not at all convinced that it is desirable or possible to lay down hard and fast rules which seek to dictate in every combination of circumstances, the considerations which will persuade the court that a departure by the acquiescing party from the previously supposed state of law or fact is so unconscionable that a court of equity will interfere. Nor, in my judgment, do the authorities support so inflexible an approach, and that is particularly so in cases in which the decision has been based on the principle stated by Lord Kingsdown."

At pages 915,916of [1981] 1 All ER and at page 593 of [1981] 2 WLR:

"That, however, does not necessarily imply his acceptance of the proposition that all the probanda are applicabe to every case of estoppel by acquiescence and it seems clear from his earlier pronouncement in Eleclrolux Ltd. v. Electrix Ltd. [1954] 71 RPC 23 (CA) at p. 33 that that was not, indeed, his view.

Furthermore, the more recent cases indicate, in my judgment, that the application of Ramsden v. Dyson [1866] LR 1 HL 129, principle—whether you call it proprietary estoppel, estoppel by acquiescence or estoppel by encouragement is really immaterial—requires a very much broader approach which is directed to ascertaining whether, in particular individual circumstances, it would be unconscionable for a party to be permitted to deny that which, knowingly or unknowingly, he has allowed or encouraged another to assume to his detriment rather than to inquiring whether the circumstances can be fitted within the confines of some preconceived formula serving as a universal yardstick for every form of unconcionable behaviour.

So regarded, knowledge of the true position by the party alleged to be estopped becomes merely one of the relevant factors—it may even be a determining factor in certain cases—in the overall inquiry. This approach, so, it seems to me, appears very clearly from the authorities to which I am about to refer."

Atpage 917 of [1981] 1 All ER and at page 594 of [1981] 2 WLR:

"Indeed I cannot see why in considering whether the defendants were behaving unconscionably it should have made the slightest difference to the result if, at the time when the plaintiff was encouraged to open his access to the road, the defendants had thought that they were bound to grant it......

The particularly interesting features of the case in the context of the present dispute are, first, the virtual equation of promissory estoppel and proprietary estoppel or estoppel by acquiescence as mere facets of the same principle and, secondly, the very broad approach of both Lord Denning MR and Scarman L.J., both of whom emphasised the flexibility of the equitable doctrine."

Similar subject is also discussed in the case of Amalgamated Investment and Property Ltd. (In liquidation) v. Texas Commerce International Bank Ltd. [1981] 1 All ER 923; [1981] 2 WLR 554 (QB). The relevant headnote reads as follows:

"Where there was a representation by one party to another that a transaction between them had an effect which in law it did not have, an estoppel arose if it was then unconscionable for the representor to go back on his representation because it had caused or contributed to the re presentee's error as to his true legal rights or deprived him of the opportunity to renegotiate the transaction to render it legally enforceable in terms of the representation."

The case of Willmott v. Barber [1880] 15 Ch 96 (Ch D), was also considered and to a certain extent was disapproved. Hence, it would also be advantageous to reproduce certain parts of the judgment on pp. 935 and 936 of [1981] 1 All ER and at p. 569 of [1981] 2 WLR:

"Now I have to say at once that despite his meticulous scholarship, I find this approach difficult to accept. Of all doctrines, equitable estoppel is surely one of the most flexible."

There was a reference to the doctrine of estoppel, the doctrine of encouragement, the doctrine of promissory estoppel and then it is observed as follows (at pp. 569, 570 of [1981] 2 WLR):

"But all these have been statements of aspects of a wider doctrine ; none has sought to be exclusive. It is no doubt helpful to establish, in broad terms, the criteria which, in certain situations, must be fulfilled before an equitable estoppel can be established; but it cannot be right to restrict equitable estoppel to certain defined categories, and indeed some of the categories proposed are not easy to defend...... It is not, therefore, surprising to discover a tendency in the more recent authorities to reject any rigid classification of equitable estoppel into exclusive and defined categories. The authorities on the subject have recently been reviewed by Oliver J. in his judgment in two related actions, Taylors Fashions Ltd. v. Liverpool Victoria Trustees Co. Ltd. and Old & Campbell Ltd. v. Liverpool Victoria Friendly Society [1981] 1 All ER 897; [1981] 2 WLR 576 (Ch D), and on the basis of his analysis of the cases, which I gratefully adopt, he rejected an argument founded upon rigid categorisation."

It would, therefore, be necessary to consider the facts of the case on the basis of the above position of law. We have already observed that plaintiff No. 2 as a director of the company was a party to the resolution showing or indicating that the disputed shares have been allotted to the financial institutions in a regular manner. The directors' report as also the balance-sheet prepared by the board of directors is consistent with this position. Plaintiff No. 1 was present at the time of the AGM on May 15, 1980. The plaintiffs have alleged in the plaint mala fides in the waiver of notice. This means that before the filing of the suit, the plaintiffs had obtained the knowledge about the mala fide waiver. However, the, plaint is silent as to when they received this knowledge. This omission has an importance. If the plaintiffs had such knowledge befere the abovementioned meetings dated March 27, 1980, and May 15, 1980, they would not have acted in the manner mentioned above. On the contrary, they would have raised a grudge about the allotment of the shares. It is for this reason that the date on which they received the knowledge was relevant. Not only that there is no pleading in this respect but none of the plaintiffs have entered the witness box to depose as to when he came to know about the alleged mala fides. The question is as to on whom the burden of proving such knowledge need not detain us any longer in the background of plaintiffs' omission to enter the witness box. The fact that the plaintiffs obtained the abovementioned information on a particular day would be within their exclusive knowledge and an adverse inference will have to be drawn against the plaintiffs, for not entering the witness box for deposing anything in this respect. Under these circumstances, it will not be open for the plaintiffs to contend that they had no knowledge or information about the alleged mala fides before March 27, 1980, and May 15, 1980. Their conduct on these two dates with previous knowledge would be a bar so as to prevent them from urging the alleged mala fides.

There is another important factor which is to be borne in mind. The financial institutions were entitled to exercise option before June 14, 1980. Had the plaintiffs taken any action on the basis of the alleged mala fides prior to that date, the financial institutions would have been able to issue one month's notice as contemplated by the debenture trust and on that basis they would have obtained the allotment of the shares. The position has now become precarious from the point of view of the financial institutions inasmuch as on the date on which the plaintiffs filed the suit the period for exercising option had already expired. Thus, granting any decree on the basis of the alleged mala fides would be prejudicial to the defendants. This is more so when the nature of the transaction was to be that of debentures with an option to convert 20% thereof into equity shares. Thus, it would be unconscionable to allow the plaintiffs any relief on the basis of the alleged mala fides. We would, therefore, hold that the plaintiffs suit would be barred by equitable principles of acquiescence and ratification.

Rectification of share register is contemplated by section 155 of the Companies Act. There cannot be any serious dispute, though Mr. Cooper does not accept this position, that rectification is a discretionary relief.

This aspect is considered in the case of Bellerby v. Rowland & Mar-wood's Steamship Co. Ltd. [1901] 2 Ch 265 (Ch D). In that case, the directors surrendered certain shares of theirs to the company. On account of that surrender the liability for the uncalled shares came to an end. Surrender was made so as to relieve the company of the losses. After some time the company's business became prosperous. The directors filed an application for rectification of the share register for reintroducing their names in the register. It was alleged that the transaction of surrender of shares was bad. The court found that the transaction was bad, however, rectification was refused by holding that the discretionary relief should not be granted. The relevant observations on p. 273 are as follows:

"It does not follow that because the surrenders of shares were bad the plaintiffs are now entitled to succeed in their claim to be restored to the register in respect of them. 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."

The discretion can be exercised by passing orders which would be appropriate in a given set of circumstances. The case, In re Sussex Brick Co. Ltd. [1904] 1 Ch D 598 (CA), is relevant in this respect. Certain shares were transferred on March 3, 1903, under the articles of association. The transferor is to be deemed to remain holder until the name of the transferee was entered in the register. On March 12,1903, the transferee applied to the company for transfer of the shares. The share certificates were also sent to the company. On March 14, 1903, the company sent a reply acknowledging the receipt of the transfer application. The transferee was informed that new certificates would be ready by March 28, 1903, after placing the matter before the board of directors. However, in between, the Secretary resigned and another person was appointed in his place. He did not place the transfer application before the board. The transferee, therefore, wrote to the company asking for the transfer certificates. In the meantime, winding-up proceedings began. The transferee gave a notice of dissent regarding the resolution of winding up. The liquidator refused to take cognizance of the notice as the transfer was not registered. The transferee made an application for rectification of the register. The court granted rectification but from the date on which the order was passed. The contention of the transferee was that the rectification should have been made with effect from the date on which the shares ought to have been transferred. The transferee, therefore, took the matter in appeal. By applying the principle 'Nune pro-time', the appeal was allowed. The court held that it should make an order that the registration should be treated as rectified from the time it ought to have been so rectified.

Mr. Nariman urged that this case would show that at any rate the rectification of the register should have been ordered by directing that the entry dated 5th June, 1979, be deleted but at the same time there should be an entry in the share register dated June 30, 1979 (i.e., the day, a month after the notice), showing that the disputed shares have been transferred to the concerned financial institutions.

Mr. Cooper urged that the present proceedings are not an application under s. 155 of the Act as the plaintiffs have filed a substantive suit for the rectification of the register and consequential declaration. On principle, we do not find that there can be any difference simply because the plaintiffs have filed the suit. Before filing of the suit, the plaintiffs had made an application under s. 155 of the Companies Act. That application was withdrawn on the ground that the matter involved a complicated question. But this would (not?) alter the position in favour of the plaintiffs. Otherwise there would be an anomaly, i.e., the relief would be discretionary if an application is filed under s. 155; while the court would be bound to grant a rectification decision if he chooses to file a suit. In our opinion, rectification of share register, whether claimed in an application under s. 155 of the Act or in a substantive suit would be a discretionary relief. The present case does not appear to be a fit one for granting such an equitable relief particularly when we take into account the conduct of the plaintiffs as well as the precarious position to which the defendants would be reduced if the allotment of shares is cancelled.

For the reasons mentioned above, it is clear that the issue of shares to the financial institutions is quite legal and proper and, consequently, the plaintiffs suit deserves to be dismissed. Hence, we pass the following order:

Appeals Nos. 390, 391, 392 and 393 of 1982, are allowed with costs. The cross-objections are dismissed. The decree passed by the learned single judge in Suit No. 1108 of 1981, is set aside and that suit is dismissed with costs.

Costs payable to defendant No. 8, both in the trial court and in the appeal court, to be determined in accordance with the rules, for two counsel. So far as the financial institutions are concerned, we quantify the total costs of Rs. 20,000 separately for the suit and for all the appeals.

Leave to appeal to Supreme Court prayed for by Mr. Cooper rejected.

Status quo as prior to the judgment till today to continue till the 25th June, 1983.

[1991] 72 COMP. CAS. 651 (SC)

SUPREME COURT OF INDIA

N. Parthasarathy

v.

Controller of Capital Issues

B. C. RAY AND N.M. KASLIWAL JJ.

TRANSFERRED CASE NO. 61 OF 1989

APRIL 16, 1991

JUDGMENT

Ray J.—One Mr. Haresh Jagtiani, a practising advocate of the High Court of Bombay and a policy-holder under the Life Insurance Corporation of India and also a holder of units issued by the Unit Trust of India and Mr. Shamit Majumdar, a holder of shares and debentures of Larsen and Toubro Ltd., filed a writ petition, being No. 2595 of 1989, in the High Court of Judicature at Bombay against the Union of India and others including the financial institutions questioning the legality and validity of the consent given by the Controller of Capital Issues to the proposed issue of convertible secured debentures aggregating to Rs. 820 crores by Larsen and Toubro Ltd. in so far as the said issue seeks to offer such convertible debentures to persons other than the existing shareholders and members and employees of Larsen and Toubro Ltd. and praying for quashing the same as well as for a declaration that the transfer of 39 lakhs shares of Larsen and Toubro Ltd. held by the Unit Trust of India, Life Insurance Corporation of India, General Insurance Corporation and its subsidiaries to Trishna Investment and Leasing Ltd. through the instrumentality of BOB Fiscal Services Ltd. is arbitrary, illegal, mala fide and a fraud on the statutory powers of the respondents and is clearly ultra vires articles 14 and 39(b) and (e) of the Constitution on the allegations that, in or around the middle of the year 1988, the respondents entered into a secret agreement by which a large chunk of the equity shares of Larsen and Toubro Ltd., the largest engineering company in India, would stand surreptitiously divested by the respondents in favour of the Ambani group, the third largest monopoly house in India. This divestment was achieved not directly but indirectly and with a motive to conceal the real nature of the deal by interpolating BOB Fiscal Services Ltd. (a wholly owned subsidiary of the Bank of Baroda) as the conduit for the transfer of shares from the public financial institutions to the satellite companies of the Ambani group.

The petitioners also alleged in the petition that, pursuant to this secret agreement, the following events took place in quick succession :

In or around August, 1988, four satellite companies of Reliance group, namely, Skylab Detergents Ltd., Oskar Chemicals P. Ltd., Maxwell Dyes and Chemicals P. Ltd. and Pro-lab Synthetics P. Ltd., gave a total deposit of Rs. 30 crores to an investment company associated with Ambani which, in turn, deposited this amount with BOB Fiscal Services Ltd., a wholly owned subsidiary of the Bank of Baroda, a nationalised bank.

BOB Fiscal Services Ltd., which had been formed only three months earlier, acquired, either immediately before the above deposit or immediately subsequent thereto, 33 lakhs equity shares of Larsen and Toubro from UTI, LIC, GIC and its subsidiaries. Later, in January, 1989, it acquired a further six lakhs shares from the LIC.

Within weeks after the deposit by the four companies mentioned above, Trishna Investments and Leasing Ltd., another satellite company of the Ambani group, paid the requisite amounts for the acquisition of the said 33 lakhs shares in Larsen and Toubro from BOB Fiscal Services Ltd. to the latter through a stock-broker firm and, immediately thereafter, the money advanced by the above four companies was returned by BOB Fiscal Services Ltd. through the investment company associated with Ambanis, which was earlier used as a conduit for making deposits from the four satellite companies of the Reliance group.

The deposit by the four companies was made immediately after the divestment of the shares by the respondents was okayed by the highest level in the Government and the deposit was returned immediately after the Ambani group was able to divert moneys taken by them in the name of Reliance Petrochemicals Pvt. Ltd. by the issue of convertible debentures of the order of Rs. 594 crores.

The said 33 lakhs shares were registered in the name of BOB Fiscal Services Ltd. in the register of members of Larsen and Toubro Ltd. on October 11, 1988, and later on January 6, 1989, a further six lakhs shares were registered in the name of BOB Fiscal Services Ltd. On any valuation based on market values of Larsen and Toubro Ltd. shares at the relevant time, the value of 39 lakhs shares would cost not less than Rs. 45 crores.

On the very day of the registration of the shares in the name of BOB Fiscal Services Ltd., namely, October 11, 1988, two nominees of the Ambani group, Mr. Mukesh Ambani and Mr. M. Bhakta, a solicitor of Reliance Industries, joined the board of Larsen and Toubro Ltd. and were co-opted as additional directors.

Subsequently, on December 30, 1988, Mr. Anil Ambani another nominee of the Ambani group was also co-opted on the board of Larsen and Toubro Ltd., as an additional director.

On January 6, 1989, the entire 39 lakhs equity shares of Larsen and Toubro Ltd. registered in the name of BOB Fiscal Services Ltd. (of which six lakhs shares transferred to BOB Fiscal Services Ltd. by LIC were registered in the name of BOB Fiscal Services Ltd. only on January 6, 1989), were transferred to Trishna Investments and Leasing Ltd., which is a satellite company of the house of Ambanis.

Thus, BOB Fiscal Services Ltd. merely acted as a conduit for funnelling shares from the public financial institutions to the Ambani group and this interpolation of BOB Fiscal Services Ltd. was necessitated to get over the legal impediments in the way of selling any part of the controlling shares held by public financial institutions to private parties by private deals except to those already in management and at a price equal to two times the market price.

The chairman of the Bank of Baroda, Mr. Premjit Singh, is closely linked to the house of Ambanis through the business of his son, Harinder Singh. BOB Fiscal Services Ltd. is the wholly-owned subsidiary of the Bank of Baroda and it was incorporated only two months preceding the acquisition of Larsen and Toubro Ltd. shares by BOB Fiscal Services Ltd. In fact, the acquisition of Larsen and Toubro shares for the Ambani group for which it had acted as a conduit is the first business of BOB Fiscal Services Ltd.

Subsequently, on April 28, 1989, Mr. Dhirubhai Ambani, the chairman of the Reliance group, became the chairman of Larsen and Toubro Ltd., thus completing the process of take-over of the management of Larsen and Toubro by the Ambani group.

By this process, the public financial institutions which had virtual ownership and control of Larsen and Toubro Ltd. holding about 40$ shares of the company (with no other individual shareholder holding more than 2%), voluntarily diluted their holdings to 33% and parted with approximately 7% to the house of Ambanis and made them the single largest private shareholder. This was done, in the submission of the petitioners, deliberately and by a design to legitimise the eventual take-over of Larsen and Toubro by the Ambanis. While the petitioners challenge the divestment of 1% ownership rights in Larsen and Toubro Ltd. and the management of the company to the Ambani group, the immediate and proximate provocation for this writ petition is the proposed issue of convertible debentures by Larsen and Toubro Ltd. now under the management of the house of Ambanis to raise Rs. 820 crores from the stock market.

The proposed issue has the effect of aggravating and perpetuating, and irretrievably divesting and transferring the ownership of Larsen and Toubro in favour of the Ambani group. The concealed and covert intent which is manifest in the direct effect of the proposed issue is to make Larsen and Toubro Ltd. a completely family-owned and a decisively family-controlled industrial corporation—whereas the openly declared policy of the Government is to force the reverse, viz., professionalise the existing family-controlled companies. By the proposed issue, the house of Ambanis and the shareholders, debentureholders and employees of Reliance Industries and Reliance Petrochemical Industries Ltd. would collectively hold 35.5% of the ownership rights in Larsen and Toubro and will be the single largest block or group in the company. This preferred group which is not in law entitled to any issue of shares from Larsen and Toubro Ltd., has been chosen to be the preferential beneficiaries of the scheme under which they would get shares in Larsen and Toubro Ltd. at Rs. 60 per share when the shareholders of Larsen and Toubro Ltd. themselves (who, by law, are entitled to further issue of shares from Larsen and Toubro Ltd.) would be issued Larsen and Toubro shares under the convertible debentures issued in April, 1989, only at Rs. 65 per share. Thus, as against a 35.5% holding of the Ambani-Reliance group, the public finance bodies, which held 40% shares before they diluted their holdings in favour of the Ambani group, would have had their holding further diluted to only 22.9% as a result of the present issue. In other words, by approving the terms of the proposed issue, the public financial institutions have agreed to a further dilution of their holdings from 32.8% to 22.9% without any consideration whatsoever for agreeing to such reduction and to pass on their vested rights under section 81 of the Companies Act to pre-emptive allotment of shares in Larsen and Toubro to the members, debentureholders and employees of Reliance Industries Ltd. and Reliance Petrochemicals Ltd. It is, in this background, significant that the preferential allotment to the shareholders, debentureholders and employees of the house of Ambanis who have no statutory right, offered to them in shares in Larsen and Toubro Ltd. at a premium of only Rs. 50 per share, while in the fully convertible debentures issue made by Larsen and Toubro Ltd. in April/May, 1989, the existing shareholders of Larsen and Toubro were given conversion rights at a premium of Rs. 50 per share in the first conversion and Rs. 55 per share in the second conversion, i.e., Rs. 5 more than the Reliance group is called upon to pay. It means that, while the existing shareholders of Larsen and Toubro were paying for their own shares a premium of Rs. 50 or Rs. 55 per share, a new group of shareholders, debentureholders and employees of the house of Ambanis would be getting Larsen and Toubro shares at a premium of only Rs. 50. It means that, by showing extraordinary favour to a totally different group which is not entitled to Larsen and Toubro shares, the Ambani group is creating a favoured lobby of their own, almost a clan, who are already their shareholders, debentureholders and employees to act as a group to own and control Larsen and Toubro Ltd. This is a device to perpetuate and aggravate their own decisive control over Larsen and Toubro to which the public financial institutions are willing and enthusiastic parties inside the board room and in the general meeting of Larsen and Toubro Ltd.

In the facts and circumstances, the petitioners pleaded that they are entitled to a declaration that the divestment by the respondents of the controlling shares in Larsen and Toubro to the house of Ambanis in a secret and circuitous arrangement is arbitrary, illegal, mala fide and a fraud on the statutory powers of the respondents. It was further pleaded that, pursuant to this secret arrangement, the financial institutions such as the UTI, LIC, GIC and its subsidiaries divested themselves of 7% shares of Larsen and Toubro Ltd. in favour of the Ambani group in an illegal and arbitrary manner as a result of which the Ambani group became the single largest private shareholder. This paved the way for the said private monopoly group and the Government to rationalise the take over of the management of Larsen and Toubro Ltd. by the Ambani group with the active connivance and support of the Central Government.

The modus operandi adopted for the transfer was as under :

(a) In the month of May, 1988, the Bank of Baroda of which Mr. Premjit Singh is the chairman, forms a subsidiary for merchant banking under the name and style of BOB Fiscal Services P. Ltd. This company became a public company under section 43A of the Companies Act, 1956, in June, 1988. Mr. Harjit Singh, son of Premjit Singh, owned a company "Krystal Poly Fab. Ltd." whose only business is texturising of partially oriented yarn from Reliance Industries Ltd. and the supply of texturised yarn back to Reliance Industries Ltd. or its nominees.

(b) On August 5, 1988, four satellite companies of the House of Ambanis, viz., Skylab Detergents Ltd., Oscar Chemicals P. Ltd., Maxwell Dyes and Chemicals P. Ltd. and Prelab Synthetics Ltd. gave a total deposit of Rs. 30 crores to an investment company, associated with Reliance which, in turn, deposited the same amount with BOB Fiscal Services Ltd.

(c) Either immediately preceding this deposit or immediately there after, BOB Fiscal Services Ltd. acquired 33 lakhs equity shares in Larsen and Toubro Ltd. from the UTI, LIC and GIC and its subsidiaries. Later, it acquired a further 6 lakhs shares in Larsen and Toubro Ltd. from the LIC. The manner in which the transfer had been effected by the public financial institutions and the bulk sale amounting to about 1% of the then share capital of Larsen and Toubro Ltd. left no one in doubt about what the financial institutions intended to do, viz., they intended to shed a vital seven per cent, of the ownership rights held by them in Larsen and Toubro Ltd.

(d) In July, 1988, Reliance Petrochemicals Ltd. of the Ambani group had issued convertible debentures for Rs. 594 crores to the public and others and had raised a vast sum of monies as subscription. The petitioners under-stand that as soon as the above funds became available to the Ambani group for employment, a part of it was diverted for acquisition of Larsen and Toubro Ltd. shares not directly in the name of Reliance Industries Ltd. or Reliance Petrochemicals Ltd. but in the name of faceless, benami concerns of the Ambani group with virtually no financial standing of their own.

(e) Thereafter, on October 11, 1988, the 33 lakhs equity shares of Larsen and Toubro Ltd. acquired by BOB Fiscal Services Ltd. were registered in the register of members of Larsen and Toubro Ltd. in folio No. B. 69567 at pages 1851 to 1858. These shares had been transferred by the LIC, UTI, GIC and its subsidiaries to BOB Fiscal Services Ltd.

(f) On the same day, two nominees of the Ambani group, Mr. Mukesh Ambani and Mr. M.L. Bhakta, a solicitor of Reliance Industries Ltd., who are also directors of Reliance Industries Ltd. and Reliance Petrochemicals Ltd., were co-opted on the board of Larsen and Toubro Ltd.

(g) It is evident from the above events that the sale to BOB Fiscal Services Ltd. by the financial institutions was accepted by all parties concerned to be a sale to the Ambani group itself. Otherwise, there is no provocation or justification for the financial institutions to propose or to support appointment of Mr. Mukesh Ambani and Mr. M. Bhakta, who are the nominees of the Ambani group, on the board of Larsen and Toubro Ltd. The date of the transfer to BOB Fiscal Services Ltd. and the date of appointment of the Ambani group nominees on the Larsen and Toubro Ltd. board being the same is not a mere coincidence.

(h) Again, in December, 1988, Mr. Anil Ambani, another nominee of the Ambani group was co-opted on the board of Larsen and Toubro Ltd. as an additional director with the support of financial institutions even though the 33 lakhs shares still stood in the name of BOB Fiscal Services Ltd.

It has been further pleaded that Trishna Investments and Leasing Ltd., to which the 33 lakhs equity shares of Larsen and Toubro Ltd. were sold by the financial institutions through the instrumentality of BOB Fiscal Services Ltd., was incorporated as a private limited company on October 1, 1986, with a paid-up capital of Rs. 11,000. It is evident that even after acquisition of 3,300 equity shares of Rs. 10 each by Reliance Industries Ltd., the paid-up share capital was only Rs. 44,000.

An affidavit in opposition was filed on behalf of the respondents by Mr. S. D. Kulkarni, a whole-time director and Vice-President (Finance) of Larsen and Toubro Ltd. In paragraph 6 of the said affidavit, it has been stated that shareholders are different and distinct from the company and do not have any interest whatsoever in the property of the company unless and until winding up takes place. The company is a distinct legal entity and it does not have, in law or fact, any control over its shareholders in regard to dealing with their investment in the new company or any other company. It has been further stated that the resolution regarding the issue of the debentures was taken at a special general meeting of the company and the decision is a near unanimous decision of the 1.5 lakhs shareholders with only one among them dissenting. It was stated in these circumstances that the writ petition under article 226 was not maintainable. It has also been stated that the entirety of the consent granted by the Controller of Capital Issues under the Act is legal and valid. These statements have been made by the deponent without filing any proper verification of affidavit and as such there was no proper controversion or denial of the statements made in the writ petition. The other affidavits filed on behalf of the respondents are also not affirmed or verified duly in accordance with the provisions of the Rules of the Supreme Court nor in accordance with the provisions of Order 19, rule 3, of the Code of Civil Procedure.

The High Court of Bombay, by its judgment and order dated September 29, 1989, dismissed the writ petition at the preliminary hearing.

A Letters Patent Appeal was filed in the High Court at Bombay against the said judgment by the petitioners. The respondents filed Transfer Petitions Nos. 506 and 507 of 1989 and Transfer Petitions Nos. 571 to 573 of 1989 in this court under article 139A of the Constitution of India praying for the transfer of the said Letters Patent Appeal as well as Writ Petition No. 13199 of 1989 filed in the High Court at Madras by one Mr. N. Parthasarathy, a shareholder of Larsen and Toubro Ltd., against the Controller of Capital Issues and Larsen and Toubro Ltd. and Writ Petition No. 18399 of 1989 filed in the Karnataka High Court by Prof. S.R. Nayak and another against the Union of India and others raising similar questions.

This court, vide its order dated November 9, 1989, allowed the Transfer Petitions Nos. 506 and 507 of 1989 and 571 to 573 of 1989 and directed that the Letters Patent Appeal against the judgment passed in Writ Petition No. 2595 of 1989 pending in the Bombay High Court be transferred to this court for final disposal. Writ Petition No. 13199 of 1989 filed in the Madras High Court and Writ Petition No. 18399 of 1989 filed in the Karnataka High Court were also transferred to this court. These matters on transfer to this court were numbered as Transfer Case No. 1 of 1990, Transfer Case No. 61 of 1989 and Transfer Case No. 62 of 1989, respectively.

Transfer Petitions Nos. 458 to 467 of 1990 praying for the transfer of cases filed in different High Courts raising similar grounds are allowed and the transferred cases arising out of these are also heard along with Transferred Cases Nos. 1 of 1990, 61 of 1989 and 62 of 1989.

Two questions that pose themselves for consideration in all these above cases are : (1) whether the surreptitious divestment of 39 lakhs shares of Larsen and Toubro, a large industrial undertaking by sale through the instrumentality of BOB Fiscal Services Ltd., a subsidiary of a nationalised bank, i.e., the Bank of Baroda, by the public financial institutions — GIC, LIC, UTI and thereby helping a private monopoly house of the Ambani group to acquire the said shares and thereby to get into the management of the public company amounts to an arbitrary exercise of statutory power of the State and the respondents. Secondly, whether the consent accorded by the Controller of Capital Issues to the preferential issue of debentures by Larsen and Toubro Ltd. of Rs. 310 crores for being subscribed by the shareholders and employees of Reliance Petrochemicals Ltd., Reliance Industries Ltd. amounts to immeasurable injury and prejudice to the public without any application of mind and thereby enabling the Ambani group to have the largest shareholding and thereby to control Larsen and Toubro Company which is ultra vires articles 14 and 39(b) and (c) of the Constitution.

Larsen and Toubro Ltd. is a public limited company incorporated under the Indian Companies Act, 1913 (8 of 1913), and it is recognised as a premier engineering company in the country with a pool of highly trained and experienced people. It has been engaged in diverse activities in the engineering field, cement manufacture, shipping, switch gear, industrial machinery, electrical equipment, etc., and various other core sector industries including manufacture of sophisticated equipment for space and defence programmes of the country. On October 1, 1986, Trishna Investment and Leasing Ltd., a satellite company of the Ambani group was incorporated with a paid-up capital of Rs. 11,000 (1,100 shares of Rs. 10 each). This continued till December 29, 1988, when its capital was raised to Rs. 44,000.

In May, 1988, BOB Fiscal Services Ltd. was incorporated as a wholly owned subsidiary of the Bank of Baroda, a nationalised bank. The entire share capital of BOB Fiscal Services Ltd. was contributed by the Bank of Baroda aggregating to about Rs. 10,00,00,000 (ten crores) to undertake mutual fund activities. It is to be taken notice of in this connection that Premjit Singh was the chairman of the Bank of Baroda at the relevant time and his son, Harjeet Singh, owned Kristal Poly Fab Ltd. whose only business is with Reliance Industries Ltd. Premjit Singh is closely linked to the house of Ambanis through the business of his son, Harjeet Singh. BOB Fiscal Services Ltd. was incorporated as a subsidiary of the Bank of Baroda only two months prior to the acquisition of shares of Larsen and Toubro Ltd., for the Ambani group for which it had acted as a conduit and it was the first business of BOB Fiscal Services Ltd. On July 15, 1988, BOB Fiscal Services Ltd. approached the Life Insurance Corporation of India and the Unit Trust of India to sell to it two "baskets" of blue chip shares of the value of Rs. 25 crores approximately each. This will be evident from paragraph 6(c) of the affidavit of the Unit Trust of India. On August 1, 1988, the UTI and the LIC each offered to sell to BOB Fiscal Services Ltd. a basket of shares valued at Rs. 25 crores. The UTI basket was valued at Rs. 23.66 crores including 10 lakhs Larsen and Toubro Ltd. shares which were sold at Rs. 108 per share. The LIC basket was valued at Rs. 25.56 crores and it included 15 lakhs Larsen and Toubro shares. Larsen and Toubro shares constituted approximately 55% of the value of the two baskets. This is clear from paragraph 6(d) of the affidavit of the Unit Trust of India. On August 3, 1988, BOB Fiscal Services Ltd. accepted the two baskets of shares comprising 25 lakhs Larsen and Toubro shares and shares of seven other companies valued in total at Rs. 50.23 crores. On August 5, 1988, four satellite companies of the Reliance group gave Rs. 30 crores to V. B. Desai, finance broker, who, in turn, gave a short-term call deposit of Rs. 30 crores to BOB Fiscal Services Ltd. as is evident from the affidavit filed by BOB Fiscal Services Ltd. On August 5, 1988, BOB Fiscal Services Ltd. sold 25 lakhs Larsen and Toubro shares to V.B. Desai, the broker. Thus, BOB Fiscal Services Ltd. acquired 33 lakhs equity shares of Larsen and Toubro from the UTI, LIC, GIC and its subsidiaries. Later, in January, 1989, it acquired a further six lakhs shares from the LIC within weeks after the deposit by the four companies mentioned above. Trishna Investment and Leasing Ltd., another satellite company of the Ambani group, paid the requisite amounts for the acquisition of the said 33 lakhs shares of Larsen and Toubro from BOB Fiscal Services Ltd., through the finance broker, V. B. Desai, associated with the Ambanis. It is convenient to mention in this connection that, in July, 1988, Reliance Petrochemicals Ltd. of the Ambani group issued convertible debentures for Rs. 594 crores to the public and others and had raised a vast sum of money as subscription. The Ambani group diverted a part of it for acquisition of Larsen and Toubro shares in the name of benami concerns of their group which had virtually no financial standing.

On October 11, 1988, 33 lakhs shares were registered at a meeting of the board of directors of Larsen and Toubro in the name of BOB Fiscal Services Ltd. On the same day, two nominees of Reliance Industries Ltd., M. L. Bhakta and Mukesh Ambani, who are directors of Reliance Industries Ltd., Reliance Petrochemicals P. Ltd. were co-opted as directors of Larsen and Toubro. The nominee-directors of UTI, LIC and IDBI did not raise any question as to the induction of Ambani's on the board of Larsen and Toubro company even though not a single share of Larsen and Toubro stood in their names. On December 30, 1988, Trishna Investment and Leasing Ltd. issued 3,300 equity shares of Rs. 10 each to Reliance Industries Ltd. and Reliance Petrochemicals P. Ltd. The capital of Trishna Investment was Rs. 44,000. On that day, the registered office of Trishna Investment was shifted to Maker Chamber IV, i.e., the office of Reliance Industries Ltd. On December 30, 1988, Anil Ambani was co-opted as director of Larsen and Toubro without any question being raised by the nominee-directors of UTI, LIC and IDBI. On January 6, 1989, the 39 lakhs shares sold by UTI, LIC and GIC to BOB Fiscal Services Ltd. were lodged by BOB Fiscal Services Ltd. for transfer in favour of Trishna Investment and Leasing Ltd. whose registered office was located at the office of Reliance Industries Ltd. Thus, BOB Fiscal Services Ltd. merely acted as a conduit for funnelling shares from the public financial institutions to the Ambani group. This is apparent from the fact that Mr. Premjit Singh, the chairman of the Bank of Baroda is closely linked to the house of Ambani through the business of his son, Mr. Harjeet Singh, and BOB Fiscal Services Ltd. is the wholly-owned subsidiary of the Bank of Baroda and it was incorporated only two months preceding the acquisition of Larsen and Toubro Ltd. shares by it.

On April 28, 1989, Dhirubhai Ambani, the chairman of the Reliance group, became the chairman of Larsen and Toubro. By this process, the public financial institutions which held 40% of the shares of Larsen and Toubro company voluntarily diluted their holding to 33% and parted with approximately 7% to the house of Ambanis and made them the single largest private shareholder. This was done as submitted by the appellants deliberately and with a design to legitimise the eventual take over of Larsen and Toubro by the Ambanis. It is to be noticed that, on May 26, 1989, the board of directors of Larsen and Toubro decided to convene an annual general meeting on July 27, 1989. The board also resolved to recommend that Rs. 8 crores be invested in two specified companies and that a further sum of Rs. 50 crores be Invested in the purchase of equity shares in any other company. On June 23, 1989, the board of directors of Larsen and Toubro further resolved to invest a sum of Rs. 76 crores in the purchase of equity shares of Reliance Industries Ltd. On July 21, 1989, Reliance Industries Ltd. and Reliance Petrochemicals Ltd. wrote letters to Larsen and Toubro seeking suppliers' credit to the extent of Rs. 635 crores for projects which they planned to entrust to Larsen and Toubro. It is appropriate to note that, prior to this, the total intercorporate investment of Larsen and Toubro was approximately Rs. 4 crores and investment in the shares of other companies was less than Rs. 50 lakhs. On July 22, 1989, the board of directors of Larsen and Toubro approved a proposal to raise funds by issue of convertible debentures amounting to Rs. 920 crores. The board resolved that notice should be issued convening an extraordinary general meeting on August 21, 1989, to consider a special resolution for issue of convertible debentures of Rs. 920 crores.

On July 26, 1989, two applications were made to the Controller of Capital Issues for (i) the rights issue of Rs. 200 crores, and (ii) the public issue of Rs. 720 crores. The application states that it is proposed to reserve preferential allotment of Rs. 360 crores out of the public issue (i.e., 50% of the public issue) for Larsen and Toubro group companies, viz., Reliance Industries Ltd. and Reliance Petrochemicals Ltd. The application further mentions that Dhirubhai Ambani is the chairman and Mukesh Ambani is the vice-chairman of Larsen and Toubro and that Anil Ambani and Mr. M. L. Bhakta are directors. On August 11, 1989, a further letter was addressed by Larsen and Toubro to the Controller of Capital Issues forwarding copies of monopolies and restrictive trade practices clearance with regard to projects awarded to Larsen and Toubro made by the Central Government under section 22(3)(a) of the Monopolies and Restrictive Trade Practices Act. On August 29, 1989, the Controller of Capital Issues passed an order approving the issue of convertible debentures. The prospectus is dated September 5, 1989, stating that the company is part of the Reliance group.

We have heard the arguments of the respondents. The public financial institutions tried to justify the transfer of blue chip equity shares of Larsen and Toubro Ltd. on the ground that, while deciding to sell those shares, they acted purely on business principles and sold those shares at a very high market price and thereby earned a huge profit. These sales were made in order to earn a huge profit in the interest of their constituents and for recycling the fund for investing in business by purchasing shares of other companies in public interest and in the interest of the money market. There is no hanky-panky about it nor was it effected with the motive of diluting shares held by public financial institutions in order to facilitate the increase in the holding of Ambani group, a private monopoly house, to get into the management of this public company. It has been further contended on behalf of respondents Nos. 3 to 6 and 9 that the transfer of 39 lakhs shares of Larsen and Toubro were not made in favour of satellite companies of the Ambani group, through BOB Fiscal Services Ltd. which is a wholly-owned subsidiary of the Bank of Baroda, surreptitiously and discreetly on the basis of a design and a secret arrangement by transferring 7% out of 40% of the shareholding in Larsen and Toubro and thus reducing their shareholding in the company to 33%. It has also been submitted that, in transferring those equity shares, the financial institutions acted purely on business principles and to earn profit by these transactions and in the case of the LIC and the UTI in the interest of the policyholders and the unitholders, as the case may be. It has also been urged that the acceptance of the requests made by the subsidiary of the Bank of Baroda, i.e., BOB Fiscal Services Ltd., for selling the blue chip shares in Larsen and Toubro to them at the highest market price through the broker was in public interest inasmuch as, if all those 39 lakhs shares had been put in the stock market for sale, it would have created an adverse effect on the company and there would have been a run affecting adversely the interest of the Larsen and Toubro company. It has also been contended that it was not possible to know the actual purchasers of these shares from respondent No. 10, BOB Fiscal Services Ltd. Certain decisions of this court have been cited at the Bar.

The entire sequence of events and the manner in which the financial institutions sold those 39 lakhs equity shares of Larsen and Toubro to BOB Fiscal Services Ltd and it, immediately after purchase of those shares with the 30 crores of rupees given by four satellites of the Reliance group, transferred those shares to Trishna Investment and Leasing Ltd., a satellite of the Ambani group though it had a capital of only Rs. 44,000 and the money required for purchase was at least Rs. 39 crores leads to the conclusion that such transfers had been made to help the Ambanis acquire the shares of Larsen and Toubro Company in a circuitous way. Moreover, the fund for purchase of the said shares was provided by the Ambani group from out of the money received by issue of convertible debentures for Rs. 594 crores to the public and others. Furthermore, immediately after acquisition of shares of Larsen and Toubro Ltd., Mukesh Ambani and M.L. Bhakta, who are directors of Reliance Industries Ltd./Reliance Petrochemicals Ltd. were co-opted as directors without any question as to their induction in the board of directors even by the nominee-directors of financial institutions, even though the shares were not registered in their names. Anil Ambani was also co-opted as director in December, 1988, and in.April, 1989, Dhirubhai Ambani became chairman of Larsen and Toubro. All these circumstances taken together clearly spell some doubt as to whether the transfer of such a huge number of 39 lakhs shares by the public financial institutions was in public interest and was made on purely business principles. Public financial institutions should be very prudent and cautious in transferring the equity shares held by them and should not be guided by the sole consideration of earning more profit by selling them but by also taking into account the factors of controlling market finances in public interest. In Life Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp Cas 548 (SC), it was observed (at page 637) :

"Broadly speaking, the court will examine the actions of the State if they pertain to the public law domain and refrain from examining them if they pertain to the private law field. The difficulty will be in demarcating the frontier between the public law domain and the private law field... The question must be decided in each case with reference to the particular action ... When the State or an instrumentality of the State ventures into the corporate world and purchases the shares of a company, it assumes to itself the ordinary role of a shareholder, and dons the robes of a shareholder with all the rights available to such a shareholder."

This observation, in my considered opinion, has no application to the facts of the instant case as the public financial institutions are not purchasing the shares of a company.

However, I do not think it necessary to dilate on this point as the financial institutions have already bought back all the 39 lakhs shares from Trishna Investment and Leasing Ltd. with the accretions thereto but, at the same time, we add a note of caution that the public financial institutions, while transferring or selling bulk number of shares, must consider whether such a transfer will lead to acquisition of a large proportion of the shares of a public company and thereby creating a monopoly in favour of a particular group to have a controlling voice in the company, if the same is not in public interest and not congenial to the promotion of business.

The contention regarding the maintainability of the writ petition as a public interest litigation cannot be taken into consideration in view of the decisions of this court in S.P. Gupta v. Union of India [1982] 2 SCR 365, Bandhua Mukti Morcha v. Union of India [1984] 2 SCR 67. Even the case of LIC of India v. Escorts Ltd. [1986] 59 Comp Cas 548 (SC) arose out of a public interest litigation.

The next crucial question that falls for consideration is about the legality and validity of the consent given to the mega issue of debentures for the rights issue of Rs. 200 crores and for convertible issue of debentures of Rs. 620 crores out of which 310 crores of debentures were earmarked for issue to the shareholders and debentureholders of Reliance Industries Ltd. and Reliance Petrochemicals Ltd. As stated hereinbefore that, after the purchase of 39 lakhs equity shares of Larsen and Toubro company from the public financial institutions, BOB Fiscal Services Ltd., a subsidiary of the Bank of Baroda transferred the same on the same day on which the transferred shares were registered in its name in the register of Larsen and Toubro to Trishna Investing and Leasing Ltd., a satellite of the Ambani group. It has also been alleged that, after Dhirubhai Ambani became the chairman of the board of directors of Larsen and Toubro Ltd. on April 28, 1989, Mukesh Ambani and M.L. Bhakta, directors of Reliance Industries Ltd./Reliance Petrochemicals Ltd. and Anil Ambani were co-opted as directors of Larsen and Toubro. The board of directors of Larsen and Toubro, at its meeting held on July 22, 1989, approved a proposal to raise funds by issue of convertible debentures of Rs. 920 crores and further resolved that notice should be issued convening an extraordinary general meeting on August 21, 1989, to consider a special resolution for issue of convertible debentures of Rs. 920 crores. Immediately thereafter, on July 25, 1989, two applications were made to the Controller of Capital Issues, Department of Economic Affairs, for sanction to the rights issue of debentures of Rs. 200 crores and for the public issue of debentures worth Rs. 720 crores. The application records that it is proposed to reserve/preferentially allot Rs. 360 crores out of the public issue (i.e., 50% of the public issue) for Larsen and Toubro's group companies, viz., Reliance Industries Ltd. and Reliance Petrochemicals Ltd. The application also mentions that Dhirubhai Ambani is the chairman and Mukesh Ambani is the vice-chairman of Larsen and Toubro and that Anil Ambani and Mr. M.L. Bhakta are directors. On August 11, 1989, another letter was sent by Larsen and Toubro to the Controller of Capital Issues, respondent No. 2 stating, inter alia, that the company wishes to modify their proposal by reducing the reservation for the shareholders of Reliance Industries Ltd./Reliance Petrochemicals Ltd. from Rs. 360 crores to Rs. 310 crores, etc., and the issue of total debentures was reduced to Rs. 820 crores. On August 21, 1989, at the extraordinary general meeting of Larsen and Toubro Ltd., a resolution was passed authorising the board of directors of the company to issue 12.5% fully secured convertible debentures of the total value of Rs. 820 crores to be subscribed in the manner as stated therein. Respondent No. 2, Controller of Capital Issues, by his letter dated August 29, 1989, addressed to Larsen and Toubro Ltd. with reference to its letter dated July 26, 1989, intimated that the Central Government, in exercise of the powers conferred by the Capital Issues (Control) Act, 1947, gave their consent to the issue by Larsen and Toubro Ltd. of 12.5% fully secured convertible debentures of the value of Rs. 820 crores in the manner specified therein.

The consent given by the Controller of Capital Issues was challenged on the ground that it was given in undue haste without duly considering the issue that providing the preferential allotment of debentures of Rs. 310 crores to the equity shareholders of Reliance Industries Ltd. and Reliance Petrochemicals Ltd. will increase considerably the holding of equity shares by the Ambani group to control a public limited company. The consent order made by the Controller of Capital Issues was attacked mainly on the ground that the said order was made casually without any application of mind and without considering the fact that the effect of the same order will be to help the Ambani group to acquire debentures of the value of Rs. 310 crores specifically earmarked for preferential allotment to the shareholders of Reliance Industries Ltd. and Reliance Petrochemicals Ltd. and thereby to have the control of Larsen and Toubro, a public limited company. It has also been alleged that this consent has been given hurriedly within 24 hours of the making of the application for consent to the Controller of Capital Issues.

An affidavit-in-reply has been filed on behalf of respondents Nos. 1 and 2, the Union of India and the Controller of Capital Issues, denying all these allegations. It has been submitted that the claim made in the writ petition that undue haste in clearing the application (under the Capital Issues (Control) Act) was shown by respondents Nos. 1 and 2 and the application was cleared in just 24 hours, is not correct. It is not correct to say that the approval was given by the empowered committee on August 21, 1989, at 4 p. m., even before the general body meeting of Larsen and Toubro took place. It has been submitted that the application by Larsen and Toubro Ltd. was dated July 26, 1989, and the consent was given on August 29, 1989. The charge is false, baseless and mischievous. It has been stated in paragraph 3 of the said affidavit that the preferential issue, per se, is not a novel idea. It has been stated that the Controller of Capital Issues has been permitting reservations for various categories out of public issue based on the requests made by companies after passing a special resolution in their general body meeting to that effect. There is no restriction on the shareholders of the company to offer shares of their company to anybody after passing a special resolution in the general body meeting as per section 81(1A) of the Companies Act. Through such resolution resolved at such meetings, shareholders can also offer shares of their company to any person or corporate body who is not even connected with the company. However, the Controller of Capital Issues would not normally permit reservations for shareholders of any unconnected company out of public issue, unless it is offered to shareholders of an associate/group company of the issuing company. It is submitted that Larsen and Toubro had indicated that Reliance Industries Ltd. and Reliance Petrochemicals Ltd. are their group companies. It is also submitted that Larsen and Toubro filed a copy of the special resolution passed in the general body meeting held on August 21, 1989, which permitted the company to offer its convertible debentures worth Rs. 310 crores to the shareholders of Reliance Industries Ltd. and Reliance Petrochemicals Ltd. It is submitted that the Controller of Capital Issues permitted similar reservation for shareholders of associate/group companies in the public issue of Apollo Tyres Ltd., Essar Gujarat Ltd., Bindal Agro Ltd., Chambal Fertilizers Ltd. and several other companies. It is submitted that there was no reason for the Controller of Capital Issues to reject the request of Larsen and Toubro for this reservation as the shareholders of Larsen and Toubro had approved such reservation.

It has been further submitted that the charge of favouring the Reliance group/Ambani group is frivolous and misleading and seeks to convey a wrong impression and imputes motives for which there is no basis. It has been further submitted that the impugned issue had been consented by the Central Government after due consideration, including the need for funds. It is submitted that funds are required by the company for working capital needs, normal capital expenditure and for executing the turnkey contracts of Larsen and Toubro Ltd. It is submitted that Larsen and Toubro indicated the turnkey contracts including, inter alia, the Gas Cracker Project and Acrylic Fibre Project of Reliance Industries Ltd. and Caustic Chlorine Project of Reliance Petrochemicals Ltd., for Rs. 635 crores as projects are to be executed. The Controller of Capital Issues has not permitted Reliance Industries Ltd. and Reliance Petrochemicals Ltd. to raise funds for these projects so far. Earlier funds raised from capital markets were used or/are being used for the following projects :

RIL-PSF, PFY, PTA, LAB and Textile Units ;

RPL-HDPE, PVCL and MEG.

The allegation that, for the same projects, the Controller of Capital Issues permitted Larsen and Toubro to raise funds is baseless. The financing details of projects of Reliance Industries Ltd. and Reliance Petrochemicals Ltd. were also examined in Maheshwari's case [1989] JT 2 SC 338 in the Supreme Court and no double financing of same project was found. Reliance Industries Ltd. and Reliance Petrochemicals Ltd. have given an undertaking that they will not raise funds from the public for financing the cost of projects to the extent suppliers' credits are extended by Larsen and Toubro. It is stated that MRTP approval to Reliance Industries Ltd. for the Gas Cracker project does not provide for suppliers' credit from Larsen and Toubro in the scheme of finance and it is submitted that this statement is correct. It is also submitted that the Controller of Capital Issues will take this aspect into account before permitting any further issue, in future, to Reliance Industries Ltd. and Reliance Petrochemicals Ltd. for these projects. However, this aspect does not affect the consent order of Larsen and Toubro in view of the undertaking given by Reliance Industries Ltd. and Reliance Petrochemicals Ltd. mentioned above.

The application for consent was submitted to respondent No. 2 on July 26, 1989, for sanction. On August 21, 1989, at an extraordinary general meeting of shareholders of Larsen and Toubro, a resolution was passed with only one shareholder dissenting for the issue of debentures of Rs. 820 crores as provided therein. A copy of this resolution was sent to the Controller of Capital Issues who, after duly considering the same, accorded his consent on August 29, 1989. The argument that there has been complete non-application of mind by the Controller of Capital Issues in according his consent is not sustainable. Moreover, the Controller of Capital Issues issued a letter dated September 15, 1989, to Larsen and Toubro to note the amendment of the condition of the consent order to the effect that fund utilisation shall be monitored by the Industrial Development Bank of India. This will further go to show that the consent was given only after due consideration and in accordance with the provisions of section 3 of the Capital Issues (Control) Act, 1947 (29 of 1947).

Much arguments have been made as to the provision in the prospectus reserving preferential allotment of debentures of Rs. 310 crores to the equity shareholders of Reliance Industries Ltd. and Reliance Petrochemicals Ltd. mainly on the ground that it will increase the shareholding of the Ambani group and thereby add to the monopoly control of the Ambani group over this public limited company. Under section 2(g) of the Monopolies and Restrictive Trade Practices Act, 1969, "interconnected undertakings" means two or more undertakings which are interconnected with each other in any of the manner mentioned therein. Explanation I. — For the purposes of this Act, two bodies corporate, shall be deemed to be under the same management. . . (iii) if one such body corporate holds not less than one fourth of the equity shares in the other or controls the composition of not less than one fourth of the total membership of the board of directors of the other. In the prospectus of Larsen and Toubro Ltd., obviously, it has been mentioned that Larsen and Toubro Ltd. is part of the Reliance group. Referring to the said provisions, it has been contended on behalf of the respondents, i.e., the financial institutions that mention of Larsen and Toubro company as part of the Reliance group is quite in accordance with this provision. Apropos this, a reference may be made to the provisions of section 81(1A) of the Companies Act, 1956, which are set out hereunder :

"Notwithstanding anything contained in sub-section (1), the further shares aforesaid may be offered to any person (whether or not those persons include the persons referred to in clause (a) of sub-section (1)) in any manner whatsoever —

(a) if a special resolution to that effect is passed by the company in general meeting, or"

In the extraordinary general meeting of Larsen and Toubro, a special resolution was made providing for preferential allotment of debentures to the equity shareholders of Reliance Industries Ltd. and Reliance Petrochemicals Ltd. So the reservation of debentures of the value of Rs. 310 crores of the public issue for allotment to shareholders of Reliance Industries Ltd. and Reliance Petrochemicals Ltd. cannot be questioned. In the prospectus of Larsen and Toubro Ltd. under business plans, it has been mentioned that the requirement of funds of the company for the period from October 1, 1989, to March 31, 1992, including in respect of suppliers credit to be extended to customers under turnkey projects/quasi-turnkey projects and for incurring capital expenditure on new plant and equipment, normal capital expenditure on modernisation and renovation, meeting additional working capital requirements and for repayment of existing loan liability, is estimated to be in the region of Rs. 1,425 crores. The suppliers' credits, inter alia, include Rs. 510 crores to be extended to Reliance Industries Ltd. in respect of its Cracker Project. The funds requirement is intended to be met out of the present issue of debentures to the extent of Rs. 820 crores and the balance would be met from internal accruals by way of short-term borrowings, and out of the proceeds of the previous Debentures Issue (III Series). The consent was challenged on the ground that no MRTP clearance for the issue of capital under section 21 or under section 22 of the Monopolies and Restrictive Trade Practices Act, 1969, was given. It appears from the letter dated December 2, 1988, issued by the Government of India to Reliance Industries Ltd. endorsing a copy of the Central Government's order dated November 25, 1988, passed under section 22(3)(e) of the Monopolies and Restrictive Trade Practices Act, 1969, that it gave approval for the proposal of Reliance Industries Ltd. for setting up a cracker complex. The approval of the Central Government was made under section 22(3)(d) of the Monopolies and Restrictive Trade Practices Act and communicated to Reliance Petrochemicals Ltd. by letter dated May 30, 1989. Consent was also given by the Central Government under section 22(3)(a) of the Monopolies and Restrictive Trade Practices Act for the establishment of a new undertaking for the manufacture of 20,000 (sic) of acrylic fibre. Thus, challenge to the consent given by the Controller of Capital Issues is, therefore, meritless and so it is rejected.

It is pertinent to refer in this connection to this court's judgment in the case of Narendra Kumar Maheshwari v. Union of India [1989] JT 2 SC 338 in which, considering the duties of the Controller of Capital Issues under the Capital Issues (Control) Act, while giving consent it has been observed (at page 368) :

"That apart, whatever may have been the position at the time the Act was passed, the present duties of the Controller of Capital Issues have to be construed in the context of the current situation in the country, particularly, when there is no clear cut delineation of their scope in the enactment. This line of thought is also reinforced by the expanding scope of the guidelines issued under the Act from time to time and the increasing range of financial instruments that enter the market. Looking to all this, we think that the Controller of Capital Issues has also a role to play in ensuring that public interest does not suffer as a consequence of the consent granted by him. But, as we have explained later, the responsibilities of the Controller of Capital Issues in this direction should not be widened beyond the range of expeditious implementation of the scheme of the Act and should, at least for the present, be restricted and limited to ensuring that the issue to which he is granting consent is not, patently and to his knowledge, so manifestly impracticable or financially risky as to amount to a fraud on the public. To go beyond this and require that the Controller of Capital Issues should probe in depth into the technical feasibilities and financial soundness of the proposed projects or the sufficiency or otherwise of the security offered and such other details may be to burden him with duties for the discharge of which he is as yet ill-equipped."

Three applications for directions, being I. A. No. 1, I. A. No. 2 and I. A. No. 3 of 1990, have been filed in T.C. No. 61 of 1989, T.C. No. 62 of 1989 and in T.C. No. 1 of 1990 by Larsen and Toubro Ltd. It has been stated therein that the Deputy Controller of Capital Issues, by a letter dated September 15, 1989, has intimated Larsen and Toubro Ltd. that condition No. V of the consent letter provides that the utilisation of funds shall be monitored by the Industrial Development Bank of India Ltd. The representatives of the Industrial Credit and Investment Corporation of India Ltd. (ICICI) issued a letter to Larsen and Toubro stating that it would not be correct for them as debenture trustees to give conversion of those debentures to equity shares before a reference was made to the Controller of Capital Issues and without obtaining prior written consent of the IDBI. The IDBI considered the unaudited statement of the utilisation of the debenture fund up to March 31, 1990, and were of the opinion that the applicants should make the first call only after utilising substantially the surplus funds available to the extent of Rs. 226 crores in investments (after expenditure) up to June 30, 1990, satisfying the IDBI about the need for raising further funds by way of first call. This was communicated to the applicants by the IDBI's letter dated May 7, 1990.

The board of directors, at its meeting held on May 11, 1990, considered the above circumstances as well as the proceedings pending in this court and decided that the company could not proceed with the conversion of Part A of the debentures which was due on May 23, 1990. The board authorised the company secretary to make the necessary application to the Controller of Capital Issues seeking directions for the course of action to be followed by the company in regard to the conversion. The applicant's letter dated May 15, 1990, to the Controller of Capital Issues pursuant to the aforesaid board meeting refers to the letter dated May 7, 1990, from the IDBI as well as to the objections raised by the ICICI.

The applicants sent a letter dated May 15, 1990, to the Controller of Capital Issues pursuant to the above board meeting. After lengthy and detailed discussion by the IDBI with the applicant, the IDBI was satisfied that the amount of funds that would be presently required would be to the tune of Rs. 650 to 700 crores. The company, keeping this in view, proposed to make a call (first and final) of Rs. 85 on or before October 31, 1990, in place of the originally envisaged first call of Rs. 75 and final call of Rs. 75 aggregating to Rs. 150. The applicants recorded the above discussions and intimated the IDBI of its modified proposal by its letter dated June 29, 1990.

On June 29, 1990, the board of directors of the company were apprised of the relevant proposals as approved by the IDBI. In the meeting of the directors, it was decided (though not unanimously) that directions of the Supreme Court be sought on the said proposals and that the company should take necessary steps to approach this court and the Madras High Court and implement the proposals after obtaining the directions and vacating the order of the Madras High Court.

"These interim applications were filed for obtaining the following directions :—

(a) (i) that the size of the issue do stand reduced from Rs. 820 crores to Rs. 640 crores as follows :

Public issue of debentures of Rs. 235 each	:	Rs. 485 crores;
Rights issue of debentures of Rs. 225 each	:	Rs. 155 crores
Total		Rs. 640 crores;

(ii) that, in place of the first call of Rs. 75 and the final call of Rs. 75, as originally provided for in the prospectus, a first and final call of Rs. 85 in the case of the public issue and Rs. 80 in the case of the rights issue be made on the debentureholders on or before October 31, 1990.

(iii) that the first conversion of Part A of the debentures into one equity share of Rs. 10 at a premium of Rs. 40 (premium of Rs. 30 in the case of rights issue) be made on December 1, 1990.

(iv) that the second conversion of Part B of the debentures into two equity shares of Rs. 10 each at a premium of Rs. 50 be made on the date originally scheduled, viz., May 23, 1991.

(v) that the third equity conversion of Part C of the debentures be made on the date originally scheduled, viz., May 23, 1992, at such premium per equity share as may be fixed by the Controller of Capital Issues but not exceeding Rs. 55 per share and such conversion be made into one or more equity shares of Rs. 10 each as against two or more equity shares as originally provided in the prospectus ;

(b) that, in the case of any debentureholder not agreeing to the modifications, in prayer (a) above and on intimation being received by the applicant company as mentioned in prayer (c) below the applicants do refund to such debentureholders their/its application and allotment money with interest thereon at such rates as may be directed by this court ;

(c) that this court be pleased to direct the applicants to give notice to all debentureholders individually and by publication in national newspapers of the order passed in terms of prayers (a) and (b) above that in case of any debentureholder not agreeing to the modifications in prayer (a) such debentureholder to give intimation to the applicant company within 30 days of such notice in which case the applicant company would refund the application/allotment money with interest;

(d) for further orders and directions consequential to the orders passed by this court ;

(e) for costs of the application."

Larsen and Toubro Ltd., respondent No. 2 in T.C. No. 61 of 1989, filed a rejoinder affidavit to the statement of objections filed by N. Parthasarathy to the Interim Application No. 1 of 1990 in T.C. No. 61 of 1989. In para 2 of the said rejoinder affidavit, it has been stated that :

"By his order dated November 9, 1989, this court specifically directed Larsen and Toubro Ltd. to make allotment subject to the decision of this court in the said matters. This Hon'ble court, therefore, allowed the issue to proceed on the basis of the original consent purported to be impugned by the petitioner in the Madras High Court petition. I, therefore, submit that Larsen and Toubro Limited was fully justified in seeking the directions of this Hon'ble court as prayed for in the interim application. I deny that the directions in the interim application, if granted, would render nugatory the petition filed by the petitioner or that the same would amount to a determination of the issue in the petitioner's writ petition as erroneously contended by the petitioner. I deny that Larsen and Toubro Ltd. are at all misleading this Hon'ble court or that it committed any act which is at all illegal, as falsely alleged. I submit that a decision of this Hon'ble court on the legality of the original consent order is not necessary for the issue of interim directions of the nature prayed for by Larsen and Toubro Ltd. in the above interim application."

It has also been stated in paragraph 3 of the said affidavit that this court does not (sic) have jurisdiction to entertain the said interim application either for the reasons alleged or otherwise. The said application, it is submitted, does not amount to performance of any executive function by this court as erroneously alleged by the petitioner.

The statement that the Controller of Capital Issues has no power to modify or vary a consent as alleged has been denied. It has been submitted that the Controller of Capital Issues has not varied his consent nor is any such variation of the consent order per se being sought by respondent No. 2. It has also been stated that, under sub-section (6) of section 3 of the Capital Issues (Control) Act, 1947, the Central Government has the power to vary all or any of the conditions qualifying a consent.

It has been denied in paragraph 8 of the said affidavit that the consent order of the Controller of Capital Issues is at all illegal or improper as alleged. It has been denied that it is not open to this court or to the Controller of Capital Issues to modify the terms of the said consent order.

It is to be noted that the Industrial Development Bank of India, by its letter dated June 28, 1990, to the managing director, Larsen and Toubro Ltd., stated that :

"... From a quick review of the status of the new proposal mentioned in your letter dated June 22, 1990, we feel that the net requirements of funds to be met out of debenture funds would be in the region of Rs. 600 to Rs. 650 crores as indicated by you.

We further note that from your letter dated June 28, 1990, that you propose to make the first and final call of Rs. 85 on the debentures on or before 31st October and to effect the first conversion by the end of November, 1990, and the second and third conversions according to the original dates mentioned in the prospectus.

Larsen and Toubro board will have to take a view on the size of the debenture issue in the light of the requirements of funds indicated in your letter and other modifications suggested in the terms of the debentures. The company will no doubt obtain necessary approvals from the Controller of Capital Issues, debentureholders/shareholders, etc., in consultation with its legal advisers."

A meeting of the board of directors of the company was held on June 29, 1990, and it was resolved that the directions of the Supreme Court of India be sought on the said proposals and necessary steps be taken to approach the Hon'ble High Court at Madras to vacate the said order and/or modify the same suitably and implement the proposals only after the directions from the Supreme Court were obtained and the order passed by the Hon'ble High Court at Madras was vacated and/or modified suitably.

It appears that section 55 of the Companies Act, 1956, enjoins that :

"A prospectus issued by or on behalf of a company or in relation to an intended company shall be dated, and that date shall, unless the contrary is proved, be taken as the date of publication of the prospectus."

Under section 61 of the Companies Act, it is specifically provided that :

"A company shall not, at any time, vary the terms of a contract referred to in the prospectus or statement in lieu of prospectus, except subject to the approval of, or except on authority, given by, the company in general meeting."

Section 62 of the said Act provides for payment of compensation to every person who subscribes for any shares or debentures on the faith of the prospectus for any loss or damage he may have sustained by reason of any untrue statement included in the prospectus. Similarly, section 63 of the said Act provides for criminal liability for mis-statements made in the prospectus. Section 72 of the Companies Act provides that :

"No allotment shall be made of any shares in or debentures of a company in pursuance of a prospectus issued generally, and no proceedings shall be taken on applications made in pursuance of a prospectus so issued, until the beginning of the fifth day after that on which the prospectus is first so issued or such later time, if any, as may be specified in the prospectus."

Thus, it is evident from a consideration of the above provisions of the Companies Act that the terms of contract mentioned in the prospectus or the statements in lieu of the prospectus cannot be varied except with the approval of and on the authority given by the company in the general meeting. Therefore, the consent that was given by the Central Government, nay by the Controller of Capital Issues, on a consideration of the special resolution adopted in the extraordinary general meeting of the shareholders of the company held on August 28, 1989, cannot be varied, changed or modified both as regards the reduction of the amount of debentures as well as the purposes for which the fund will be utilised contrary to what has been embodied in the prospectus and approved by the Controller of Capital Issues on the basis of the special resolution adopted at the general meeting of the shareholders of the company. Sub-section (6) of section 3 of the Capital Issues (Control) Act, 1947, states that :

"The Central Government may by order at any time —

(a) revoke the consent or recognition accorded under any of the provisions of this section ; or

(b) where such consent or recognition has been qualified with any conditions, vary all or any of those conditions :

Provided that before an order under this sub-section is made, the company concerned shall be given a reasonable opportunity of showing cause why such order should not be made."

On a plain reading of this provision, it cannot be inferred that the consent order given by the Central Government after consideration of the special resolution passed at the general meeting of the company on taking the no objection certification from the IDBI can be changed or varied in any manner whatsoever by the Central Government. The Central Government can merely vary all or any of the conditions subject to which the consent is being given.

It is appropriate to mention in this connection that the IDBI also asked Larsen and Toubro Ltd. to obtain the necessary approval from the Controller of Capital Issues, debentureholders/shareholders, etc., in respect of the reduction in requirement of funds. There has been no general meeting of the company nor was any special resolution taken for variation or reduction of the amount of debentures to be issued as required under section 81 read with clause (1A) of the Companies Act. It is also evident that no steps have been taken to have the consent already granted by the Controller of Capital Issues, varied or modified as required under the Capital Issues (Control) Act, 1947. Merely because clause (v) of the consent order provides for monitoring of the funds by the IDBI, it does not mean nor can it be inferred automatically that the suggestion of the IDBI as regards the funds requirement can be automatically given effect to without complying with the statutory requirements as provided in the provisions in the Companies Act as well as in the Capital Issues (Control) Act. The consent order is one and indivisible and as such the same cannot be varied or vivisected without taking recourse to the provisions of the statute. It is also well-settled that the contract to purchase shares or debentures is concluded by allotment of shares issued under the prospectus and section 72 of the Companies Act makes it clear that allotment can only be made after the prospectus is issued. The company is bound by the special resolution, the prospectus and the consent of the Controller of Capital Issues. The power to pass a consent order is a statutory power vested in a statutory authority under the Capital Issues (Control) Act and the court has no power or jurisdiction to step into the shoes of the statutory authority and pass or approve a consent order different from the statutory consent order given by the statutory authority. Moreover, the consent order cannot be varied by the Central Government or the Controller of Capital Issues after the said order has been made public and third parties have acted on it and acquired rights thereon.

In Palmer's Company Law, 24th edition, by C.M. Schmitthoff, under the caption, "The golden rule as to framing prospectuses" at pages 332 to 333, it is stated that :

"Those who issue a prospectus, holding out to the public the great advantages which will accrue to persons who will take shares in a proposed undertaking, and inviting them to take shares on the faith of the representations therein contained, are bound to state everything with strict and scrupulous accuracy, and not only to abstain from stating as fact that which is not so, but to omit no one fact within their knowledge, the existence of which might in any degree affect the nature, or extent, or quality, of the privileges and advantages which the prospectus holds out as inducements to take shares."

Reference may also be made to the observations in Aaron's Reefs v. Twiss [1896] AC 273 (HL) in which Lord Watson said :

"It was argued for the company that, inasmuch as its contracts for the purchase of the concession are generally referred to towards the end of the prospectus, the respondent must be held to have had notice of their contents. This appears to me to be one of the most audacious pleas that ever was put forward in answer to a charge of fraudulent misrepresentation. When analysed it means simply that a person who has induced another to act upon a statement made with intent to deceive must be relieved from the consequences of his deceit if he has given his victim constructive notice of a document, the perusal of which would expose the fraud."

In the case of State of Madhya Pradesh v. Nandlal Jaiswal [1986] 4 SCC 566 ; AIR 1987 SC 251, this court while dealing with the laches and delay held that (at page 272 of AIR 1987 SC) :

"The High Court does not ordinarily permit a belated resort to the extraordinary remedy under the writ jurisdiction because it is likely to cause confusion and public inconvenience and bring in its train new injustices. The rights of third parties may intervene and if the writ jurisdiction is exercised on a writ petition filed after unreasonable delay, it may have the effect of inflicting not only hardship and inconvenience but also injustice on third parties."

For the reasons aforesaid, I dismiss all these transferred cases. There will be no order as to costs. All the interim applications filed in these transferred cases stand disposed of in view of the observations made hereinbefore.

The Special Leave Petition (C) No. 13801 of 1989 filed against the order of the Bombay High Court in Contempt Petition No. 1 of 1989 in Writ Petition No. 2595 of 1989 is dismissed.

The Contempt Petitions Nos. 121 and 130 of 1989 are also dismissed without costs.

Kasliwal J.—I have gone through the judgment of my learned brother B.C. Ray J. and I agree with the conclusions drawn by him. But, I would like to express my own views.

Writ Petition No. 2595 of 1989 was filed by Haresh Jagtiani and Shamit Majumdar (hereinafter called "the petitioners") in the Bombay High Court challenging the validity of the consent given by the Controller of Capital Issues (CCI) dated August 29, 1989, and, subsequently, amended by order dated September 15, 1989, for the issuance of fully convertible debentures of Rs. 820 crores by Larsen and Toubro, a public limited company (L & T). Challenge was also made in respect of transfer of 39 lakhs shares of Larsen and Toubro held by the Unit Trust of India (UTI), Life Insurance Corporation of India (LIC), General Insurance Corporation (GIC) and its subsidiaries to Trishna Investment and Leasing Ltd. (in short, "Trishna Investments") through the instrumentality of BOB Fiscal Services Ltd. (in short, "BOB Fiscal"). The writ petition was dismissed on September 29, 1989, by a learned single judge of the Bombay High Court. Letters Patent Appeal against the said judgment was filed in the Bombay High Court. Several other writ petitions and suits were filed in various other High Courts. Some contempt petitions were also filed and all the above matters were transferred to this court. Some interim applications were also filed by Larsen and Toubro before this court. The issues raised in these cases are of far-reaching impact on the affirmatory public duty and public obligations on the Government of India and its instrumentalities, to preserve and to refrain from squandering away the property and economic power of the State and to prevent illegitimate growth of private monopoly power and to ensure honesty and probity in public life and in industry and business. This is the largest mega issue so far as India is concerned and involves to a great extent the investment of the country's bulk economic resources to be invested for industrial growth or development of the country in a public limited company. The matter has to be looked into on the basis of the larger public interest which can be fulfilled by a balanced investment of the country's resources.

My learned brother has already given the details regarding the manner and circumstances in which 39 lakhs shares of Larsen and Toubro were transferred by public financial institutions to Trishna Investment and Leasing Ltd., a subsidiary of Reliance group of industries, i.e., Reliance Industries Ltd. (RIL) and Reliance Petrochemicals Ltd. (RPL), through the conduit of BOB Fiscal Services Ltd. as such I need not repeat the same.

On the date of the filing of the writ petition in the Bombay High Court, a prayer was made in this regard to declare that the transfer of 39 lakhs shares of Larsen and Toubro held by UTI, LIC, GIC and its subsidiaries to Trishna Investment and Leasing Ltd. through the instrumentality of BOB Fiscal Services Ltd. is arbitrary, illegal, mala fide and a fraud on the statutory powers of the respondents and is clearly ultra vires articles 14, 39(b) and (c) of the Constitution and to issue a writ of mandamus directing the respondents to recover the shares of Larsen and Toubro and pay back the amount received therefor. This later part of the prayer for a writ of mandamus has now become infructuous in view of the changed circumstances that the 39 lakhs shares of Larsen and Toubro have already been returned to the public financial institutions, but Mr. Chinoy, counsel for the petitioners, has prayed that it would be very necessary to declare that such transfer of 39 lakhs shares at the relevant time was arbitrary, illegal, mala fide and a fraud in order to hold further that the consent given by the Controller of Capital Issues for the proposed issue of convertible debentures of Rs. 820 crores by Larsen and Toubro was not only arbitrary but based on mala fide exercise of power based on extraneous grounds. In this regard, it would be necessary to state some more facts which happened after the dismissal of the writ petition by the order of the learned single judge of the Bombay High Court dated September 29, 1989. The petitioners aggrieved against the judgment of the learned single judge filed a Letters Patent Appeal before the Division Bench of the High Court. Some shareholders filed writ petitions and suits in several High Courts and this court, in the above circumstances, thought it proper to transfer all the cases to this court. Pursuant to the order of this court dated October27, 1989, the learned Additional Solicitor-General appearing on behalf of the financial institutions submitted a memorandum. It was stated in the memorandum that the financial institutions had already bought back 39 lakhs shares of Larsen and Toubro with accretion thereto from Trishna Investment and Leasing Ltd. It was further stated that, by buying back the said shares, the financial institutions were in no way either remotely or impliedly acceding the position that the original transactions of sales were illegal or void. The financial institutions stood by their contentions which had been upheld by the Bombay High Court in its judgment dated September 29, 1989. It was further stated that the transactions had been completed on the expectation that the petitioners would withdraw the proceedings as, even otherwise, a basic portion of the petitions filed in the High Court had become infructuous.

Mr. Jethmalani, learned counsel appearing on behalf of Haresh Jagtiani, also filed, a draft of consent terms to be recorded in the transfer petition. On November 9, 1989, this court, after considering all the circumstances of the matter, thought it just and fair to pass an order to the effect that the allotment of debentures will be made by the petitioner company, i.e., Larsen and Toubro and such allotment will abide by the decision of this court in the said matters. It was further directed that Larsen and Toubro will also affix a similar notice at its registered office for the information of its shareholders as well as the original allottees. The court also indicated in the above order as under :

"The court will further make it clear that no equities will be pleaded in respect of allotment of shares."

After the passing of the above order, debentures were released and several lakhs of persons have purchased these debentures.

Trishna Investment and Leasing Ltd. had not filed any counter to the writ petition before the Bombay High Court, but have filed counter-affidavit and written submissions before this court. Dr. L.M. Singhvi, learned senior advocate appearing on behalf of Trishna Investment and Leasing Ltd. contended that Trishna Investments had agreed to the retransfer of the 39 lakhs shares to the financial institutions and it was agreed by learned counsel for the petitioners that it would form the basis for a fully comprehensive and wholistic settlement of the matter. Indeed, Shri Ram Jethmalani, learned counsel appearing for the petitioners, so stated that this Hon'ble court was also pleased to record the same in its order dated November 9, 1989. Since the petitioners have now resiled from their categorical offer, Trishna Investment and Leasing Ltd. also cannot be made to agree to a settlement upon de novo terms and conditions. It has been submitted that in its affidavit dated November 7, 1990, filed by Trishna Investment and Leasing Ltd., it has been stated that the retransfer of shares resulted in a loss of Rs. 10 crores to Trishna Investment and Leasing Ltd. It has also been submitted that though Trishna Investment Leasing Ltd. is a wholly-owned subsidiary company of Reliance Industries Ltd. but contracts made by Trishna Investment Leasing Ltd. in the present case should not be construed to mean that this Hon'ble court may hear and adjudicate all other allegations against the Reliance group without making the latter a party to the present proceedings. Trishna Investment and Leasing Ltd. cannot be treated as a substitutable alter ego without making Reliance Industries Ltd./Reliance Petrochemicals Ltd. parties.

It was contended by Dr. Singhvi, learned counsel for Trishna Investment and Leasing Ltd., that the present proceedings have now become infructuous in view of the admitted retransfer of 39 lakhs shares by Trishna Investment and Leasing Ltd. to financial institutions. It is well-settled that the court should not decide merely academic points. In this regard, it is submitted that the principal relief as sought in prayers (a) and (c) no longer exist and the aforesaid transaction of retransfer of 39 lakhs shares was on the expectation that the petitioners will withdraw the proceedings. In support of the above contention, reliance is placed on State of Maharashtra v. Ramdas Shriniwas Nayah [1983] 1 SCR 8, at page 12. It has been further submitted that, in the alternative, Trishna Investment and Leasing Ltd. must be put in the identical status quo ante by retransfer of its 39 lakhs shares back to it, along with all accretions. It was also urged that there are a large number of disputed questions of fact which cannot be decided in exercise of the extraordinary jurisdiction contained in article 226 of the Constitution.

Dr. Singhvi also urged that even if the action of the Reliance group was to corner or purchase all shares of Larsen and Toubro, there is nothing wrong or illegal about it. There was no law or rule prohibiting the purchase of shares of the company. Thus, there was nothing wrong or illegal in purchasing the shares by Trishna Investment and Leasing Ltd. Apart from that, the total shareholding vested in Trishna Investments was only about 6.5% and the representation of the Ambanis including Mr. Bhakta on the board of directors of Larsen and Toubro was only 4 out of 20. It was wholly misleading, deliberately mischievous and erroneous to suggest on the part of the petitioners that the real value of the shares transferred/sold by financial institutions was far more than the market value. There are no guidelines, rules, regulations, directions or documents prescribing any method of sale of shares where such shares are sold individually or in chunks. No control can be said to have been transferred on the basis of 6.42% of the shareholding and representation on the board of directors after the transfer to Trishna Investments. Reliance in support of the above contention is placed on Babulal Choukhani v. Western India Theatres Ltd., AIR 1957 Cal 709 at p. 715, on the passage which reads as under :

"It is in evidence that Modi had been purchasing large blocks of shares of this company, but cornering as such or purchase of a large block of shares as such, so long as they are permissible by law, is not unjustified. That by itself does not prove mala fides or bad faith either in fact or in law. To acquire a control which the law permits cannot be illegal."

It was further submitted in this regard that if purchase or cornering, per se and by itself, is neither illegal nor impermissible, then purchase or cornering through intermediaries or even if done surreptitiously cannot become illegal merely by the existence of such intermediaries or by the allegedly surreptitious nature of the transactions. The aforesaid decision of the Calcutta High Court has been applied in a large number of decisions of statutory authorities dealing with allegations of chunk purchase or cornering of shares

Dr. Chitaley appearing on behalf of BOB Fiscal Services P. Ltd. pointed out that the members of BOB Fiscal Services P. Ltd. at an extraordinary general meeting held on September 24, 1990, have passed a special resolution for voluntary winding up of the company in accordance with section 484(1)(b) of the Companies Act, 1956. By the said resolution, a chartered accountant has also been appointed as liquidator for the beneficial winding up of BOB Fiscal Services Pvt. Ltd. It was further submitted by Dr. Chitaley that the essential grievance of the writ petitioners related to the transfer of 39 lakhs shares of Larsen and Toubro by the investment institutions and its subsidiaries to Trishna Investment and Leasing Ltd. through the alleged conduit or instrumentality of BOB Fiscal Services P. Ltd. It has been alleged by the petitioners that a conspiracy was hatched between the investment institutions and the Ambani group represented by Trishna and BOB Fiscal in order to camouflage the transactions and to prove (sic) the transfer of shares to BOB Fiscal in order to avoid compliance with the alleged guidelines and policy of the financial institutions to charge twice the market price for such sale of shares. The allegations were denied by various respondents which were upheld by the Bombay High Court by its judgment dated September 29, 1989. It was further submitted that, during the course of the proceedings before this court on October 18, 1989, Trishna Investments made an offer in the open court to sell back or retransfer the 39 lakhs shares in question together with accretions to the investment institutions on no loss no profit basis. On October 27, 1989, the institutions agreed to buy back the said 39 lakhs shares with accretions thereto. It was expressly submitted and clarified by Trishna Investments and the institutions that Trishna Investments was selling back the said shares and the institutions were buying back the same without in any manner admitting any of the allegations in the writ petitions, nor were they admitting the position that the original transfer of shares by the investment institutions to BOB Fiscal were in any manner arbitrary or unlawful. Subsequently, it transpired that on or about November 8, 1989, the institutions had purchased the said 39 lakhs shares on full payment. As a sequel to the above, the main reliefs sought by the petitioners have become infructuous and do not survive at all. The entire challenge in the writ petitions in regard to the actions of the financial institutions for sale of shares to Trishna Investments through BOB Fiscal had become merely academic and any trial of the issue in relation thereto would only be an abuse of the process of law and wholly unnecessary and a waste of the time of this court. BOB Fiscal is not concerned with the challenge of the petitioners in regard to the order of the Controller of Capital Issues. It was thus submitted that the entire petition has become infructuous but, if, for any reasons, this court desires to continue with the case in respect of the challenge to the consent of the Controller of Capital Issue, then BOB Fiscal Service P. Ltd. and its chairman should be dropped from the array of parties.

The stand taken by the public financial institutions in this regard is that, while deciding to sell those shares, they acted purely on business principles and sold those shares at a very high market price and thereby earned huge profit. There was no basis in the allegation made by the petitioners that the investment institutions ought to have charged and recovered a substantially higher price (which, according to the petitioners, should have been at least 200% of the market price) for the transfer of such shares had the shares been transferred directly to Trishna Investments being a company, representing a group/persons other than those in the management. The investment institutions had transferred 39 lakhs shares to BOB Fiscal as part of a "basket" of securities purely on commercial considerations. The investment institutions were in no way concerned with any subsequent dealings in the said shares by BOB Fiscal. The entire challenge of the writ petitioners to the actions of the financial institutions was now merely academic and any decision in this regard would be a waste of judicial time and totally unnecessary. It was also submitted that all allegations of conspiracy between the financial institutions and any other party are denied. It is denied that the investment institutions were at any time aware of the fact that 39 lakhs shares which were sold to BOB Fiscal were at any time intended or destined for the Ambani group as alleged.

I agree with the observations made and conclusions arrived at by my learned brother B.C. Ray in respect of transfer of the 39 lakhs shares. I may further add that so far as the relief of a writ of mandamus directing the respondents to recover 39 lakhs shares of Larsen and Toubro and pay back the amounts received therefor is concerned, the prayer therefor does not survive in view of the shares having already been bought back by the financial institutions from Trishna Investments. However, for future guidance, it may be worthwhile to note that public financial institutions, while making a deal in respect of a very large number or bulk of shares worth several crores of rupees, must also make some inquiry as to who was the purchaser of such shares. Such transactions should be made with circumspection and care to see that the deal may not be to camouflage some illegal contrivance or inbuilt conspiracy of a private monopoly house in order to usurp the management of a public company and which, in its opinion, may not be in public interest.

We cannot subscribe to the contention raised by Dr. Singhvi that there was nothing wrong or illegal even if the action of the Reliance group was to corner or purchase all the shares of Larsen and Toubro, and even if done through intermediaries or surreptitiously cannot become illegal. If that is the law laid down by the Calcutta High Court in Babulal Choukhani v. Western India Theatres Ltd., AIR 1957 Ca 709, we disapprove it.

It is no doubt correct to say that any person or company is lawfully entitled to purchase shares of another company in the open market, but if the transaction is done surreptitiously with a mala fide intention by making use of some public financial institutions as a conduit in a clandestine manner, such a deal or transaction would be contrary to public policy and illegal. If the matter was so simple as propounded by Dr. Singhvi, why did Trishna Investments not come forward directly to purchase the 39 lakhs shares from public financial institutions and why did it enter into a deal through the conduit of BOB Fiscal in a clandestine manner. That apart, why did Trishna Investments readily agree to sell back these shares to the public financial institutions even at a loss of Rs. 10 crores as suggested, after the filing of these petitions. This, itself speaks volumes against the conduct of Trishna Investments which was a subsidiary of the Reliance group. There is no force in the contention that the propriety of such deal cannot be considered without impleading Reliance Industries Ltd./Reliance Petrochemicals Ltd. as parties to these proceedings. It may be stated that the entire transactions have been made by BOB Fiscal and Trishna Investments which are already parties. It may be noted that BOB Fiscal and Trishna Investments were made parties to the writ petition filed in the Bombay High Court and serious allegations were made against them but they did not choose to refute any allegations by filing any counter affidavit in the High Court. In any case, we have derived our conclusions on the basis of admitted facts and not otherwise. It may be worth mentioning that BOB Fiscal was formed in June, 1988, and soon thereafter entered into transactions of purchase of 39 lakhs shares of Larsen and Toubro on the strength of deposit of Rs. 30 crores by the four satellite companies of the Ambani group and soon thereafter transferred the shares in favour of Trishna Investments. It has now, been stated before us by Dr. Chitaley appearing on behalf of BOB Fiscal that, in an extraordinary general meeting held on September 24, 1990, a special resolution has been passed for voluntary winding up of BOB Fiscal. This leads one to draw a legitimate inference that BOB Fiscal was brought into existence merely to act as a conduit and was merely an interloper to effect the transfer of 39 lakhs shares from the public financial institutions in favour of the Ambani group and their satellite firms. It came into existence like a rainy insect and lived out its utility after acting as a conduit for the transfer of 39 lakhs shares in favour of Trishna Investments. I do not consider it necessary to further dilate on this point and fully agree with my learned brother that all the circumstances taken together clearly spell some doubt whether the transfer of such a huge number of 39 lakhs shares by the public financial institutions was for public interest and was made on purely business principles.

Another important question is with regard to the consent given by the Controller of Capital Issues. Larsen and Toubro had filed two applications to the Controller of Capital Issues on July 26, 1989, one for consent to the rights issue of Rs. 200 crores and another for consent to the public issue of Rs. 720 crores (subsequently reduced to Rs. 620 crores). It may be noted that, up to this time, 30 lakhs shares of Larsen and Toubro had come to Trishna Investments and M.L. Bhakta, Mukesh Ambani and Anil Ambani had been co-opted as directors of Larsen and Toubro and lastly Dhirubhai Ambani had become the chairman of Larsen and Toubro on April 28, 1989. On June 23, 1989, the board of directors of Larsen and Toubro had resolved to invest a sum of Rs. 76 crores in the purchase of equity shares of Reliance Industries Ltd. On July 21, 1989, Reliance Industries Ltd. and Reliance Petrochemicals Ltd. had written letters to Larsen and Toubro seeking suppliers credit to the extent of Rs. 635 crores for turnkey projects which they planned to entrust to Larsen and Toubro. Out of the above public issue of Rs. 820 crores, it was proposed to reserve preferential allotment of Rs. 310 crores (50 per cent, of the issue after deducting rights issue) for the shareholders of Reliance Industries Ltd. and Reliance Petrochemicals Ltd. treating them as group companies of Larsen and Toubro. On August 29, 1989, the Controller of Capital Issues passed an order approving the above issue of convertible debentures. The prospectus was issued on September 5, 1989, in which, it was stated that Larsen and Toubro was part of the Reliance group. The Controller of Capital Issues, by a further order dated September 15, 1989, amended the earlier consent order dated August 29, 1989, to the effect that fund utilisation shall be monitored by the Industrial Development Bank of India (IDBI). The Controller of Capital Issues, in another letter of the same date, namely, September 15, 1989, also stated that 50 per cent, to be raised in calls would be based upon the monitoring by the IDBI for utilisation. This court, on November 9, 1989, allowed Larsen and Toubro to open the issue subject to the condition that the allotment will abide by the decision of this court. The issue was then opened and it was over-subscribed and more than 11 lakhs applicants applied for the allotment of the debentures. On the ground that, by virtue of the conditions in the consent order, the IDBI being the monitoring agency required Larsen and Toubro to furnish its funds requirement before making calls and since considerable details had to be worked out by Larsen and Toubro, it became necessary to postpone the first call originally due on April 30. Accordingly, the board of directors of Larsen and Toubro resolved that the date of payment of the first call money payable by the debenture-holders on or before April 30, 1990, would be postponed till such time as may be decided by the directors. Meanwhile, the Industrial Credit Investment Corporation of India (ICICI) who are the debenture-trustees in respect of Series IV debentures issued a letter dated April 30, 1990, to Larsen and Toubro stating that it would not be correct for them as debenture-trustees to give conversion of these debentures into equity shares before a reference was made to the Controller of Capital Issues and without obtaining prior written consent of the IDBI The IDBI then considered the unaudited statement giving details of the utilisation of debenture funds up to March 30, 1990, and were of the view that the applicants (Larsen and Toubro) should make the first call only after utilising substantially the surplus funds available to the extent of Rs. 226 crores in investments (after expenditure) up to June 30, 1990, and after satisfying the IDBI about the need for raising further funds by way of first call. After a prolonged discussion and correspondence with all the concerned authorities, Larsen and Toubro proposed to make a call (first and final) of Rs. 85 on or before October 31, 1990, in place of the originally envisaged first call of Rs. 75 and final call of Rs. 75 aggregating to Rs. 150. Larsen and Toubro thus proposed to effect the first equity conversion by the end of November, 1990. The IDBI approved the above proposal. In view of the fact that the postponement of the first call upon the debenture-holders to be made on April 30, 1990, and the postponement of the first conversion of Part A of the debentures into equity shares as originally scheduled to be made on May 23, 1990, was occasioned by the IDBI requiring Larsen and Toubro to first satisfy the IDBI as to its requirements of funds and an objection raised by the ICICI for giving its consent to the conversion of Part A of the debentures, Larsen and Toubro submitted interim applications before this court for directions which have been mentioned in extenso in the judgment of my learned brother.

Mr. Nariman, learned senior advocate, appearing on behalf of Larsen and Toubro, in the changed circumstances, submitted that the impugned issue of convertible debentures was passed by a special resolution in the extraordinary general meeting of the shareholders of Larsen and Toubro dated August 21, 1989, and the said special resolution had not been challenged by any of the petitioners. Only the consent order of the Controller of Capital Issues had been challenged and thus, the debentures which had been issued on the authority of a special resolution remained unchallenged. It was further argued that, as regards the authority of the Controller of Capital Issues' consent order, the scope and parameters of the court's power to scrutinise the consent order have already been laid down in a recent decision of this court in N.K. Maheshwari v. Union of India [1989] 3 SCR 43. It was submitted that the limits as laid down in N. K. Maheshwari's case [1989] 3 SCR 43, have not been transgressed so as to call for any interference in the consent order. Mr. Nariman thus justified the sanctioning of preferential allotment of shares worth Rs. 300 crores for the shareholders of the Reliance group as well as the consent order or the entire issue of Rs. 820 crores. It may be further noted that, initially, Larsen and Toubro had taken the stand to reduce the total amount of the issue to Rs. 640 crores instead of Rs. 820 crores, but finally took the stand that the issue may be proceeded with to the full extent of Rs. 820 crores in view of the fact that the IDBI had itself, in an affidavit-in-reply to their application before this court, taken the stand that it was not the IDBI's view to curtail the amount of issue and that it was Larsen and Toubro's own decision. Larsen and Toubro thus, in its affidavit dated September 11, 1990, made it clear that the issue may be proceeded with to the full extent of Rs. 820 crores and only a postponement of the dates of the first call, first equity conversion and the second call may be permitted.

Mr. Chinoy, learned counsel appearing for the petitioners, vehemently submitted that the petitioners had not come forward with a grievance regarding the validity of the issue of debentures only. His contention was that the petitioners had come forward raising larger issues affecting the entire economy of the country and the underhand practice adopted by financial institutions and big private industrialists. It was submitted that there was a limited financial capacity of the investor public in shares and that the Controller of Capital Issues, as a controller, ought to see that such public investment should not go in the hands of a few industrialists which would be contrary to the Directive Principles enshrined in article 39(b) and (c) of the Constitution of India. It should adhere to the above State policy enshrined in the Directive Principles that the ownership and control of the material resources of the community are so distributed as to subserve best the common good and that the operation of the economic system does not result in concentration of wealth and means of production to the common detriment. It was submitted that the facts on record clearly establish that the mega issue was conceived, proposed and implemented with the intent and object of utilising the reputation and goodwill of Larsen and Toubro to raise funds to the extent of Rs. 635 crores for funding the projects of the Reliance group of industries. The consent so given by the Controller of Capital Issues was vitiated on account of the non-application of mind and its failure to consider the facts of the case in the light of its application to act in public interest and in consonance with the principles embodied in article 39(b) and (c).

Dr. Singhvi, learned senior advocate appearing on behalf of Trishna Investments, submitted that economic and corporate issues can never be a subject-matter of judicial review, as already laid down in State of Madhya Pradesh v. Nandlal Jaiswal [1987] SCR 1, 54 and Life Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp Cas 548 (SC) ; [1985] Suppl 3 SCR, 909 at pages 1017 and 1018. It was submitted that the Controller of Capital Issues had given consent after thoroughly applying its mind. In any case, the impugned consent order is a single, composite indivisible order which cannot be appropriately bisected or bifurcated. Even if, for argument sake, it may be considered that the consent was not proper, then the whole consent must go and it cannot be selectively upheld and selectively quashed. As regards suppliers' credit it has been urged that provision of suppliers' credit is an extremely common and a well known commercial modality and indeed, constitutes an alternative scheme and mechanism of finance. Indeed, the concept of suppliers' credit, is integrally connected and inextricably intertwined with the concept of a turnkey project. In sum and substance, the concept of suppliers' credit simply means that the entire turnkey project is the property of Larsen and Toubro which executes it and then hands it over to the purchaser (in this case Reliance Industries Ltd./Reliance Petrochemicals Ltd.) and extends credit for payment to Reliance Industries Ltd./Reliance Petrochemicals Ltd. with effect from the date when the project is handed over as a running unit by Larsen and Toubro. The suppliers/works contractor Larsen and Toubro gives credit in the sense that the purchaser promises to pay, inter alia, by bills of exchange or other customary payment organised with the price of the project would be paid in instalments inclusive of further running interest from the date of handing over till the date of payment. It has been submitted that all official documents and other materials in the present case specifically stipulate and specify the precise particular projects for which the moneys were sought to be raised by Larsen and Toubro. Thus, it is uncontrovertibly clear that the sole and only purpose for raising of funds and the sole and only requirement of funds by Larsen and Toubro related to the extension of suppliers' credit to Reliance Industries Ltd., inter alia, in respect of its cracker project which has also been shown on pages 10 and 11 of the prospectus. Similarly, a reference has been made to other turnkey projects of Reliance Industries Ltd./Reliance Petrochemicals Ltd. in the prospectus. It has thus been argued that if the consent of the Controller of Capital Issues was given taking note of all these circumstances, then Larsen and Toubro has no right to change the same and utilise the funds for other purposes. The issue was only of Rs. 820 crores for specific projects of Reliance Industries Ltd./Reliance Petrochemicals Ltd. worth Rs. 635 crores and the entire issue would be subject to the fulfilment of the above contracts made with Reliance Industries Ltd./ Reliance Petrochemicals Ltd. The original consent of the Controller was given on August 29, 1989, and the same cannot be changed by subsequent letters of the Controller dated September 15, 1989. Those letters can only be construed harmoniously and in conjunction with the sanction dated August 29, 1989. They can only be construed as nominating the IDBI to monitor the sanction dated August 29, 1989, which is based on ther proposal and the special resolution of the company. It was argued that the issue was carried out according to the prospectus filed on September 6, 1989. The two letters of September 15, 1989, cannot be construed as authorising the IDBI or Larsen and Toubro to redraw the consent or to override the special resolution or the prospectus for that would be completely violative of the provisions of the Companies Act, the Capital Issues Control Act and the Rules made thereunder.

Mr. Asoke Sen, learned senior advocate appearing on behalf of K.B.J. Tilak, opposed the interim applications submitted on behalf of Larsen and Toubro. It was contended that Larsen and Toubro had no right to change the conditions of the consent order as well as the terms and conditions mentioned in the propectus. Mr. Sen also placed reliance on de Smith's Judicial Review of Administrative Action, 4th edition, page 285, which sets out the principles governing the exercise of discretionary powers as under :

"The relevant principles formulated by the courts may be broadly summarised as follows.. The authority in which a discretion is vested can be compelled to exercise that discretion, but not to exercise it in any particular manner. In general, discretion must be exercised only by the authority to which it is committed. That authority must genuinely address itself to the matter before it. It must not act under the dictation of another body or disable itself from exercising the discretion in each individual case. In the purported exercise of its discretion, it must not do what it has been forbidden to do, nor must it do what it has not been authorised to do. It must act in good faith, must have regard to all relevant considerations and must not be swayed by irrelevant considerations, must not seek to promote purposes alien to the letter or to the spirit of the legislation that gives it power to act, and must not act arbitrarily or capriciously. Nor where a judgment must be made that certain facts exist can a discretion be validly exercised on the basis of an erroneous assumption about those facts. These several principles can conveniently be grouped in two main categories : failure to exercise discretion, and excess or abuse of discretionary power. The two categories are not, however; mutually exclusive. Thus, discretion may be improperly fettered because irrelevant considerations have been taken into account and where an authority hands over its discretion to another body, it acts ultra vires. Nor, as will be shown, is it possible to differentiate with precision the grounds of invalidity contained within each category."

When such order is passed without regard to relevant considerations or on irrelevant grounds or for an improper purpose or in bad faith, then the order becomes void. Mr. Sen also cited a passage of the House of Lords in Anisminic Ltd. v. Foreign Compensation Commission [1969] 2 AC 147 which has been quoted by the Supreme Court in Union of India v. Tarachand Gupta and Bros. [1971] 3 SCR 557 at page 570 which reads as under :

"It has sometimes been said that it is only where a tribunal acts without jurisdiction that its decision is a nullity. But, in such cases, the word "jurisdiction" has been used in a very wide sense and I have come to the conclusion that it is better not to use the term except in the narrow and original sense of the tribunal being entitled to enter on the enquiry in question. But, there are many cases where, although the tribunal had jurisdiction to enter on the enquiry, it has done or failed to do something in the course of the enquiry which is of such a nature that its decision is a nullity. It may have given its decision in bad faith. It may have made a decision which it had no power to make. It may have failed in the course of the enquiry to comply with the requirements of natural justice. It may, in perfect good faith, have miscontrued the provisions giving it power to act so that it failed to deal with the question remitted to it and decided some question which was not remitted to it. It may have refused to take into account something which it was required to take into account. Or it may have based its decision on some matter which, under the provisions setting it up, it had no right to take into account. I do not intend this list to be exhaustive. But if it decides a question remitted to it for decision without committing any of these errors, it is as much entitled to decide that question wrongly as it is to decide it rightly."

It was also submitted that the consent order of the Controller is an integrated and composite order and that it cannot be vivisected either by the IDBI or by the High Court. It is a statutory order which has been made by a statutory authority in accordance with the Capital Issues (Control) Act and Rules, approved by the Controller and the issue was subscribed on the basis of such consent order and prospectus and no other functionaries can change this order. It was submitted that the prospectus did not specify any contract apart from the turnkey contract of Reliance Industries Ltd. and also did not mention anything except the supply credit necessary for financing these turnkey projects which would require Rs. 635 crores out of Rs. 820 crores. In other words, the principal purpose of the issue was the financing of the turnkey projects of the value of Rs. 635 crores. It is fallacious to argue that the issue was for Rs. 1,425 crores as is sought to be argued on behalf of Larsen and Toubro. The prospectus mentions at page 45 of the interim application, under the head "Business plans" that, for the period October 1, 1989, to March 31, 1992, funds requirement was estimated at Rs. 1,425 crores. If was further specifically stated that the suppliers' credit, inter alia, included Rs. 510 crores to be extended to Reliance Industries Ltd. in respect of its Naptha Cracker project. It was further specifically stated that the funds requirement was intended to be met out of the present issue of the debentures to the extent of Rs. 820 crores and the balance would be met from internal accruals, in other words, from the internal resources of the company and not by borrowings or by debenture proceeds.

Mr. Parasaran, learned senior advocate appearing on behalf of the petitioners in Writ Petitions Nos. 11112 and 11113 of 1990 filed in the High Court of Madras and subject matter of transfer petitions in this court, argued that each compulsorily convertible debenture-holder has rights accrued in his favour pursuant to the allotment. Each debenture-holder has his own perception of the rights accrued in his favour which he may seek to enforce. Such enforcement of rights accrued in his favour will necessarily result in his taking up a legal position which may agree with the stand taken by one or other of the parties. It has been submitted that the consent order passed by the Controller of Capital Issues is either valid or invalid. There is no third position possible. It was further submitted that a prospectus is an invitation for offer from the public for the subscription or purchase of any shares or debentures. The invitation is accepted and the offer is made when an application is made for allotment of debentures. Once the debentures are allotted, the contract is concluded. It was further contended that each and every allottee of the debenture is entitled to specifically enforce the contract for specific performance. The court will enforce specific performance in favour of the allottee debenture-holder and maintain consent as a whole and bind other allottees on grounds of equity as all have acted on the basis of the consent. It was contended that, with regard to the shares, specific performance is the rule. Reliance in support of this contention is placed on Jai Narain v. Surajmull [1949] AIR 1949 FC 211. It was pointed out by the Federal Court that shares of a company are limited in number and are not ordinarily available in the market, and that it is quite proper to grant a decree for specific performance of a contract for sale of such shares. The IDBI can only monitor the utilisation of funds by Larsen and Toubro as they are collected in terms of the clause as specified in the prospectus to ensure that the funds are actually utilised for the specific predetermined projects for which they are raised and this condition cannot be so interpreted as to confer a right on the IDBI to decide as to the mode and manner and collection of funds itself.

Mr. S.S. Ray, learned senior advocate, contended that the consent order dated August 29, 1989, was perfectly lawful and valid and that the judgment of the Bombay High Court in this regard was correct. It was not possible for the court to dissect or vivisect the consent order or to apply the "blue pencil theory" there too and also to hold that a part of it is valid while the rest is invalid. The consent order was an integral part of a single scheme having a single purpose and had to be considered in total conjunction with a series of documents and happenings. Mr. Ray drew the attention of the court to the correspondence which took place from July 26, 1989, to September 15, 1989, between Larsen and Toubro and the Controller of Capital Issues.

Mr. Ray also brought to the notice of the court two events which happened thereafter, namely, the order of this court dated November 9, 1989, by which allotment of the debentures was allowed without claiming any equity by the allottee and allotment of the debentures to the plaintiff on November 23, 1989. Mr. Ray also brought to the notice of this court further events relevant for the purpose of this case. Notice was given by the LIC to Larsen and Toubro on April 2, 1990, to call an extraordinary general meeting to remove the Ambanis from the board but no meeting was held. On April 19, 1990, Mr. Dhirubhai Ambani stepped down as Chairman of Larsen and Toubro. Various correspondence took place between Larsen and Toubro and the IDBI, vide two letters dated June 22, 1990, and one dated June 28, 1990. The IDBI also sent a reply on June 28, 1990 to both the letters dated June 22, 1990, and June 28, 1990, sent by Larsen and Toubro. In this reply letter, IDBI stated as under :

"From a quick review of the status of the new proposal mentioned in your letter dated June 22, 1990, we feel that the net requirement of funds to be met out of debenture funds would be in the region of Rs. 600 to Rs. 650 crores as indicated by you .... Larsen and Toubro Board will have to take a view on the size of the debenture issue in the light of the requirement of funds indicated in your letter and other modifications suggested in the series of the debentures. The company will no doubt obtain necessary approvals from the Controller of Capital Issues, debenture-holders/shareholders, etc. in consultation with its legal advisers."

It is clear that the IDBI also realised that further approvals from the Controller of Capital Issues was necessary and also of the debenture-holders, but this was never done.

A meeting by the board of directors of Larsen and Toubro was held on September 26, 1990 in which the mega issue was reduced from Rs. 820 crores to Rs. 640 crores. The date of conversion of debentures was varied and the suppliers' credit for Rs. 545 crores in respect of turnkey projects of Reliance Industries Ltd. was cancelled. It was pointed out by Mr. Ray that taking note of the above documents and the happenings, even if a part of the consent order dated August 29, 1989, is found to be bad or unlawful, nothing can remain of the consent order and it has to go in its entirety.

Mr. Hegde, the learned Additional Solicitor-General appearing on behalf of the financial institutions, submitted that it was wrong to say that the Ambani holding in Larsen and Toubro has increased from 12% to 35.3%. It is based on a completely erroneous hypothesis that the shareholdings in Reliance Industries Ltd./Reliance Petrochemicals Ltd. are only of the Ambanis, 35 lakhs shareholders comprising 50 per cent of the investing public of India are in fact the public at large. Rs. 200 crores worth of debentures were under the rights issue and it was mandatory under the guidelines for subscribing to any issue. Out of the remaining Rs. 620 crores, approximately, Rs. 320 crores debentures were reserved for preferential entitlement to equity shareholders of Reliance Industries Ltd./Reliance Petrochemicals Ltd. The prospectus itself mentions that any unsubscribed portion in the public offered by prospectus would go to the category of public. The claim of any loss as suggested in the statement given by the petitioners is completely wrong and baseless. The allegation that an illegal benefit is made by the Ambanis from the 7% transfer of shares does not survive as the entire shares with accretions have been handed over back to the public financial institutions.

Mr. R.K. Garg, learned senior advocate appearing on behalf of respondents Nos. 1 and 5 in Transfer Petitions Nos. 458 and 467 of 1990, contended that the sole question involved in all the cases is whether the Controller of Capital Issues was acting illegally or constitutionally in giving consent to Larsen and Toubro for coming out with the mega issue of Rs. 820 crores, primarily and substantially for execution of turnkey contracts for the Reliance projects, with a stipulation in the contract that the cost of construction would be Rs. 510 crores and suppliers' credit will be extended on mutually agreed terms and conditions. The Controller of Capital Issues, after application of mind, insisted on an undertaking to be given by Reliance that, on extension of suppliers' credit, they would be precluded from raising this amount from the market. It was further submitted that Larsen and Toubro themselves had applied for sanction for competing for these lucrative contracts with foreign business rivals who were extending suppliers' credit as a matter of routine and Indian companies were losing their business to them because of their superior financial strength, though without superior special skills or experience. According to Mr. Garg, the construction of the Harija project sponsored by Reliance Industries Ltd. would have gone to foreign business rivals who were required to be paid in foreign exchange at considerable detriment to the national economy and as such Reliance Industries Ltd. did a good turn to the national economy by giving the contract of turnkey projects to Larsen and Toubro. It was further submitted that, after the allotment of debentures, a concluded contract between the debenture-holders and Larsen and Toubro has come into existence and the rights and liabilities as contained in the prospectus cannot be varied by this court. The Controller of Capital Issues has no power to defeat, destroy or vary the contracts made between the investor and the company concerned.

On the other hand, Mr. Harish Salve, learned counsel appearing on behalf of the petitioners in Transferred Case No. 61 of 1989, submitted that the order granting permission by the Controller of Capital Issues is alleged to be illegal as the Controller of Capital Issues has overlooked the implications of the Monopolies and Restrictive Trade Practices Act vis-a-vis the supplier's credit. The dominant and real object underlying the issue was to make available funds for application to the Reliance group projects and also to provide a tool by which the Ambanis and the Reliance group shareholders could increase their control over Larsen and Toubro and dilute the control of the financial institutions. The issue was brought about directly as a result of the illegal takeover of Larsen and Toubro by the Ambanis. Thus, the entire issue is tainted by fraud and void ab initio.

It has been further submitted that, in reality and substance, the entire issue is tainted since the issue was an attempt by the Ambanis who had, by means fair and foul, garnered the control of Larsen and Toubro to raise moneys using the fair name of Larsen and Toubro for their own purposes. The money raised, admittedly, was not even required except for projects of the Reliance group.

Mr. B.R.L. Iyengar, learned senior advocate appearing on behalf of the petitioners, S.R. Nayak and others, in the writ petition filed in the Karnataka High Court and transferred to this court, supported the contentions of the petitioners in the writ petitions filed in the Bombay High Court. Mr. Iyengar further submitted that the capital available for investment at any given time has to be sized and allocated according to national priorities by laying down an investment policy which should inform and govern the action of the different departments of the Government including the Controller of Capital Issues who is a functionary in the Finance Ministry. At the given time, that is, in 1988-89, the capital market had, according to available economic reports, about Rs. 5,000 crores public investment funds, limited as it was by poor, savings and high inflation. There were so called mega issues four or five in number who had the resources to exploit the media including the electronic media. None of these mega issues had anything like suppliers' credit from their associates, companies or otherwise. Reliance Petrochemicals had already appropriated Rs. 560 crores thus nearly 3,000 crores of rupees had been appropriated by large issues when the impugned issue was presented. After that, the capital available for wage goods industries, other labour intensive industries, critical industries, sought to be set up by hundreds of professionals who had neither political influence nor the means to exploit the media would have been left with a very meagre amount available for allocation. Thus, articles 38 and 39(b) and (c) of the Constitution were not kept in mind by the authorities in making capital allocation. They addressed themselves to the so-called requirement of Larsen and Toubro in isolation and, admittedly, did not have material priorities on the investment policy in mind.

It was further contended that the Reliance group of industries had, in about one year, established access to about 1,500 crores of rupees, including suppliers' credit of Rs. 635 crores and had thereby become India's largest conglomerate, with three different kinds of industries and that, by its very nature, a conglomerate unlike a linear monopoly defies control and regulation was a glaring factor quite apart from the technicalities of the Monopolies Act. Section 22(3)(b) and (d) of the Monopolies and Restrictive Trade Practices Act required an indepth policy examination at the highest policy levels and consultation with the Monopolies Commission and the Planning Commission. The record does not disclose any such consideration or consultation ; on the other hand, the so-called consideration can be seen to be casual, perfunctory and biased. Even in the case of transfer of shares of an ordinary company, the directors have discretion to refuse the transfer if they feel that the person is undesirable or that his shareholding is not in the best interests of the company and, repeatedly, courts have upheld such bona fide refusal to transfer. Such being the case, it was notorious in the present case that the Ambanis' high ambitions were out to take over Larsen and Toubro. It was thus contended that the nominees of the financial institutions were at the very outset put on inquiry, when, without any shareholding, the first two Ambanis sat on the board of directors and, thereafter, Dhirubhai Ambani usurped the chairman's seat. The Controller of Capital Issues failed to perform its duties in a proper manner and such action of granting consent in the prevailing circumstances was not done in good faith. The sale of shares by the financial institutions itself was a grave breach of trust. For the Reliance group of industries, it was not possible to further increase their capital base by releasing any mega issues and they have tried to succeed in doing indirectly what they could not have done directly. The first step in the execution of this nefarious plan was the transfer of 39 lakhs shares from the financial institutions to BOB Fiscal. The second step was the transfer of these shares by BOB Fiscal to Trishna Investments, a subsidiary of the Ambanis. The third step was the induction of Ambanis into the board of management of Larsen and Toubro and the fourth step was of convening an extraordinary general meeting of the shareholders and getting a resolution passed in such meeting for execution of certain projects of Reliance Industries Ltd. and Reliance Petrochemicals Ltd. for cornering more than 3/4th amount out of the entire mega issue of Rs. 820 crores. This could not have been done without the active connivance and support of the Controller of Capital Issues and other financial institutions. The question raised in this case is not one of legality but of propriety and reasonableness and bona fides of the action of the financial institutions in the course of execution of this plan which has virtually resulted in not merely transfer of a professionally managed company with a reputation built over the years into the hands of a private group but also the said company being used by the said private group to raise enormous capital in the capital market for the execution of its own projects. It was further submitted by Mr. Iyengar that the consent as a whole is liable to be quashed and that the same cannot be bifurcated.

The petitioners and the group of lawyers supporting them have argued that the consent given by the Controller of Capital Issues is bad and should be struck down on the ground that it was given in undue haste, without proper application of mind, in violation of the provisions of the Monopolies and Restrictive Trade Practices Act and mala fide in order to benefit the Reliance group. In the alternative, it has been contended that no preferential reservation could have been made of Rs. 310 crores of convertible debentures for the shareholders of Reliance group of companies. In this regard, it has been contended that in case this court does not hold the entire consent as invalid, then the part giving preferential reservation of Rs. 310 crores of convertible debentures for the shareholders of the Reliance group of companies may be declared invalid but the remaining part of the issue of Rs. 510 crores be declared valid, as the consent can be legally bifurcated into valid and invalid portions.

The other group of lawyers have contended that the consent given by the Controller of Capital Issue did not suffer from any infirmity and, in any case, it cannot be bisected or bifurcated into valid and invalid portions. The consent order was an integral part of a single scheme and shall be valid or invalid as a whole and it does not lie within the judicial review of the courts to declare one part of the consent order as valid and the other part as invalid.

As already mentioned above, this is a mega issue amounting to Rs. 820 crores, out of which Rs. 200 crores is the rights issue for the shareholders and employees of Larsen and Toubro itself. Issue of Rs. 310 crores being reserved as preferential issue for the shareholders of the Reliance group of companies being an associate/group of Larsen and Toubro itself. The balance issue of Rs. 510 crores is meant for the general public. So far as the rights issue of Rs. 200 crores is concerned, the same is perfectly valid and nobody has come forward to challenge the same. As regards the preferential issue of Rs. 310 crores in favour of shareholders of the Reliance group of companies, Larsen and Toubro and the Reliance group of companies were interconnected within the meaning of section 2(g) of the Monopolies and Restrictive Trade Practices Act and it is permissible according to law. The size of the issue was so large that it was considered necessary to reserve a substantial portion of it in favour of the shareholders of the Reliance group of companies, in order to ensure the successful absorption of the entire issue. It may also be noted that the shareholders of the Reliance group of companies are numbering about 35 lakhs and they represent the investor base of the entire shareholding community of the country. My learned brother, B.C. Ray J., has dealt with this matter in detail and has found that a preferential issue per se is not a novel idea. The Controller of Capital Issues has been permitting reservations for various categories out of public issue based on the request made by companies after passing a special resolution in the general body meeting and there is no restriction on the shareholders of a company to offer shares of their company to anybody after passing a special resolution as required under section 81(1A)(a) of the Companies Act. I am fully in agreement with the above view taken by my learned brother B.C. Ray J. After the aforesaid view taken by us, the question of bifurcating or vivisecting the consent order given by the Controller of Capital issues does not survive. The legal controversy thus raised that the consent given by the Controller of Capital Issues under the Capital Issues (Control) Act can be held valid or invalid as a whole but not some part of it as valid and the rest invalid does not require to be decided in this case and the same is left open.

The next question which calls for consideration is whether the consent order for the mega issue of Rs. 820 crores as a whole given by the Controller of Capital Issues can be declared illegal or not on the grounds raised by the petitioners. This court, in N.K. Maheshwari's case [1989] JT 2 SC 338, 368 while considering the duties of the Controller of Capital Issues under the Control of Capital Issues Act while giving consent, has observed as under :

"That apart, whatever may have been the position at the time the Act was passed, the present duties of the Controller of Capital Issues have to be construed in the context of the current situation in the country, particularly, when there is no clear cut delineation of their scope in the enactment. This line of thought is also reinforced by the expanding scope of the guidelines issued under the Act from time to time and the increasing range of financial instruments that enter the market. Looking to all this, we think that the Controller of Capital Issues has also a role to play in ensuring that public interest does not suffer as a consequence of the consent granted by him. But, as we have explained later, the responsibilities of the Controller of Capital Issues in this direction should not be widened beyond the range of expeditious implementation of the scheme of the Act and should, at least for the present, be restricted and limited to ensuring that the issue to which he is granting consent is not, patently and to his knowledge, so manifestly impracticable or financially risky as to amount to a fraud on the public. To go beyond this and to require that the Controller of Capital Issues should probe indepth into the technical feasibillities and financial soundness of the proposed projects or the sufficiency or otherwise of the security offered and such other details may be to burden him with duties for the discharge of which he is as yet ill-equipped."

In the above paragraph, this court has clearly laid down that the Controller of Capital Issues has also a role to play in ensuring that public interest does not suffer as a consequence of the consent granted by him. The Controller of Capital Issues cannot be permitted to take an alibi and a policy of hands off on the ground that this court had said in the above case that it may be "to burden him with duties for the discharge of which he is as yet ill-equipped". It was never the intention in the above case to lay down that the Controller of Capital Issues was not even required to see whether any public interest suffers or not as a consequence of the consent granted by him. It is the bounden duty of the Controller of Capital Issues before giving an order of consent for the issuance of any mega issue to keep in mind and to carry out the directive principles of State policy as enshrined in article 39(b) and (c) of the Constitution which provide as under :

"39(b). That the ownership and control of the material resources of the community are so distributed as best to subserve the common good ;

39(c). That the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment."

It is no doubt correct to say that the Controller of Capital Issues is not required to probe indepth into the technical feasibilities and financial soundness of the proposed projects or the sufficiency or otherwise of the security offered but, at the same time, it has to see that the capital available for investment at any given time has to be sized and allocated according to national priorities and, in the changed socio-economic conditions of the country, to secure a balanced investment of the country's resources in industry; agriculture and social services.

It has been argued by Mr. Iyengar that, in 1988-89, the capital market, according to available economic reports, had about Rs. 5,000 crores public investment funds, limited as it was by poor savings and high inflation. There were so called mega issues, four or five in number, which had the resources to exploit the media including the electronic media. None of these mega issues had anything like suppliers' credit from their associates, companies or otherwise. Reliance Petrochemicals had already appropriated Rs. 560 crores and nearly 3,000 crores of rupees had been appropriated by large issues when the impugned issue was presented. After that, the capital available for wage goods industries, other labour intensive industries, critical industries sought to be set up by hundreds of professionals who had neither political influence nor the means to exploit the media would have been left with a very meagre amount available for allocation. It has been further contended that the Reliance group of companies had, in about one year, established access to about 1,500 crores of rupees, including suppliers' credit of Rs. 635 crores and had thereby become India's largest conglomerate with three different kinds of industries and that, by its very nature, a conglomerate unlike a linear monopoly defies control and regulation was a glaring factor quite apart from the technicalities of the Monopolies Act which ought to have been considered by the Controller of Capital Issues.

In N.K. Maheshwari's case [1989] JT 2 SC 338, challenge was made to an order of consent of the Controller of Capital Issues granted for the issue of shares (Rs. 50 crores) and debentures (Rs. 516 crores) by Reliance Petrochemicals Ltd. It was pointed out that though the issue proposed was of shares of Rs. 50 crores and debentures of Rs. 516 crores, the company was allowed to retain over subscription to the tune of 15% amounting to Rs. 77.40 crores. Reliance Industries Ltd. was the promoter of Reliance Petrochemicals Ltd. Though mega issues had already been issued by Reliance Industries Ltd. Reliance Petrochemicals Ltd. and a substantial amount of about Rs. 1,060 crores had already been mopped up from the public for the projects of the Reliance group of companies and they were not entitled to raise any further public issue in this regard, a device of suppliers' credit and turnkey projects to the extent of Rs. 635 crores was made for funding the projects of the Reliance group of industries by Larsen and Toubro. It was proposed from the side of Larsen and Toubro at the time when Dhirubhai Ambani was the chairman and his two sons and M. L. Bhakta, their solicitor, were on the board of directors of Larsen and Toubro. Thus, the intention was to syphon off an amount of Rs. 635 crores out of the issue of Rs. 820 crores in utilising and funding the turnkey projects of the Reliance group. These facts were known to the Controller of Capital Issues and were certainly relevant at the time of granting consent to the impugned issue of Rs. 820 crores. Though this point has lost its force now in the changed circumstances, certainly it was worth noticing by the Controller of Capital Issues at the time of granting consent. This court, on November 9, 1989, had allowed the allotment of the debentures and, thereafter, approximately, 11 lakhs debenture-holders have bought the debentures. It would not be in the interest of the general investor-public to cancel the entire mega issue. Many transactions must have already taken place on the floor of the stock exchange regarding the sale and purchase of the debentures during this intervening period. Under the order of this court dated November 9, 1989, no restrictions were placed on Larsen and Toubro in the matter of utilisation of funds. According to Larsen and Toubro against Rs. 410 crores due on application and allotment, Larsen and Toubro has so far received Rs. 396 crores, out of which approximately Rs. 300 crores have been utilised towards issue expenses, capital expenditure, repayment of loans and working capital in terms of the objects of the issue. The balance available with the company is approximately Rs. 96 crores only. There is already a safeguard provided in the order of the Controller of Capital Issues, dated November 15, 1989, that the fund utilisation shall be with the approval of the IDBI. In any case, the consent order given by the Controller of Capital Issues cannot be held invalid on any of the grounds of challenge raised by the petitioners. In these proceedings, this court is neither called upon nor is entitled to decide as to how and in what manner the amount mopped up from the public by this mega issue could be utilised or spent. Thus, I agree with my learned brother B. C. Ray J. that the consent given by the Controller of Capital Issues is valid.

All the above cases including the interim applications stand disposed of by the above order. The judgment of the Bombay High Court dated September 29, 1989, also stands modified in accordance with the findings and observations recorded by us as mentioned above. The contempt applications are dismissed. The parties are left to bear their own costs.

MADRAS HIGH COURT

[1994] 1 SCL 287 (MAD.)

HIGH COURT OF MADRAS

Indo Swiss Exports Ltd.

v.

Ind Bank

JUSTICE AR. LAKSHMANAN

W.M.P. NO. 7144 OF 1994

IN WRIT PETITION NO. 4497 OF 1994

MARCH 16, 1994

Section 81 of the Companies Act, 1956 - Further issue of capital - On 9-3-1994 an application was filed before CLB restraining petitioner from continuing with public issue slated to open on 16-3-1994, as a vital fact viz., filing of suit in High Court and order of attachment before judgment passed by court, was suppressed by petitioner - On 10-3-1994 Company Law Board passed an order directing petitioner to mention this fact in any advertisement that was likely to be issued with regard to public issue and the order was notified to lead manager - On 15-3-1994, lead managers informed that they were withdrawing from public issue - Whether petitioner could open public issue on 16-3-1994 and appoint new lead managers to act on its behalf to its public issue - Held yes.

FACTS

One PB filed an application before the Company Law Board on 9-3-1994 against the petitioner-company. The application was filed for restraining the petitioner from going ahead with the public issue stated to open on 16-3-1994. It was contended that the petitioner had suppressed a vital fact, viz., the filing of suit in the High Court and the order of attachment before judgment passed by the court. On 10-3-1994 the Company law Board passed an order directing the petitioner to mention the vital fact in any advertisement that was likely to be issued with regard to the public issue. The order the passed without prejudice to any of the rights of the petitioner. A copy of the order was also directed to be sent to the Registrar of Companies. The petitioner-company contended that they had informed respondents 1 and 2, lead managers to the issue, about the order passed by Company Law Board and that between 10-3-1994 and 15-3-1994, the 1st respondent, who was actively involved in the public issue, never expressed any intention of withdrawing from the issue. It was further contended by the petitioner that on 15-3-194 the respondents No. 1 and 2 informed that they were withdrawing from the issue and that they had decided to withdraw their mandate to act as lead managers to the petitioner's public issue. According to the petitioner, the withdrawal by the respondents 1 & 2 from the public issue at the last moment was wholly arbitrary and without jurisdiction and the lead managers were aware that the petitioner would suffer monetarily and its reputation would be tarnished.

HELD

The balance of convenience was in favour of the petitioner. A prima facie case was also made out by the petitioner for grant of interim order.

In the instant case, the petitioner could open the public issue on 16-3-1994 and close it if 90 per cent of the subscription was received. The petitioner could also appoint new lead managers to act on its behalf to its public issue and bankers to the issue, viz., were also permitted to collect the subscription.

R. Gandhi, M. Vaidyanathan and V.V. Siva Kumar for the Petitioner.

ORDER

1. The writ petition has been filed by the Petitioner/company to issue a writ of mandamus forbearing the respondents from interfering/preventing the public issue of the petitioner-company opening on 16-3-1994 in any manner.

2. It appears that on 9-3-1994, an application was filed by one Mr. Peter Huber before the Company Law Board, Madras Bench, for restraining the petitioner from going ahead with the public issue. It was contended that the petitioner had suppressed a vital fact, viz., the filing of suit in the High Court and the order of attachment before judgment passed by the Court. After hearing all the parties, the Company Law Board passed an order directing the petitioner to mention this fact in any advertisement that is likely to be issued with regard to the public issue in future from 10-3-1994. The said order was passed without prejudice to any of the rights of the petitioner before it to agitate this point in sections 397 and 398 of the Companies Act, 1956 petition pending before the Company Law Board. A copy of the said order was also directed to be sent to the Registrar of Companies, Tamil Nadu, Madras, for such action as they may deem fit.

3. According to the petitioner, they have informed respondents 1 and 2 viz., Ind Bank and Bank of Baroda about the order passed by the Company Law Board on 10-3-1994 and between 10-3-1994 and 15-3-1994, the 1st respondent, which was actively involved in the public issue, never expressed any intention of withdrawing from the issue. However, at about 4-15 P.M., on 15-3-1994, the petitioner was informed over phone that respondents 1 and 2 are withdrawing from the issue. At about 6-30 P.M., on 15-3-1994, the petitioner was also informed by respondents 1 and 2 that they have decided to withdraw their mandate to act as lead manager to the petitioner's public issue slated to open on 16-3-1994. According to the petitioner, the action of respondents 1 and 2 in withdrawing from the issue at the last moment is wholly arbitrary and without jurisdiction and that the lead managers are aware that the petitioner would suffer monetarily and that its reputation would be tarnished. Since the petitioner has no other alternative effective remedy. It has approached this Court by filing the above writ petition.

4. I have heard Mr. R. Gandhi, the learned senior counsel for the petitioner, and also gone through the affidavit and the other documents filed along with the writ petition. The balance of convenience is in favour of the petitioner. A prima facie case is also made out by the petitioner for the grant of interim order. The petitioner is, therefore, at liberty to open the public issue slated to open today, i.e., 16-3-1994, and close it if 90 per cent of the subscription is received. The petitioner is also at liberty to appoint new lead managers to act on its behalf to its public issue slated to open to-day. The bankers to the issue, viz., Indian Bank, Bank of Baroda, Federal Bank Ltd. and State Bank of Mysore are permitted to collect the subscription notice.

[1995] 084 COMP. CAS. 618 (SC)

SUPREME COURT OF INDIA

Gujarat Bottling Co. Ltd.

v.

Coca Cola Co.

S.C. AGRAWAL AND S. SAGHIR AHMAD, JJ.

CIVIL APPEAL NOS. 6839-40 OF 1995

AUGUST 4, 1995

Shanti Bhushan, Gopal Subramaniam, Arun jetley, F.S. Nariman, T.R. Andhyarujina, Anil B. Divan, Harish N. Salve, K.K. Venugopal , A. Sitalwad, Hemant Sahai, Amit Kapur, Ashok Grover, P.S. Shroff, Sunil Dogra, Dinyar Madan, Ramji Srinivasan, Ms. Monica Sharma, S.S. Shroff, S.V. Thakore, B.V. Desai, Prasant Patnaik, C.L. Sareen, R.C. Lohli, Ms. Indu Malhotra and Ms. Aysha Khatri for the appearing party.

JUDGMENT

S.C. Agrawal, J.—Special leave granted.

In the past, nations often went to war for the protection and advancement of their economic interests. Things have changed now. Under the international order envisaged by the Charter of the United Nations war is no longer an instrument of State policy. Nowadays there are wars between corporations, more particularly corporations having multi-national operations, for the protection and advancement of their economic interests. These wars are fought on the economic plane but some of the battles spill over to courts of law. The present case is one such legal battle. The combatants are two American multi-national corporations dominating the soft drinks market and having operations in a number of countries. On the one side is Coca Cola Company, respondent No. 1 (hereinafter referred to as "Coca Cola"), and on the other side is Pepsico Inc. (for short "Pepsi"), and its subsidiaries and subsidiaries of the subsidiaries which are under direct or indirect control of Pepsi. There is a long history of trade rivalry between these two multi-national corporations.

Coca Cola had been operating in this country till 1977 when, on account of the change of policy of the new Government Coca Cola had to close its operations in India. After the departure of Coca Cola, the products of the domestic manufacturers filled the vacuum. A substantial share of the market came to be controlled by the Parle group of companies owned and controlled by Mr. Ramesh Chauhan and Mr. Prakash Chauhan, respondents Nos. 3 and 4. The said group was manufacturing under trade marks bearing the names "Gold Spot", "Thums Up", "Limca", "Maaza", "Rim Zim" and "Citra" as well as "Bisleri" club soda. They had arrangements with bottlers in different parts of the country whereunder the bottlers prepared beverages from the essences/syrups supplied by the Parle group and after bottling the same the beverages were sold under the names for which trade marks were held by the Parle group. In the late 1980s Pepsi started operations in India and introduced beverages under their trade marks. Coca Cola followed suit thereafter. Under the deed of assignment dated November 12,1993, the Parle group assigned their trade marks in the beverages bearing the names "Gold Spot", "Thums Up", "Limca", "Maaza", "Rim Zim" and "Citra" to Coca Cola. On January 6, 1994, Coca Cola applied to the Registrar of Trade Marks for being recorded as subsequent proprietor of the trade marks which had been assigned to it by the various Parle entities.

Gujarat Bottling Co. Ltd., appellant No. 1 (hereinafter referred to as "GBC"), is a company incorporated under the Companies Act, 1956. Twenty-one per cent. of its shares are held by Ahmedabad Advertising and Marketing Consultants Ltd., respondent No. 7. The remaining 79 per cent. of shares were held by Mr. Pinakin K. Shah, respondent No. 2, and his family members and business associates and respondents Nos. 3 and 4 and their family members and associates in the ratio of 78 per cent. and 22 per cent. respectively. The shares of respondent No. 7 were also held by respondent No. 2 and his family members and associates and respondents Nos. 3 and 4 and their family members and associates in the same ratio of 78 per cent. and 22 per cent. respectively. GBC has bottling plants at Ahmedabad and Rajkot in Gujarat. GBC was having an arrangement with respondents Nos. 3 and 4 whereunder licence had been given to GBC to prepare, bottle, sell and distribute beverages under the trade marks "Thums Up", "Limca", "Gold Spot", "Maaza", "Citra", "Rim Zim" and "Bisleri" club soda. In anticipation of the assignment of the rights in trade marks by the Parle group in its favour, Coca Cola, on September 20, 1993, entered into an agreement (hereinafter referred to as "the 1993 agreement") with GBC whereby Coca Cola permitted and authorised GBC, upon the terms contained in the said agreement, to bottle, sell and distribute the beverages known and sold under the trade marks "Gold Spot", "Thums Up", "Limca", "Maaza" and "Rim Zim". The trade mark "Citra" was excluded from this agreement for the reason that a suit for "passing off" was pending against the Parle entity concerned in the Delhi High Court and there was uncertainty of the outcome of this litigation. The 1993 agreement was to come into effect on the date Coca Cola indicated in writing to GBC that all trade marks related to the said agreement have been assigned and transferred to Coca Cola. The 1993 agreement is to operate till November 17, 1998, unless earlier terminated as provided in the said agreement. Under paragraphs 4(a), 6, 18, 19, 20 and 23, Coca Cola is empowered to terminate the said agreement without notice and in paragraph 21 provision is made for the termination of the said agreement by either side on giving one year's written notice. The said period of notice could be reduced by mutual consent in writing between Coca Cola and GBC. Paragraph 14 of the 1993 agreement contains a negative covenant by GBC not to manufacture, bottle, sell, deal or otherwise be concerned with the products, beverages of any other brands or trade marks/trade names during the subsistence of the agreement including the period of one year's notice as contemplated in paragraph 21. Under paragraph 19, Coca Cola has the right to discontinue supplying to GBC with essences/ syrups and/or other materials on the happening of any of the events mentioned in clauses (a) to (e) of the said paragraph. Clause (b) of paragraph 19 relates to transfer of stock, shares or interest or other indicia of ownership of GBC resulting in the effective transfer of control without the prior express written consent of Coca Cola. The 1993 agreement came into force on November 12, 1993, when the trade marks related to the said agreement were assigned and transferred to Coca Cola. Two such agreements were executed—one pertaining to Ahmedabad town and other pertaining to Rajkot town. In addition, Coca Cola also entered into two separate agreements under letters dated September 20, 1993, in respect of permission to use the trade mark "Citra" by GBC for Ahmedabad and Rajkot towns. Two other separate agreements were entered into by Coca Cola under letters dated September 20, 1993, for Ahmedabad and Rajkot towns for the use of the trade mark "Bisleri" club soda by GBC. All these four letter agreements are operative for two years and can be renewed by mutual consent. These agreements can be terminated by giving three months' notice by either side. These agreements were also to come into effect from the date indicated by Coca Cola in writing to GBC that all trade marks related to the said agreements have been assigned and transferred to Coca Cola.

On April 30, 1994, Coca Cola entered into another agreement (hereinafter referred to as "the 1994 agreement") with GBC whereby Coca Cola granted to GBC a non-exclusive licence to use the trade marks mentioned in the schedule to the agreement, namely, "Gold Spot", "Limca", "Thums Up", "Maaza", "Citra", etc., in relation to goods prepared by or for the licensee (GBC) from concentrates and/or syrup supplied by the licensor (Coca Cola) and packaged or dispensed in accordance with standards, specifications, formulae, processes and instructions furnished or approved by the licensor from time to time and only so long as such goods are manufactured within such territory of India and sold within such territory of India and in such bottles or other containers as shall be approved by the licensor from time to time. In the said, agreement, it is provided that both the parties shall make application to the Registrar of Trade Marks under the Trade and Merchandise Marks Act, 1958 (hereinafter referred to as "the Act"), or any statutory modification or enactment thereto or thereof for the time being in force to procure the registration of the licensee (GBC) as a registered user of the said trade marks as aforesaid as soon as the said trade marks are registered and shall sign and execute all such documents as are reasonably proper and necessary to secure such registration and for any change thereof in future. The said agreement is not limited to any particular period and is to continue in force without limitation of period but can be terminated at any time by either party upon giving ninety days' notice in writing to the other or by mutual consent. But in the event of either party committing a breach of any of the provisions of the said agreement, it shall be lawful for the other party, by giving thirty days' notice in writing, to terminate the agreement. In accordance with the 1994 agreement an application was submitted by Coca Cola on July 12, 1994, under sections 48 and 49 of the Act to register the said agreement as a registered user agreement.

After the execution of these agreements, steps for upgradation of the plants of GBC at Ahmedabad and Rajkot were taken and when the upgradation of the said two plants was near completion, Coca Cola advised GBC that it was necessary for GBC to provide for additional investments in marketing arrangements, purchase of crates and other equipment and trucks, etc. GBC was, however, reluctant to make further investment and respondent No. 2 requested Coca Cola to give its consent in advance for transfer of interest of respondent No. 2 in GBC. Coca Cola declined to give its consent to such a transfer in advance without being aware as to who the prospective purchaser was and informed GBC and respondent No. 2 that the transfer can be permitted provided GBC does not lose the controlling power or management in favour of an outsider. On January 20, 1995, the shareholding of respondent No. 2 and his family members and associates as well as respondents Nos. 3 and 4 and their family members and associates in GBC and respondent No. 7 were transferred to appellants Nos. 2 to 5 which are concerns closely associated and connected with or affiliated to subsidiaries of Pepsi, respondent No. 6, and Pepsi Foods Limited, respondent No. 5, a subsidiary of Pepsi. As a result Pepsi acquired control over GBC. On January 25, 1995, GBC gave a notice to Coca Cola under clause 7 of the 1994 agreement whereby the said agreement was terminated. In the said notice it is also stated that without prejudice to the contentions of GBC that the 1993 agreement stands replaced by the 1994 agreement and/or that the termination period under the 1993 agreement in any event stands reduced to 90 days and that the said letter dated January 25, 1995, be treated, as a matter of abundant caution, as termination notice also under clause 21 of the 1993 agreement. On January 25, 1995, GBC also addressed a letter to Coca Cola informing them that shares representing 70.6 per cent. approximately of the paid up equity capital of GBC had been acquired by, and transferred in favour of, appellants Nos. 2 to 5'. On January 31, 1995, GBC addressed a letter to the Director (F&VP), Ministry of Food Processing Industries, Government of India, for approval of crowncap designs pertaining to the beverages of which the trade marks are held by Pepsi.

On January 30, 1995, Coca Cola filed a suit (Suit No. 400 of 1995) in the Bombay High Court seeking various reliefs. In the said suit Coca Cola took out Notice of Motion No. 316 of 1995, seeking interim relief. During the course of hearing on the said notice of motion before the learned single judge of the High Court (Dhanuka J.), learned counsel for Coca Cola sought interim relief in terms of prayers (a)(i), (a)(ii), (a)(iii) and (a)(viii) of the notice of motion. By his order dated February 22, 1995, the learned single judge declined the application for grant of interim relief in terms of prayers (a)(i), (a)(ii) and (a)(viii) but issued an interim injunction restraining GBC from manufacturing, bottling or selling or dealing with the products, beverages of any brand or trade mark owned by respondents Nos. 5 and 6 or any one else other than Coca Cola. GBC was permitted to pursue its application dated January 31, 1995, pending before the Director (F&VP), Ministry of Food Processing Industries, in accordance with law but GBC was directed not to act upon the permission of the said authority or any other authority, if granted, without obtaining prior leave of the court. Two appeals (Appeals Nos. 183 and 191 of 1995) were filed against the said order of the learned single judge before the Division Bench of the High Court—one was by GBC and the other was by Coca Cola. During the course of hearing of the said appeals the parties, through their counsel, submitted that as decision in the appeals would have impact on the motion pending before the learned single judge, it was desirable that Notice of Motion No. 316 of 1995, should be taken up on board and disposed of finally by the Division Bench so as to avoid one more appeal. In view of the said submission and by consent of the parties, the motion was heard and disposed of finally by the Division Bench by the impugned judgment dated March 31, 1995. By the said judgment, Notice of Motion No. 316 of 1995 was made absolute in terms of prayers Nos. (a)(ii) and (a)(iii) as modified. Prayer (a)(ii) was for an injunction restraining respondent No. 1 (GBC) either directly or indirectly by itself or through its shareholders from concerning itself with the products, beverages of any other brand or trade mark of the plaintiffs (Coca Cola). Under prayer (a)(iii) as modified an injunction has been granted in the following terms :

"That in the event of the sale of shares, having taken place before the institution of the suit, deponent No. 1 and those to whom the shares have been sold and also subsequent transferees, their servants, agents, nominees, employees, subsidiary companies, controlled companies, affiliates or associate companies or any person acting for and on their behalf are restrained by an interim injunction from using the plants of respondent No. 1 at Ahmedabad and Rajkot for manufacturing, bottling or selling or dealing with or concerning themselves in any manner whatsoever with the beverages of any person till January 25, 1996."

Feeling aggrieved by the said judgment of the Division Bench of the High Court, dated March 31, 1995, GBC (defendant No. 1) and the four transferees of the shares of GBC (defendants Nos. 7 to 10) have filed these appeals.

By the said interim order the High Court has given effect to the negative stipulation contained in paragraph 14 of the 1993 agreement which is in the following terms :

"As such the bottler covenants that the bottler will not manufacture, bottle, 'sell, deal or otherwise be concerned with the products, beverages of any other brands or trade marks/trade names during the subsistence of this agreement including the period of one year's notice as contemplated in paragraph 21."

On behalf of the appellants submissions have been made assailing the validity of the said negative covenant. For that purpose it is necessary to determine whether the 1993 agreement subsists or has been legally terminated. The case of GBC, in this regard, is that the 1993 agreement is no longer in operation since it has been superseded by the 1994 agreement and the 1994 agreement has been terminated by notice dated January 25, 1995, and that, in the alternative, the requirement regarding giving of one year's written notice for terminating the 1993 agreement as contained in paragraph 21 of the said agreement was reduced by mutual consent by the parties by the 1994 agreement wherein under clause 7 the period of such notice for terminating the agreement is 90 days and that by notice dated January 25, 1995, the 1993 agreement stands terminated on the expiry of 90 days from the date of the said notice. These submissions require an examination of the nature and contents of the 1993 and 1994 agreements but before we proceed to do so we may briefly refer to the relevant law governing the use of trade marks in India.

The first enactment whereby the machinery for registration and statutory protection of trade marks was introduced in this country was the Trade Marks Act, 1940. Prior to the said enactment the law relating to trade marks in India was based on common law which was substantially the same as was applied in England before the passing of the Trade Marks Registration Act, 1875. At common law, the right to property in a trade mark was in the nature of monopoly enabling the holder of the said right to restrain other persons from using the mark. For being capable of being the subject-matter of property a trade mark had to be distinctive. This right was an adjunct of the goodwill of a business and was incapable of separate existence dissociated from that goodwill [see General Electric Co. (of U.S.A.) v. General Electric Co. Ltd. [1972] 2 All ER 507 (HL)]. The Trade Marks Act, 1940, which was based on the Trade Marks Act, 1938, of U.K., has now been replaced by the Act. The Act has codified the law relating to trade and merchandise marks and is a comprehensive piece of legislation dealing with registration and protection of trade marks and criminal offences relating to trade marks and other markings in merchandise. Under the Act, registration of trade marks is not compulsory and as regards unregistered trade marks, some aspects are governed by the Act while others are still based on common law. In respect of a trade mark registered under the provisions of the Act certain statutory rights have been conferred on the registered proprietor which enable him to sue for the infringement of the trade mark irrespective of whether or not that mark is used. The Act also makes provisions where under a registered proprietor of a trade mark can permit any person to use the mark as a registered user and for that purpose provisions are made in sections 48 to 54 of the Act. In clause (m) of section 2, the expression "permitted use" in relation to a registered trade mark has been defined to mean "(i) the use of a trade mark by a registered user of the trade mark in relation to goods—(a) with which he is connected in the course of trade ; and (b) in respect of which the trade mark remains registered for the time being ; and (c) for which he is registered as a registered user ; and (ii) which complies with any conditions of restrictions to which the registration of the trade mark is subject". In sub-section (1) of section 48 it is provided that a person other than a registered proprietor of a trade mark may be registered as the registered user thereof in respect of any or all of the goods in respect of which the trade mark is registered otherwise than as a defensive trade mark and in the said section the Central Government has been empowered to make rules providing that no application' for registration as such shall be entertained unless the agreement between the parties complies with the conditions laid down in the rules for preventing trafficking in trade marks. Under sub-section (2), the permitted use of a trade mark shall be deemed to be used by the proprietor thereof and shall be deemed not to be used by a person other than the proprietor, for the purpose of section 46 or for any other purpose for which such use is material under the Act or any other law. Section 49 makes provision for submission of application for registration of trade mark as a registered user and one of the requirements is that the said application shall be accompanied by the agreement in writing or a duly authenticated copy thereof entered into between the registered proprietor and the proposed registered user with respect to the permitted use of the trade mark and it is further required that the registered proprietor or some person authorised to the satisfaction of the Registrar to act on his behalf give an affidavit in respect of the matters set out in sub-clauses (a) to (d) of clause (ii) of sub-section (1) of section 49. Section 51 empowers a registered user of a trade mark to call upon the proprietor to take proceedings to prevent infringement of the trade mark and if .the proprietor refuses or neglects to do so within three months after being so called upon, the registered user may institute proceedings for infringement in his own name as if he were the proprietor, making the proprietor a defendant. Section 52 deals with the power of the Registrar to vary or cancel registration as registered user. Under section 53 a registered user does not have the right of assignment or transmission of the right to use the trade mark. Further provisions relating to registered user are contained in Chapter V (rules 82 to 93) of the Trade and Merchandise Marks Rules, 1959 (hereinafter referred to as "the Rules"). Rule 83 provides the particulars which are required to be stated in the agreement between the registered proprietor and the proposed registered user with respect to the permitted use of the trade mark. The said particulars include "the particulars specified in sub-clauses (a) to (d) of clause (ii) of sub-section (1) of section 49" and a provision about "means for bringing the permitted use to an end when the relationship between the parties or the control by the registered proprietor over the permitted user ceases."

The abovementioned provisions contained in the Act and the Rules indicate that the use of a registered trade mark by a registered user is subject to fulfilment of certain conditions and for the purpose of registration of a registered user it is necessary for the registered proprietor of the trade mark and the proposed registered user to execute an agreement which must contain the prescribed particulars and must be submitted along with the application for registration as a registered user. The registration as registered user enables the use of the trade mark by the registered user to be treated as use by the proprietor of the trade mark and enables a registered user to take proceedings in his own name to prevent infringement of the trade mark.

Apart from the said provisions relating to registered users, it is permissible for the registered proprietor of a trade mark to permit a person to use his registered trade mark. Such licensing of trade marks is governed by common law and is permissible provided (i) the licensing does not result in causing confusion or deception among the public; (ii) it does not destroy the distinctiveness of the trade mark, that is to say, the trade mark, before the public eye, continues to distinguish the goods connected with the proprietor of the mark from those connected with others ; and (iii) a connection in the course of trade consistent with the definition of trade mark continues to exist between the goods and the proprietor of the mark, [see P. Narayanan-Law of Trade Marks and Pass-ing-Off, fourth edition, para 20.16 at page 335]. It would thus appear that use of a registered trade mark can be permitted to a registered user in accordance with the provisions of the Act and for that purpose the registered proprietor has to enter into an agreement with the proposed registered user. The use of the trade mark can also be permitted de hors the provisions of the Act by grant of licence by the registered proprietor to the proposed user. Such a licence is governed by common law.

We may now examine the two agreements, viz., the .1993 agreement and the 1994 agreement. In the 1993 agreement, in paragraph 2, Coca Cola has agreed to permit and authorise GBC, upon the terms contained in the said agreement, to bottle, sell and distribute the beverages known as and sold under the trade marks set forth in annexure-II to the agreement. Under paragraph 3 it is required that beverages shall be manufactured in a plant approved by Coca Cola in accordance with the formula and procedure provided by Coca Cola. In clause (a) of paragraph 4 JGBC expressly covenants to consistently maintain the quality of the said beverages in all respects and to strictly adhere and conform to the technical specifications and standards as provided, using only such ingredients and of such quality as approved by Coca Cola. GBC also undertakes to exercise great care and caution to see that sub-standard, inferior or unwholesome beverages will not be manufactured/marketed by GBC or its agents directly or indirectly and if Coca Cola observes that the quality of the beverages is not maintained consistently, and/or there are persistent complaints from the market, dealers, outlets, consumers, etc., concerning the low standard or inferior quality of the beverages manufactured/marketed by GBC, Coca Cola retains the right to forthwith terminate the agreement. In clause (b) of paragraph 4, in order to assure compliance by GBC with the above requirements, it is permissible for the representatives and/or agents of Coca Cola to inspect at any time the premises of GBC, the finished beverages, the methods of preparation thereof and the bottling process, and full co-operation in this regard is to be extended by GBC. GBC has also agreed to submit samples of the finished beverages to Coca Cola every month for analysis and approval by Coca Cola who is the sole judge to determine and certify the quality of the said beverages as fit for marketing. Paragraph 5 relates to keeping by GBC of complete records of all chemical tests carried out as specified by Coca Cola and of production, sale and distribution of the beverages and furnishing of monthly reports about the same to Coca Cola. Under clause (a) of paragraph 6, GBC undertakes to buy only from Coca Cola or a manufacturer approved by Coca Cola essences and beverage bases (ingredients for making the said beverages). Under clause (b) of paragraph 6, GBC undertakes to buy bottles, crowns, labels and other ingredients of the quality, standard and specifications laid down by Coca Cola preferably from the suppliers approved by Coca Cola and in case GBC chooses to buy the above items from a supplier/suppliers other than the one approved by Coca Cola, GBC is required to submit the items so procured to Coca Cola to determine the quality, standard and specifications before they are put to use to manufacture, bottle or sale of the said beverages. Under clause (c) of paragraph 6, GBC has agreed to use only bottles, labels and crowns for the said beverages of a type, style, size and design approved by Coca Cola. The breach of clauses (a), (b) and (c) of paragraph 6 would constitute an infringement of the agreement for which Coca Cola reserves its right to terminate the agreement. Under paragraph 7, GBC has agreed to vigorously and diligently promote and solicit the sale of the said beverages and assure full and complete distribution of the said beverages to meet the market demand for the said beverages. Under clause (a) of paragraph 8, GBC covenants and agrees not to manufacture, bottle, sell, deal in or otherwise be concerned with any product under any get up or container used by Coca Cola or which is likely to be confused or used in unfair competition therewith or passed-off therefor. Under clause (b) of paragraph 8, GBC covenants and agrees not to manufacture, bottle, sell, deal in or otherwise be concerned with any product under any trade mark or other designation which is an imitation or infringement of these trade marks or is likely to cause passing-off of any product which is calculated to lead the public to believe that it originates from Coca Cola because of GBC's association with the business of bottling, distributing and selling the beverages. In the said clause, it is provided that the use of the said trade marks in any form or fashion or any words graphically or phonetically similar thereto or in imitation thereof on any product other than that of Coca Cola, would constitute an infringement of the trade marks or be likely to cause passing off. Under clause (c) of paragraph 8 GBC covenants and agrees that during the continuance of the agreement it will not manufacture, bottle, sell, deal in or otherwise be concerned with any beverages put out under any trade mark or name or style being the same or deceptively similar to the trade marks owned by Coca Cola or having similar or near similar phonetic rendering and any beverages put out under the said trade marks or otherwise which is an imitation of the essence, syrup or beverages or is likely to be a substitute thereof. In paragraph 9 it has been provided that the decision of Coca Cola on all matters concerning the said trade marks shall be final and conclusive and not subject to question by GBC and Coca Cola will protect and defend above trade marks at its sole cost and expenses and GBC will co-operate fully with Coca Cola in the defence and protection of the said trade marks in use in the territory infringing Coca Cola's trade marks. In paragraph 10, GBC has assured Coca Cola that it will safeguard that no spurious beverages are manufactured, marketed, sold or otherwise dealt with in the bottles registered with Coca Cola's trade name or trade marks and GBC has further undertaken to take all the necessary steps to prevent any spurious or imitation beverages being filled in the bottles registered under Coca Cola's trade name or trade marks. In paragraph 11 GBC has recognised Coca Cola's ownership of the trade marks and has agreed to only use the said trade marks in the manner lawfully permitted and not to take any action which would cause breach or harm the trade marks or Coca Cola's ownership thereof in any manner. In paragraph 12 it is provided that nothing contained in the agreement shall be construed as conferring upon GBC any right, title or interest in the above trade marks, or in their registration or in any designs, copyrights, patents, trade names, signs, emblems, insignia, symbols, slogans, or other marks or devices used in connection with the said beverages. In paragraph 13 GBC has agreed to sell and distribute the said beverages under Coca Cola's trade marks strictly on its own merits, and make only such representation concerning the said beverages as shall have been previously authorized in writing by Coca Cola and that GBC will not use Coca Cola's trade marks or any other such name/names which are deceptively similar or have phonetic resemblance or can be confused with Coca Cola's trade mark, as part of its name, nor will GBC use in connection with any drink any trade mark or design which is deceptively similar to Coca Cola's, trade marks or any other trade marks which Coca Cola may acquire. In paragraph 14 GBC recognises that Coca Cola has awarded the territory on the assurance of GBC, that it will work vigorously and diligently to promote and solicit the sale of the products/beverages produced under the trade marks of Coca Cola and has further assured full and complete distribution of Coca Cola's products/beverages to meet the demand from the consumers because of the goodwill enjoyed by Coca Cola and its products/beverages and GBC also recognises that Coca Cola has incurred heavy expenditure by way of advertisements, periodic training of the sales, marketing and technical staff of GBC as well as the protection of its goodwill and GBC recognises that it is imperative that it must maintain with full vigour the continuity of the supply of Coca Cola's products/beverages for safeguarding the interest of the consuming public and thus maintaining the goodwill of Coca Cola. At the end of paragraph 14 there is the negative stipulation which has already been set out earlier. In paragraph 15 GBC has agreed that it will not sell the said beverages to the retailers in the territory on prices higher than the price agreed to or recommended by Coca Cola in writing. In paragraph 16 Coca Cola reserves its rights to grant at any time one or more additional licence near the area where GBC plant is located, if in the judgment of Coca Cola the situation warrants commissioning of further/additional licence. In paragraph 17 it is provided that nothing in the agreement shall create or be deemed to create any relationship of agency, partnership or joint venture between Coca Cola and GBC and further that GBC will assume full responsibility or liability for and will hold Coca Cola harmless from any loss, injury, claims or damages resulting from or claimed to result from acts of commission or omission on the part of GBC. In paragraph 18, GBC has agreed not to sell, assign, transfer, pledge, mortgage, lease, licence or in any other way or manner encumber or dispose of, in whole or in part, the agreement or any interest herein, either directly or indirectly, nor to pass by operation of law or in any other manner without Coca Cola's prior written consent. Under paragraph, 19 Coca Cola has the right to cancel and terminate the agreement forthwith by written notice to GBC upon the happening of any one or more of the events mentioned in clauses (a) to (e) of the said paragraph. The said power is in addition, to all other rights and remedies which Coca Cola may have. In the concluding part of paragraph 19, it is provided that upon the happening of any one or more of the foregoing events, Coca Cola shall also have the right to discontinue supplying GBC with essence/syrup and/ or other materials for such length of time as Coca Cola may, in its sole judgment, deem necessary without thereby cancelling or prejudicing Coca Cola's right to cancel or terminate the agreement for the said cause or for any one or more of other cause or causes. In paragraph 20, it is prescribed that the said agreement shall expire, without notice, on November 17, 1998, unless it has been earlier terminated as provided in the agreement. Paragraph 21 makes provision for termination of the agreement by either side on giving one year's written notice which period may be reduced by mutual consent in writing between Coca Cola and GBC. Paragraph 23 deals with partial invalidity resulting from any of the provisions of the agreement being held invalid for whatever reason by any court, governmental agency, body or tribunal. In paragraph 25 provision is made for supersession of all prior contracts, agreements or commitments, either written or oral, which are rendered null and void and of no effect. Paragraph 29 provides that the agreement shall come into effect at the. date on which Coca Cola indicates in writing to GBC that all trade marks related to the said agreement have been assigned and transferred to Coca Cola, provided that if such notice is not issued by the first anniversary of the agreement, then the agreement shall be void ab initio and of no effect. In paragraph 30, GBC represents and warrants to Coca Cola that GBC acknowledges that the trade marks listed on annexure-II will be, as of the effective date of this agreement, the property of Coca Cola, that GBC has no right, title or interest to such trade marks, except pursuant to the licence granted by the agreement and that GBC has no existing claims or basis for claims against Parle (Exports) Limited or any of its affiliates which would affect the rights of Coca Cola under the agreement.

A perusal of the various provisions contained in the 1993 agreement shows that by this agreement Coca Cola has agreed to grant a licence to GBC for the use of the trade marks in respect of the beverages mentioned in annexure-II to the agreement which were to be acquired shortly by Coca Cola. A number of provisions in the agreement relate to the use of the said trade marks by GBC so as to ensure that such user of the trade marks by GBC is strictly in accordance with the common law governing user of trade marks. The 1993 agreement was, therefore, an agreement for grant of licence under common law for user by GBC of the trade marks which were to be acquired by Coca Cola. The 1993 agreement also contains various provisions governing preparation, bottling and sale of the beverages covered by the said trade marks. In that sense the 1993 agreement can be regarded as an agreement for grant of a franchise by Coca Cola, as franchiser to GBC as franchisee, whereunder GBC has been permitted to manufacture, bottle and sell the beverages covered by the trade marks referred to and mentioned in the agreement in the area covered by the agreement subject to the conditions laid down in the agreement.

We would now come to the 1994 agreement. In this agreement Coca Cola has been described as the licensor and GBC as the licensee. In clause (a) of the preamble to the agreement it is stated that the licensor has acquired the trade marks specified in the schedule to the agreement by virtue of deeds of assignment dated November 12, 1993, in respect of the goods specified in the said schedule. In clause (b) of the preamble reference is made to the 1993 agreement and it is stated that the parties have arranged for the preparation, packaging and sale of the goods by the licensee and for the use of the said trade marks in relation thereto, and may enter into further arrangements in future, within the scope of the 1994 agreement. In clause (c) of the preamble it is stated that the licensor holds no equity interest in the licensee and wishes to enter into an agreement for the use of the said trade marks on a purely contractual basis. Thereafter, the agreement provides in paragraph 1 for grant of a nonexclusive licence by the licensor to the licensee to use the said trade marks in relation to goods prepared by or for the licensee from concentrates and/or syrups supplied by the licensor or its nominee and prepared and packaged or dispensed in accordance with standards, specifications, formulae, processes and instructions, furnished or approved by the licensor from time to time and so long as such goods are manufactured within such territory of India and in such bottles or other containers as shall be approved by the licensor from time to time. In paragraph 2 of the agreement it is provided that the licensor and the licensee shall make application to the Registrar of Trade Marks under the Act or any statutory modification on enactment thereto or thereof for the time being in force to procure the registration of the licensee as a registered user of the said trade marks as aforesaid as soon as the said trade marks are registered and shall sign and execute all such documents as are reasonably proper and necessary to secure such registration and for any change thereof in future. In paragraph 3 the licensee has undertaken to prepare and package or dispense the said goods strictly in accordance with standards, specifications, formulae, processes and instructions furnished or approved by the licensor from time to time to use the said trade marks in relation only to such goods so prepared and packaged or dispensed and also agreed to permit the licensor or its authorised representative at all reasonable times to inspect at the licensee's premises and elsewhere as the licensor may consider appropriate to implement these covenants to ensure quality control of the said goods and the methods of preparing, packaging or dispensing the said goods and the licensee will, if called upon by the licensor to do so, submit samples of the said goods, including packages and the markings thereon, for the inspection, analysis and approval of the licensor. Paragraph 4 records the understanding that the licensee shall not be the sole licensee/permitted user of the said trade marks. In paragraph 5, the licensee has agreed that whenever the said trade marks are used by the lincensee in relation to the said goods, the marks shall be so described as to clearly indicate that the trade marks are being used only by way of permitted use. In paragraph 6, the licensee recognises the licensor's title to the said trade marks and the licensee agrees that it shall not at any time do or suffer to be done any act or thing which will in any way impair the rights of the licensor in and to the said trade marks and the licensee shall not acquire and shall not claim any right, title or interest in and to the said trade marks adverse to the licensor by virtue of the licence granted under the agreement to the licensee or through the licensee's use of the trade marks. In paragraph 7, it is provided that the agreement shall continue in force without limit of period but may be terminated at any time by either party upon giving 90 days' notice in writing to the other or by mutual consent and further that in the event of either party committing a breach of any of the provisions of the agreement it shall be lawful for the other party by giving 30 days' notice in writing to terminate the agreement. In paragraph 8, the licensee covenants that upon any amendments the licensor may request the licensee to execute for the purpose of applying for variation or cancellation of the entry of the licensee as a registered user of the said trade marks and that in the event of cancellation, the licensee will not make any further use of the said trade marks.

A perusal of the provisions contained in the 1994 agreement, more particularly paragraphs 2 and 8, indicates that the said agreement has been executed with a view to comply with the requirements of the Act and the Rules for registration of GBC as the registered user of the trade marks specified in the Schedule to the agreement which had been acquired by Coca Cola. This agreement has been executed as per the requirements of rule 83 of the Rules read with sub-clauses (a) to (d) of clause (ii) of subsection (1) of section 49. This is evident from paragraphs 1, 3, 4, 5 and 6 which contain particulars referable to sub-clauses (a), (b) and (c) and paragraph 7 which contains particulars referable to sub-clause (d) of clause (ii) of sub-section (1) of section 49. The 1994 agreement must, therefore, be treated as an agreement for registration of GBC as a registered user as contemplated by section 49 of the Act. In other words, the 1994 agreement is a statutory agreement which is required to be executed under section 49 of the Act read with rule 83 of the Rules for registration of GBC as a registered user of the trade marks held by Coca Cola. It is true that provisions similar to these contained in 1994 agreement are also contained in the 1993 agreement. But that is so because a licence to use a trade mark in common law can only be granted subject to certain limitations which are akin to the requirements for an agreement for registered user under the Act. But, at the same time, the 1993 agreement is much wider in its amplitude than the 1994 agreement in the sense that the 1993 agreement includes various terms regulating the exercise of the right of franchise that has been granted by Coca Cola to GBC in the matter of manufacturing, bottling and selling of the beverages which provisions are not found in the 1994 agreement. The 1994 agreement cannot be construed as wiping out the said terms and conditions regarding exercise of franchise granted by Coca Cola to GBC as contained in the 1993 agreement. In this context, reference may also be made to paragraph 25 of the 1993 agreement which contains an express provision for superseding all prior contracts/agreements or commitments either written or oral. No similar provision regarding the supersession of the 1993 agreement is contained in the 1994 agreement. We are, therefore, of the opinion that the 1994 agreement cannot be construed as superseding the 1993 agreement and the learned single judge and the Division Bench of the High Court have rightly rejected the contention urged on behalf of GBC that the 1993 agreement was superseded by the 1994 agreement.

Shri Shanti Bhushan, learned senior counsel appearing for the appellants, however, laid emphasis on the alternative submission that the period of notice for terminating the agreement as contained in paragraph 21 of the 1993 agreement was reduced by mutual consent from one year to 90 days by paragraph 7 of the 1994 agreement. We find it difficult to accept this contention. It is no doubt true that paragraph 21 of the 1993 agreement enables the termination period to be reduced by mutual consent in writing between Coca Cola and GBC. There is, however, no such agreement which expressly reduces the said termination period under paragraph ,21 of the 1993 agreement. What is suggested is that paragraph 7 of thel994 agreement is such an agreement which, by implication, reduces the termination period prescribed in paragraph 21 of the 1993 agreement. Since we are of the view that the nature and scope of the two agreements, i.e., the 1993 agreement and the 1994 agreement, are not the same and that while the 1993 agreement is an agreement for grant of licence in common law and the 1994 agreement is executed as per the requirements of the Act and the Rules for the purpose of registration of user, GBC as registered user of the trade marks under the Act, clause 7 of the 1994 agreement has to be confined in its application to that agreement only and it cannot be construed as having modified the termination period contained in paragraph 21 of the 1993 agreement. Moreover, paragraph 21 of the 1993 agreement requires that reduction of the termination period has to be by mutual consent of both the parties, viz., Coca Cola and GBC. Mutual consent postulates consensus ad idem between the parties. There is no material on record to show that there was such a consensus ad idem between Coca Cola and GBC regarding reducing the termination period for the notice under paragraph 21 of the 1993 agreement. The notice dated January 25,1995, that was given by GBC to Coca Cola does not lend support to the case of the appellants. In the said notice it is stated:

"Without prejudice to our contentions that the so called licence agreement dated September 20, 1993 (herein, "the licence agreement"), stands replaced by the trade mark license agreement and/or that the termination period under the license agreement in any event stands reduced to 90 days please treat this letter, as a matter of abundant caution, as termination notice also under clause 21 of the licence agreement."

In the said notice, it is not stated that the parties had mutually agreed to reduce the termination period from one year to 90 days by the 1994 agreement. What is stated in the notice is the contention of GBC that the 1993 agreement is replaced by the 1994 agreement and that in any event the termination period had been reduced to 90 days. If it was mutually agreed by Coca Cola and GBC that the termination period for notice under paragraph 21 of the 1993 agreement is being reduced from one year to 90 days by the 1994 agreement, there was no reason why GBC would riot have mentioned about the said mutual understanding in the notice dated January 25, 1995. The fact that there is no mention about such mutual understanding in the notice dated January 25, 1995, and what is stated in the said notice about reduction of the termination period of the notice is by way of the contention of GBC negatives the case put forward by the appellants that the termination period for the notice under paragraph 21 of the 1993 agreement had been reduced from one year to 90 days. It must, therefore, be held that the 1993 agreement can be terminated only by giving a notice of one year as required by paragraph 21 of the said agreement. The question whether the notice dated January 25, 1995, can be treated as a notice terminating the 1993 agreement on the expiry of the period of one year from the date of the said notice has not been examined by the High Court. We do not propose to go into the same and leave it to the High Court to deal with it, if raised. For the present, we will proceed on the basis that the 1993 agreement subsists and it does not stand terminated on the expiry of 90 days from the date of notice dated January 25, 1995.

We may now examine the submission of Shri Shanti Bhushan that the negative stipulation contained in paragraph 14 of the 1993 agreement, being in restraint of trade, is void in view of the provisions of section 27 of the Indian Contract Act, 1872. For that purpose, it is necessary to consider whether and, if so, to what extent the law in India differs from the common law in England.

Under the common law in England a man is entitled to exercise any lawful trade or calling as and where he wills. The law has always regarded jealously any interference with trade, even at the risk of interference with freedom of contract, as it is public policy to oppose all restraints upon liberty of individual action which are injurious to the interests of the State. A person may be restrained from carrying on his trade by reason of an agreement voluntarily entered into by him with that object and in such a case the general principle of freedom of trade must be applied with due regard to the principles that public policy requires for persons of full age and understanding the utmost freedom to contract. Traditionally the doctrine of restraint of trade applied to covenants whereby an employee undertakes not to compete with his employer after leaving the employer's service and covenants by which a trader who has sold his business agrees not to compete thereafter with the purchaser of the business. The doctrine is, however, not confined in its application to these two categories but covenants falling in these two categories are always subjected to the test of reasonableness. Since the doctrine of restraint of trade is based on public policy its application has been influenced by changing views of what is desirable in the public interest. The decisions on public policy are subject to change and development with the change and development of trade and the means of communication and the evolution of economic thought. The general principle once applicable to agreements in restraint of trade has consequently been considerably modified by later decisions in England. In the earliest times all contracts in restraint of trade, whether general or partial, were void. The severity of this principle was gradually relaxed, and it became the rule that a partial restraint might be good if reasonable, although a general restraint was of necessity void. The distinction between general and partial restraint was subsequently repudiated and the rule now is that the restraints, whether general or partial, may be good if they are reasonable and any restraint on the freedom of contract must be shown to be reasonably necessary for the purpose of freedom of trade. A covenant in restraint of trade must be reasonable with reference to the public policy and it must also be reasonably necessary for the protection of the interest of the covenantee and regard must be had to the interests of the covenantor. Contracts in restraint of trade are prima facie void and the onus of proof is on the party supporting the contract to show that the restraint goes no further than is reasonably necessary to protect the interest of the covenantee and if this onus is discharged the onus of showing that the restraint is nevertheless injurious to the public is on the party attacking the contract. The court has to decide, as a matter of law, (i) whether a contract is or is not in restraint of trade, and (ii) whether, if in restraint of trade, it is reasonable. The court takes a far stricter and less favourable view of covenants entered into between employer and employee than it does of similar covenants between vendor and purchaser or in partnership agreements, and accordingly a restraint may be unreasonable as between employer and employee which would be reasonable as between the vendor and purchaser of a business, [see Halsbury's Laws of England, fourth edition, volume 47, paragraphs 9 to 26 ; Niranjan Shankar Golihari v. Century Spinning and Manufacturing Co. Ltd. [1967] 2 SCR 378, at pages 384-85]. Instead of segregating two questions, (i) whether the contract is in restraint of trade, (ii) whether, if so, it is "reasonable", the courts have often fused the two by asking whether the contract is in "undue restraint of trade" or by a compound finding that it is not satisfied that this contract is really in restraint of trade at all but, if it is, it is reasonable, [see Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd. [1968] AC 269 (HL), at page 331, Lord Wilberforce].

In India agreements in restraint of trade are governed by section 27 of the Indian Contract Act which provides as follows :

"27. Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.

Exception 1.—One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business,, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein :

Provided that such limits appear to the court reasonable, regard being had to the nature of the business."

The said provision was lifted from Hon. David D. Field's Draft Code for New York which was based upon the old English doctrine of restraint of trade, as prevailing in ancient times. The said provision was, however, never applied in New York. The adoption of this provision has been severely criticised by Sir Frederick Pollock who has observed that "the law of India is tied down by the language of the section to the principle, now exploded in England, of a hard and fast rule qualified by strictly limited exceptions." While construing the provisions of section 27 the High Courts in India have held that neither the test of reasonableness nor the principle of the restraint being partial or reasonable are applicable to a case governed by section 27 of the Contract Act, unless it falls within the exception. The Law Commission in its Thirteenth Report has recommended that the provision should be suitably amended to allow such restrictions and all contracts in restraint of trade, general or partial, as were reasonable, in the interest of the parties as well as of the public. No action has, however, been taken by Parliament on the said recommendation, [see Superintendence Co. of India (P.) Ltd. v. Krishna Murgai [1980] 3 SCR 1278 at pages 1291, 1296-98, per A.P. Sen J.]

We do not propose to go into the question whether reasonableness of restraint is outside the purview of section 27 of the Contract Act and for the purpose of the present case we will proceed on the basis that an enquiry into the reasonableness of the restraint is not envisaged by section 27. On that view instead of being required to consider two questions as in England, the courts in India have only to consider the question whether the contract is or is not in restraint of trade. It is, therefore, necessary to examine whether the negative stipulation contained in paragraph 14 of the 1993 agreement can be regarded as in restraint of trade. This involves the question, what is meant by a contract in restraint of trade ?

In Attorney-General of the Commonwealth of Australia v. Adelaide Steamship Co. Ltd. [1913] AC 781, Lord Parker has said (at page 794) :

"Monopolies and contracts in restraint of trade have this in common, that they both, if enforced, involve a derogation from the common law right in virtue of which any member of the community may exercise any trade or business he pleases and in such manner as he thinks best in his own interests."

Referring to these observations Lord Reid in Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd. [1968] AC 269, 294 (HL), has said:

"But that cannot have been intended to be a definition: all contracts in restraint of trade involve such a derogation but not all contracts involving such a derogation are contracts in restraint of trade. Whenever a man agrees to do something over a period he thereby puts it wholly or partly out of his power to 'exercise any trade or business he pleases' during that period. He may enter into a contract of service or may agree to give his exclusive services to another : then during the period of the contract he is not entitled to engage in other business activities. But no one has ever suggested that such contracts are in restraint of trade except in very unusual circumstances."

In McEllistrim v. Ballymacelligott Co-operative Agricultural and Dairy Society Ltd. [1919] AC 548 (HL), Lord Finlay, after referring to the principle enumerated in Herbert Morris Ltd. v. Saxelby [1916] 1 AC 688 (HL), that public policy requires that every man shall be at liberty to work for himself and shall not be at liberty to deprive himself or the State of his labour, skill or talent by every contract that he enters into, had stated, "this is equally applicable to the right to sell his goods." Doubting the correctness of this statement Lord Reid in Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd. [1968] AC 269, 296 (HL), has said:

"It would seem to mean that every contract by which a man (or a company) agrees to sell his whole output (or even half of it) for any future period to the other party to the contract is a contract in restraint of trade because it restricts his liberty to sell as he pleases, and is, therefore, unenforceable unless his agreement can be justified as being reasonable. There must have been many ordinary commercial contracts of that kind in the past but no one has ever suggested that they were in restraint of trade."

In Petrofina (Great Britain) Ltd. v. Martin [1966] Ch 146, Diplock L. J. (as the learned Law Lord then was), in the Court of Appeal, has said (at page 180) :

"A contract in restraint of trade is one in which a party (the covenantor) agrees with any other party (the covenantee) to restrict his liberty in the future to carry on trade with other persons not parties to the contract in such manner as he chooses."

In the same case, Lord Denning M.R. has said (at page 169):

"Every member of the community is entitled to carry on any trade or business he chooses and in such manner as he thinks most desirable in his own interests, so long as he does nothing unlawful : with the consequence that any contract which interferes with the free exercise of his trade or business, by restricting him in the work he may do for others, or the arrangements which he may make with others, is a contract in restraint of trade. It is invalid unless it is reasonable as between the parties and not injurious to the public interest."

After referring to these observations, Lord Morris in Esso Petroleum Co. Ltd.'s case [1968] AC 269, 307 (HL) has said :

"These are helpful expositions provided they are used rationally and not too literally. Thus if A made a contract under which he willingly agreed to serve B on reasonable terms for a few years and to give his whole working time to B, it would be surprising indeed if it were sought to describe the contract as being in restraint of trade. In fact such a contract would very likely be for the advancement of trade."

These observations indicate that a stipulation in a contract which is intended for the advancement of trade shall not be regarded as being in restraint of trade. In Esso Petroleum Co. Ltd.'s case [1968] AC 269 (HL), the question whether the agreement under consideration was a mere agreement for the promotion of trade and not an agreement in restraint of it, was thus answered by Lord Pearce (at pages 327, 328) :

"Somewhere there must be a line between those contracts which are in restraint of trade and whose reasonableness can, therefore, be considered by the courts and those contracts which merely regulate the normal commercial relations between the parties and are, therefore, free from doctrine.

The doctrine does not apply to ordinary commercial contracts for the regulation and promotion of trade during the existence of the contract, provided that any prevention of work outside the contract, viewed as a whole, is directed towards the absorption of the parties' services and not their sterilisation. Sole agencies are a normal and necessary incident of commerce and those who desire the benefits of a sole agency must deny themselves the opportunities of other agencies."

In the same case, Lord Wilberforce has observed (at pages 322-33):

"It is not to be supposed, or encouraged, that a bare allegation that a contract limits a trader's freedom of action exposes a party suing on it to the burden of justification. There will always be certain general categories of contracts as to which it can be said, with some degree of certainty;, that the 'doctrine' does or does not apply to them. Positively, there are likely to be certain sensitive areas as. to which the law will require in every case the test of reasonableness to be passed : such an area has long been and still is that of contracts between employer and employee as regards the period after the employment has ceased. Negatively, and it is this concerns us here, there will be types, of contract as to which the law should be prepared to say with some confidence that they do not enter into the field of restraint of trade at all.

How, then, can such contracts be defined or at least identified? No exhaustive test can be stated—probably no precise non-exhaustive test. But the development of the law does seem to show that judges have been able to dispense from the necessity of justification under a public policy test of reasonableness such contracts or provisions of contracts as, under contemporary conditions, may be found to have passed into the accepted and normal currency of commercial or contractual or conveyancing relations."

There is a growing trend to regulate distribution of goods and services through franchise agreements providing for grant of franchise by the franchiser on certain terms and conditions to the franchisee. Such agreements often incorporate a condition that the franchisee shall not deal with competing goods. Such a condition restricting the right of the franchisee to deal with competing goods is for facilitating the distribution of the goods of the franchiser and it cannot be regarded as in restraint of trade.

If the negative stipulation contained in paragraph 14 of the 1993 agreement is considered in the light of the observations in Esso Petroleum Co. Ltd.'s case [1968] AC 269 (HL), it will be found that the 1993 agreement is an agreement for grant of franchise by Coca Cola to GBC to manufacture, bottle, sell and distribute the various beverages for which the trade marks were acquired by Coca Cola. The 1993 agreement is thus a commercial agreement whereunder both the parties have undertaken obligations for promoting the trade in beverages for their mutual benefit. The purpose underlying paragraph 14 of the said agreement is to promote the trade and the negative stipulation under challenge seeks to achieve the said purpose by requiring GBC to wholeheartedly apply to promoting the sale of the products of Coca Cola. In that context, it is also relevant to mention that the said negative stipulation operates only during the period the agreement is in operation because of the express use of the words "during the subsistence of this agreement including the period of one year as contemplated in paragraph 21,'' in paragraph 14. Except in cases where the contract is wholly one sided, normally the doctrine of restraint of trade is not attracted in cases where the restriction is to operate during the period the contract is subsisting and it applies in respect of a restriction which operates after the termination of the contract. It has been so held by this court in Niranjan Shankar Golikari's case [1967] 2 SCR 378, 389 ; AIR 1967 SC 1098, 1104, wherein it has been said :

"The, result of the above discussion is that considerations against restrictive covenants are different in cases where the restriction is to apply during the period after the termination of the contract than those in cases where it is to operate during the period of the contract. Negative covenants operative during the period of the contract of employment when the employee is bound to serve his employer exclusively are generally not regarded as restraint of trade and therefore do not fall under section 27 of the Contract Act. A negative covenant that the employee would not engage himself in a trade or business or would not get himself employed by any other master for whom he would perform similar or substantially similar duties is not, therefore, a restraint of trade unless the contract as aforesaid is unconscionable or excessively harsh or unreasonable or one sided as in the case of W.H. Milsted and Son Ltd. [1927] WN 233."

Similarly, in Superintendence Co.'s case [1980] 3 SCR 1278, A.P. Sen J., in his concurring judgment, has said that (at page 1289): "the doctrine of restraint of trade never applies during the continuance of a contract of employment ; it applies only when the contract comes to an end."

Shri Shanti Bhushan has submitted that these observations must be confined only to contracts of employment and that this principle does not apply to other contracts. We are unable to agree. We find no rational basis for confining this principle to a contract for employment and excluding its application to other contracts. The underlying principle governing contracts in restraint of trade is the same and as a matter of fact the courts take a more restricted and less favourable view in respect of a covenant entered into between an employer and an employee as compared to a covenant between a vendor and a purchaser or partnership agreements. We may refer to the following observations of Lord Pearce in Esso Petroleum Co. Ltd.'s case [1968] AC 269, 328 (HL) :

"When a contract only ties the parties during the continuance of the contract, and the negative ties are only those which are incidental and normal to the positive commercial arrangements at which the contract aims, even though those ties exclude all dealings with others, there is no restraint of trade within the meaning of the doctrine and no question of reasonableness arises. If, however, the contract ties the trading activities of either party after its determination, it is a restraint of trade, and the question of reasonableness arises."

Since the negative stipulation in paragraph 14 of the 1993 agreement is confined in its application to the period of subsistence of the agreement and the restriction imposed therein is operative only during the period the 1993 agreement is subsisting, the said stipulation cannot be held to be in restraint of trade so as to attract the bar of section 27 of the Contract Act. We are, therefore, unable to uphold the contention of Shri Shanti Bhushan that the negative stipulation contained in paragraph 14 of the 1993 agreement, being in restraint of trade, is void under section 27 of the Contract Act.

Shri Shanti Bhushan has urged that even if the negative stipulation contained in paragraph 14 of the 1993 agreement is found to be valid it is confined in its application to the preceding part of paragraph 14 which reads as under :

"The bottler recognises that it is imperative that the bottler must maintain with full vigour the continuity of the supply of the company's products/beverages for safeguarding the interest of the consuming public and thus maintaining the goodwill of the company."

Laying emphasis on the words "as such" in the negative stipulation, Shri Shanti Bhushan has contended that the negative stipulation must be read as relatable to this part of paragraph 14 which means that the said stipulation can be invoked only if GBC is not able to maintain the continued supply of the products and beverages to Coca Cola. According to Shri Shanti Bhushan, such an eventuality has not arisen in view of the fact that Coca Cola has refused to supply GBC with essence/syrup and/or other materials which are required for preparing the products and beverages. The submission of Shri Shanti Bhushan is that in these circumstances the negative stipulation contained in paragraph 14 cannot be invoked by Coca Cola.

Shri T.R. Andhyarujina, learned senior counsel appearing for Coca Cola, has, on the other hand, pointed out that in paragraph 14 the part commencing with the words "As such" is independent of the preceding sub-paragraph and is not a part of the preceding sub-paragraph referred to above and that the negative stipulation must be read with all the earlier sub-paragraphs contained in paragraph 14 and its application cannot be confined to the sub-paragraph immediately preceding the words "as such" as contended by Shri Shanti Bhushan. We are in agreement with the said submission of Shri Andhyarujina. In our opinion, the negative stipulation contained at the end of paragraph 14 must be read as applicable to all the sub-paragraphs of paragraph 14 preceding the said stipulation and, if it is thus read, it is apparent that the purpose of the negative stipulation in paragraph 14 is that GBC will work vigorously and diligently to promote and solicit the sale of the products/beverages produced under the trade marks of Coca Cola as mentioned in the first sub-paragraph of paragraph 14. This would not be possible if GBC were to manufacture, bottle, sell, deal or otherwise be concerned with the products, beverages or any other brands or trade marks/trade names.

We are, therefore, unable to agree with Shri Shanti Bhushan that the negative stipulation contained in paragraph 14 of the 1993 agreement must be confined in its application to the immediately preceding sub-paragraph of paragraph 14 of the 1993 agreement.

Shri Shanti Bhushan has next contended that clause (b) of paragraph 19 of the 1993 agreement which imposes a restraint in the matter of transfer of shares in GBC is void inasmuch as transfer of shares of a company registered under the Companies Act is governed by section 82 of the said Act and no restraint can be placed by contract on the said right to transfer the shares of a company. Shri Shanti Bhushan has placed reliance on the decision of this court in V.B. Rangaraj v. V.B. Gopalakrishnan [1992] 73 Comp Cas 201 ; [1992] 1 SCC 160, and has submitted that if clause (b) of paragraph 19 is held to be void then Coca Cola cannot invoke the concluding part of paragraph 19 and discontinue the supply of essences/ syrup and/or other materials to GBC while the 1993 agreement subsists. The relevant part of paragraph 19 is as under:

"19.Upon the happening of any one or more of the following events in addition to all other rights and remedies, the company shall have the right to cancel and terminate this agreement forthwith by written notice to the bottler ...

(b) Should the bottler be other than a natural person, no change shall be made in its structure nor shall any transfer be made of any of its stock, share or interest or other indicia of ownership which would result in an effective transfer of control without the prior express written consent of the company. The company reserves the right to terminate this agreement at will for failure to notify it of such change or transfer . . .

Upon the happening of any one or more of the foregoing events, the company shall also have the right to discontinue supplying the bottler with essence/syrup and/or other materials for such length of time as the company may in its sole judgment deem necessary without thereby cancelling or prejudicing the company's right to cancel or terminate the agreement for the said cause or for any one or more of other cause or causes."

Clause (b) does not appear to be very happily worded. Since the parties to the 1993 agreement were Coca Cola and GBC only and the shareholders of GBC were not parties to the agreement, it cannot have any binding force on the shareholders of GBC. Clause (b) of paragraph 19 cannot, therefore, be construed as placing any restraint on the right of the shareholders to transfer their shares. It can only be construed to mean that in the event of the shareholders of GBC transferring their shares and such transfer resulting in an effective transfer of control of GBC, Coca Cola has a right to terminate the agreement and even without terminating the agreement Coca Cola has the additional right to discontinue supplying GBC with essence/syrup and/or other materials for such length of time as Coca Cola may in its sole judgment deem necessary without thereby cancelling or prejudicing Coca Cola's right to cancel or terminate the agreement for the said cause or for any one or more of other cause or causes. In other words, in the event of effective transfer of control of GBC as a result of transfer of shares by the shareholders, apart from its right to cancel the agreement Coca Cola has also been given the right to discontinue the supply of essences/syrups and/or other materials to GBC. This clause governs the relationship between Coca Cola and GBC inter se and it cannot be construed as placing a restraint on the right of the shareholders to transfer their shares. V.B. Rangaraj's case [1992] 73 Comp Cas 201 (SC) on which reliance has been placed by Shri Shanti Bhushan has, therefore, no application.

Shri Shanti Bhushan has next urged that in the facts and circumstances of the case the High Court was not justified, in law, in issuing an interim injunction enforcing the negative stipulation contained in paragraph 14 of the 1993 agreement. The submission of Shri Shanti Bhushan is that as a result of the said injunction and discontinuance by Coca Cola of the supply of essence/syrup and/or other materials by exercising its right under paragraph 19 of the 1993 agreement, the plants of GBC at Ahmedabad and Rajkot would remain idle and a large number of workers who are employed in those plants would be rendered unemployed and GBC would be saddled with heavy liabilities leading to its closure and thereby resulting in irreparable loss which cannot be compensated in the event of the suit filed by Coca Cola being dismissed. Shri Shanti Bhushan has also submitted that on the other hand, Coca Cola would not suffer any loss because it has already made alternative arrangements for supply of its products in areas covered by both the agreements between GBC and Coca Cola by arranging supply of their products from other licensees in the neighbouring areas. Shri Shanti Bhushan has placed reliance on the decision of the Gujarat High Court in Lalbhai Dalpatbhai and Co. v. Chittaranjan Chandulal Pandya, AIR 1966 Guj 189, and that of the Delhi High Court in Modern Food Industries India Ltd. v. Shri Krishna Bottlers (P.) Ltd., AIR 1984 Delhi 119, as well as on the observations of Lord Diplock in American Cyanamid Co. v. Ethicon Ltd. [1975] AC 396 (HL).

In the matter of grant of injunction, the practice in England is that where a contract is negative in nature, or contains an express negative stipulation, breach of it may be restrained by injunction and injunction is normally granted as a matter of course, even though the remedy is equitable and thus in principle a discretionary one and a defendant cannot resist an injunction simply on the ground that observance of the contract is burdensome to him and its breach would cause little or no prejudice to the plaintiff and that breach of an express negative stipulation can be restrained even though the plaintiff cannot show that the breach will cause him any loss, [see Chitty on Contracts, twenty-seventh edition, volume 1, General Principles, para 27-40 at page 1310 ; Halsbury's Laws of England, fourth edition, volume 24, para 992]. In India section 42 of the Specific Relief Act, 1963, prescribes that notwithstanding anything contained in clause (e) of section 41, where a contract comprises an affirmative agreement to do a certain act, coupled with a negative agreement, express or implied, not to do a certain act, the circumstance that the court is unable to compel specific performance of the affirmative agreement shall not preclude it from granting an injunction to perform the negative agreement. This is subject to the proviso that the plaintiff has not failed to perform the contract so far as it is binding on him. The court is, however, not bound to grant an injunction in every case and an injunction to enforce a negative covenant would be refused if it would indirectly compel the employee either to idleness or to serve the employer, [see Ehrman v. Bartholomew [1898] 1 Ch 671, Niranjan Shankar Golikari's case [1967] 2 SCR 378, 389].

The grant of an interlocutory injunction during the pendency of legal proceedings is a matter requiring the exercise of discretion of the court. While exercising the discretion the court applies the following tests—(i) whether the plaintiff has a prima facie case ; (ii) whether the balance of convenience is in favour of the plaintiff ; and (iii) whether the plaintiff would suffer an irreparable injury if his prayer for interlocutory injunction is disallowed. The decision whether or not to grant an interlocutory injunction has to be taken at a time when the existence of the legal right assailed by the plaintiff and its alleged violation are both contested and uncertain and remain uncertain till they are established at the trial on evidence. Relief by way of interlocutory injunction is granted to mitigate the risk of injustice to the plaintiff during the period before that uncertainty could be resolved. The object of the interlocutory injunction is to protect the plaintiff against injury by violation of his right for which he could not be adequately compensated in damages recoverable in the action if the uncertainty were resolved in his favour at the trial. The need for such protection has, however, to be weighed against the corresponding need of the defendant to be protected against injury resulting from his having been prevented from exercising his own legal rights for which he could not be adequately compensated. The court must weigh one need against another and determine where the "balance of convenience" lies, [see Wander Ltd. v. Antox India P. Ltd. [1990] (Supp) SCC 727 at pages 731-32]. In order to protect the defendant while granting an interlocutory injunction in his favour the court can require the plaintiff to furnish an undertaking so that the defendant can be adequately compensated if the uncertainty were resolved in his favour at the trial.

Shri Shanti Bhushan has contended that Coca Cola can be adequately compensated for the loss caused to it by award of damages in the event of its succeeding in the suit and that if the impugned injunction granted by the High Court is not reversed the loss suffered by GBC would be irreparable and incalculable inasmuch as the plants at Ahmedabad and Rajkot would remain idle and a large number of workmen employed in those plants would be rendered unemployed and it may lead to closure of the undertaking of GBC. Shri Nariman and Shri Andhyarujina, on the other hand, have submitted that Pepsi in taking over GBC, took a calculated commercial risk knowing full well the effect of the negative covenant contained in the 1993 agreement and that if GBC is not restrained from manufacturing and selling Pepsi products for the stipulated period of one year, the goodwill and the market share which Coca Cola has for its own products would be effectively destroyed by a rival which has captured GBC and that damages would not be an adequate compensation for the injury which would be irreparable and that in respect of the loss that may be sustained by it, GBC would be protected by the undertaking that is required to be given by Coca Cola under rule 148 of the Bombay High Court (Original Side) Rules, 1980.

We are inclined to agree with the submission of Shri Nariman and Shri Andhyarujina. Having regard to the negative covenant contained in paragraph 14 of the 1993 agreement which is subsisting, Coca Cola has made out a prima facie case for grant of an injunction. As regards the other two requirements for grant of interlocutory injunction, viz., balance of convenience and irreparable injury, we find that as a result of the transfer of shares of GBC and respondent No. 7 in favour of appellants Nos. 2 to 5, the plants of GBC at Ahmedabad and Rajkot are now under the control of Pepsi. The 1993 agreements were, entered into by Coca Cola to ensure that the plants of GBC at Ahmedabad and Rajkot are available for manufacture of the beverages bearing the trade marks that were acquired by Coca Cola. The negative stipulation in paragraph 14 was inserted in order to preclude the said plants being used for the manufacture of products of other manufacturers during the period the 1993 agreements were subsisting. Pepsi by taking control over GBC sought to achieve a dual purpose, viz., reduce the production capacity of beverages bearing the trade marks held by Coca Cola by denying use of the plants of GBC at Ahmedabad and Rajkot for manufacture of those products and to increase the production capacity of Pepsi products by making available these plants for manufacture of Pepsi products. As a result of the interim injunction granted by the High Court, the two plants of GBC cannot be used for manufacture of Pepsi products till January 25, 1996, and the effort of Pepsi to gain an advantage over Coca Cola by reducing the availability of products of Coca Cola and increasing the availability of Pepsi products in the areas covered by the 1993 agreements has been frustrated to a certain extent inasmuch as the increase in the availability of Pepsi products has been prevented. In the absence of such an order Pepsi would have been free to use the plants of GBC at Ahmedabad and. Rajkot for the manufacture of their products. This could have resulted in reduction of the share of Coca Cola in the beverages market and the resultant loss in goodwill and profits could not be adequately compensated by damages. In so far as loss that may be caused to GBC as a result of grant of interim injunction, we are of the view that the loss that may be sustained by GBC can be assessed and GBC can be compensated by award of damages which can be recovered from Coca Cola in view of the undertaking that Coca Cola is required to give under rule 148 of the Bombay High Court (Original Side) Rules, 1980. It has not been suggested that Coca Cola does not have the financial capacity to pay the amount that is found payable.

The interim injunction granted by the High Court has been assailed by the appellants on the ground that as a result of refusal by Coca Cola to continue with the supply of essence/syrup and/or materials the bqttling plants of GBC at Ahmedabad and Rajkot would remain idle and a large number of workmen who were employed in the said plants would be rendered unemployed. We cannot lose sight of the fact that this complaint is being made by Pepsi through the mouth of the appellants; It is difficult to appreciate how Pepsi can ask Coca Cola to part with its trade secrets to its business rival by supplying the essence/syrup, etc., for which Coca Cola holds the trade marks to GBC which is under the effective control of Pepsi. Pepsi took a deliberate decision to take over GBC with the full knowledge of the terms of the 1993 agreement. It did so with a view to paralyse the operations of Coca Cola in that region and promote its products. In view of the negative stipulation contained in paragraph 14 of the 1993 agreement which has been enforced by the High Court, Pepsi has not succeeded in this effort. It must suffer the consequences of the failure of the effort and it cannot assail the interim injunction granted by the High Court by invoking the plight of the workmen who are employed in the bottling plants of GBC.

In this context, it would be relevant to mention that in the instant case GBC had approached the High Court for the injunction order, granted earlier, to be vacated. Under Order 39 of the Code of Civil Procedure, the jurisdiction of the court to interfere with an order of interlocutory or temporary injunction is purely equitable and, therefore, the court, on being approached, will, apart from other considerations, also look to the conduct of the party invoking the jurisdiction of the court, and may refuse to interfere unless his conduct was free from blame. Since the relief is wholly equitable in nature, the party invoking the. jurisdiction of the court has to show that he himself was not at fault and that he himself was not responsible for bringing about the state of things complained of and that he was not unfair or inequitable in his dealings with the party against whom he was seeking relief. His conduct should be fair and honest. These considerations will arise not only in respect of the person who seeks an order of injunction under Order 39, rule 1 or rule 2 of the Code of Civil Procedure, but also in respect of the party approaching the court for vacating the ad interim or temporary injunction order already granted in the pending suit or proceedings.

Analysing the conduct of GBC in the light of the above principles, it will be seen that GBC, who was a party to the 1993 agreement, has not acted in conformity with the terms set out in the said agreement. It was itself, prima facie, responsible for the breach of the agreement, as would be evident from the facts set out earlier. Neither was the consent of Coca Cola obtained for transfer of shares of GBC nor was Coca Cola informed of the names of persons to whom the shares were proposed to be transferred. Coca Cola, therefore, had the right to terminate the agreement but it did not do so. On the contrary, GBC itself issued the notice for terminating the agreements by giving three months' notice.

It is contended by Shri Nariman and, in our opinion, rightly, that GBC, having itself acted in violation of the terms of agreement and having breached the contract, cannot legally claim that the order of injunction be vacated, particularly as GBC itself is primarily responsible for having brought about the state of things complained of by it. Since GBC has acted in an unfair and inequitable manner in its dealings with Coca Cola, there was hardly any occasion to vacate the injunction order and the order passed by the Bombay High Court cannot be interfered with not even on the ground of closure of factory, as the party responsible, prima facie, for breach of contract cannot be permitted to raise this grievance.

Shri Shanti Bhushan has lastly urged that the interim injunction granted by the High Court is in very wide terms because not only GBC but also those to whom the shares have been sold and also subsequent transferees, their servants, agents, nominees, employees, subsidiary companies, controlled companies, affiliates or associate companies or any person acting for and on their behalf are restrained by the interim injunction from using the plants of GBC. It is no doubt true that the interim injunction is widely worded to cover the persons aforementioned but in its operation the order only restrains them from using the plants of GBC at Ahmedabad and Rajkot for manufacturing, bottling or selling or dealing with or being concerned in any manner whatsoever with the beverages of any person till January 25, 1996, the expiry of the period of one year from the date of notice dated January 25, 1995. The interim injunction is thus confined to the use of the plants at Ahmedabad and Rajkot by any of these persons and it is in consonance with the negative stipulation contained in paragraph 14 of the agreement dated September 20, 1993.

For the reasons aforementioned, we do not find any infirmity in the impugned order of the High Court dated March 31, 1995, granting an interim injunction in terms of prayers (a)(ii) and (a)(iii) of the notice of motion as amended. The appeals, therefore, fail and are accordingly dismissed. No costs.

CALCUTTA HIGH COURT

[1996] 9 SCL 6 (CAL.)

HIGH COURT OF CALCUTTA

Milan Sen

v.

Guardian Plasticote Ltd.

BABOO LALL JAIN, J.

SUIT NO. 72 OF 1993

APRIL 12/18 OF 1996

Section 81, read with section 397, of the Companies Act, 1956 - Further issue of capital - Whether need for additional capital or rights issue is a question which is primarily to be decided by directors of company and Court should strike down decision for rights issue or issue injunction against it only if there are extreme circumstances of mala fides or breach of trust - Held, yes

Section 108 of the Companies Act, 1956 - Transfer of shares - Validity of -Whether where shares had been transferred to another person in 1983 and with consent of one of petitioners, then on a suit by petitioners filed in 1993 any interim order could be passed to restrict transferee to act on those shares -Held, no

FACTS

Defendant No. 1 (Company) was a public limited company and the petitioners were the shareholders of the company. An American company also held 25 per cent of the shareholders of the company. The board of directors passed a resolution dated 30-12-1992 to issue new shares and issued letter of offers to all the shareholders of the company. The petitioners filed a suit for declaration that the board meeting and the resolution dated 30-12-1992 were illegal. They also prayed for injunction restraining the defendant company from giving any effect, or further effect, to the purported board resolution dated 30-12-1992 for the issue of 68,000 equity shares of defendant company. It was contended by the petitioners that in a bid to oust and keep them from the management and control of the company and to reduce them into an insignificant minority the resolution was passed to issue new shares, and also that there was no genuine demand to enhance the working capital of the company. It was also contended that the American company which held 25 per cent of shareholding of the company could not be applying for the said new shares since the company had been declaring dividend in a very insignificant manner. It had also been alleged that 22,120 equity shares were illegally recorded in the name of the defendant No. 3.

HELD

The defendant company was a public limited company and its members had free right of transfer of shares and the shareholders consisted of persons and parties outside the family and even a limited company which was an American company was a member holding shares to the extent of 25 per cent of the issue capital.

So far as the allegations with regard to transfer of shares to defendant No. 3 were concerned the same took place in 1983 and the suit was filed in 1993. Even apart from that one of the petitioners was personally present in the board meeting in which the transfer was accepted and the board resolution was passed unanimously in 1983. Therefore, even without taking any other points the very fact that the actual transfer was made with the consent of one of the petitioners it was hardly a case for any interim order to be made. For about ten years prior to the institution of the suit the shares were held in the name of defendant No. 3 and he had been receiving all dividends on the said shares without any objections whatsoever. The petitioners had no interest in the said shares and furthermore, the suit on that account might even be held to be barred by limitation.

The ground taken by the petitioner in regards to the American company's shareholdings were only mere apprehensions and it was up to the American company to decide its course of action if at all the American company chose not to subscribe for the rights issue, the same had to be dealt in accordance with the provisions of the Companies Act.

The question of need for additional capital or the right issue is a question which is primarily to be decided by the directors of the company and if the directors are of the view that further capital in the form of rights issue is required, the Court will be very slow to disturb the same unless there are extreme circumstances of mala fides or breach of trust.

The Supreme Court in the case of Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd. AIR 1981 SC 1298, held that if the shares are issued in the larger interest of the company, the decision to issue the share cannot be struck down on the ground that it has incidentally benefited the directors in their capacity as shareholders. In the instant case, it was not prime facie satisfied that the rights issue of shares was for any personal aggrandisement or for detriment to the company. It was also not proved that the said issue was for simply or solely for the benefit of the directors. The petitioners were at liberty to subscribe to the rights issue and maintain their percentage of shareholding. This sort of incidence was always there in rights issues. Thus it could not be said that prime facie the rights issue was not in the larger interests of the company.

Therefore no case had been made out for the issue of any interim injunction in the instant case either in respect of the rights issue of shares, or in respect of the transfer made in 1983.

The application was, therefore, dismissed.

CASES REFERRED TO

Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 All ELR, Clemens v. Clemens Bros. Ltd. [1976] 2 All ELR and Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd. AIR 1981 SC 1298.

JUDGMENT

1. The petitioners instituted this suit, inter alia, for following reliefs :

"(a) Declaration that resolution to issue New Shares in the defendant No. 1 passed in the meeting of the Board of Directors of the Defendant No. 1 on 30th December, 1992 and all acts in pursuance thereof are illegal, null and void;

(b) Declaration that the letter of offer dated 20th January, 1993, offering issuance of 68,000 Equity Shares of the Defendant No. 1 and all steps taken thereunder are illegal, null and void.

(c) Perpetual injunction be issued restraining the defendants from giving any effect or further effect to the purported board resolution dated 30th December, 1992 for issue of 68,000 Equity Shares of defendant No. 1 and from giving or issuing the said 68,000 Equity Shares or any new shares of defendant No. 1.

(d) Decree directing delivery up of all the letters of offer issued by the defendant No. 1 relating to issue of 68,000 equity shares so that the same may be adjudged void and be cancelled.

(e) Injunction be issued restraining the defendants from taking any step or accepting any money or issuing any new share, in pursuance of the said letter of offer or giving any effect thereto in any manner whatsoever.

(f) Declaration that the 22,120 equity shares of defendant No. 1, are standing in the name of Dilip Sen, and have been wrongfully recorded in the name of defendant No. 3 and decree directing ratification of the share register of defendant No. 1 by deleting the name of defendant No. 3 and by substituting the name of Dilip Sen for defendant No. 3 in respect of the said 22,120 equity shares in the register of members of defendant No. 1.

(g) Perpetual injunction restraining the defendant No. 3 from exercising any right in respect of or on the strength of the said 22,120 Equity Shares as purported transferee of Dilip Sen or as holder thereof.

(h) Decree directing the defendant No. 3 to deliver up the said share certificates relating to the said 22,120 Equity Shares to the defendant No. 1.

(i) Permanent injunction restraining the defendant No. 3 from exercising any right to take new shares on the basis of the said purported letter of offer in respect of the said 22, 120 Equity Shares of defendant No. 1.

(j) Permanent injunction restraining the defendant Nos. 2 and 3 by their servants, agents, and/or assigns from interfering or meddling in any with the affairs and functioning of the defendant No. 1 and from representing or holding themselves out in any manner as persons entitled, empowered or authorised to act for or on behalf of the defendant No. 1 including operating Bank Account, collecting monies or otherwise.

(k) Decree for Rs. 18,00,000 as will appear from paragraph 48 and/or alternatively decree directing defendant No. 3 to render true, faithful and proper accounts of their dealings and transactions with the assets, properties and monies of the defendant No. 1 and decree for such sum as may be found due and payable after taking of such accounts.

(l) Equity into dealings and transactions mentioned in paragraph 48 and a decree for such sum as may be found due upon such equity."

2. After the institution of the suit an application was moved before this Court on 4-3-1993, inter alia, for following orders :

"(a) A Special Officer be appointed to take possession of the Books of Accounts, Assets and Records of the respondent No. 1 for the purpose of initialling and making inventory thereof;

(b) A Special Officer be appointed to take charge of the Management of the Respondent No. 1 and its business by superseding and/or suspending the Board of Directors;

(c) Injunction be issued restraining the respondents from giving any effect or further effect to the purported Board Resolution dated 30th December, 1992 for issue of 68,000 equity shares of defendant No. 1 and from giving or issuing the said 68,000 equity shares or any new shares of defendant No. 1;

(d) Injunction be issued restraining the defendants from taking any step or accepting any money or issuing any new shares, in pursuance of the said letter of offer or giving any effect thereto in any manner whatsoever;

(e) Injunction restrained the defendant No. 3 from exercising any right in respect of or on the strength of the said 20,120 equity shares as purported transferee of Dilip Sen or as holder thereof;

(f) Injunction restraining the defendant No. 3 from exercising any right to take new shares on the basis of the said purpose letter of offer in respect of the said 22,120 equity shares of defendant No. 1;

(g) Injunction restraining the defendant Nos. 2 and 3 by their servants, agents and/or assigns from interfering or meddling in any way with the affairs and functioning of the defendant No. 1 and from representing or holding themselves out in any manner as persons entitled, empowered or authorised to act for or on behalf of the defendant No. 1 including operating Bank Account, collecting monies or otherwise;

(h) Ad interim order in terms of prayers above."

3. The case of the petitioners is that in a bid to oust and keep the petitioners from the management and control of the defendant No. 1 and to reduce the petitioners into an insignificant minority the respondents in collusion with each other passed a mala fide Board Resolution dated 30-12-1992 and sought to issue 68,000 Equity Shares in respondent No. 1.

4. It has also been alleged that pursuant to the said resolution and without waiting for confirmation thereof, in a subsequent Board Meeting the board of directors and the defendant No. 1 have caused the letter of offers to be issued to the shareholders. The grounds for challenging the said issue are that there is no genuine demand for augmenting working capital of the defendant No. 1. The aforesaid stipulation in the letter of offer has been incorporated with the anticipation that the American Company holding 25 per cent paid up capital of the Company would not be applying for the said new shares since the defendant No. 1 has been declaring dividend in a very insignificant manner.

It has also been alleged that 22,120 equity shares were illegally recorded in the name of the respondent No. 3, a transferee of Dilip Sen. It has also been stated that the defendant No. 3 is not entitled to exercise any right to take any share out of the new shares belonging to Dilip Sen which were illegally recorded in his name. It has also been alleged that the defendant Nos. 2 and 3 have been siphoning funds belonging to the defendant No. 1 by adopting wrongful methods. It is not in dispute that the plaintiff is a Public Limited Company. A Public Limited Company can issue rights shares in accordance with section 81 of the Companies Act, 1956.

5. Mr. S.B. Mukherjee, the learned Counsel appearing on behalf of the plaintiffs, submitted that membership of the company was entered into on the basis of personal relationship involving mutual confidence or an understanding was there as to the extent to which each of the members was to participate in the Management of the Company's business. Legal rights exercisable by the members in defendant No. 1 are subject to equitable consideration. Considerations of a personal character arising between different members which make it unjust or inequitable to insist on legal rights or to exercise them in a particular way.

6. Mr. Mukherjee relied on the judgment in the case of Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 All ELR. That was the case in which two partners having equal shares in a business as partners converted the same into a company. The share capital was also equally issued to both the partners. Under the articles shares could not be transferred without the Directors consent. One son of a partner known as 'G' was appointed as Director and each of the two original shareholders transferred to him 100 shares. Ultimately, it was held as follows :

"The Appeal would be allowed for the following reasons—

(i) the just and equitable provision in section 222(f) was an equitable supplement to the 'common law' of the company to be found in its memorandum and articles; it recognised that there might be circumstances in which the mutual rights of the members were not exhaustively defined in the articles, e.g. where they had entered into membership of the company on the basis of a personal relationship involving mutual confidence or an understanding as to the extent to which each of the members was to participate in the management of the company's business; although the just and equitable provision did not entitle one party to disregard the obligations he had assumed by entering the company, nor entitle the Court to dispense him from them, it did not entitle the Court to subject the exercise of legal rights to equitable considerations, i.e., considerations of a personal character arising between one individual and another which might make it unjust or inequitable to insist on legal rights or to exercise them in a particular way; thus a director-member might be able to prove some underlying obligation of his fellow member(s) in good faith, or confidence, that so long as the business continued he should be entitled to management participation, and that the obligation was so basic that, if broken, the conclusion must be that the association should be dissolved.

(ii) in a petitioning for a winding up on the just and equitable ground a member was not confined to such circumstances as affected him as a shareholder; he was entitled to rely on any circumstance of justice or equity which affected him in his relations with the company or with the other shareholders.

(iii) there was no obligation on the petitioning member to establish that the steps taken by the other members which were alleged to constitute grounds for winding up under section 222(f) were not carried out bona fide in the interest of the company; to confine the just and equitable provision to proved cases of mala fides would be to negative the generality of the words.

(iv) in the circumstance it was apparent that a potential basis for a winding up order on the just and equitable ground existed since, after a long association in partnership, during which he had an equal share in the management, the appellant had joined in the formation of the company; the inference was indisputable that he and N had done so on the basis that the character of the association would, as a matter of personal faith, remain the same; the appellant had established that N and G were not entitled, injustice and equity, to make use of their legal powers of expulsion; that was supported (a) by the fact that N had, by making clear that he did not regard the appellant as a partner, thereby, in effect, repudiated the relationship between them and (b) by the fact that, by ceasing to be director, the appellant had lost his right to a share in the profits through directors' remuneration, retaining only a chance of receiving dividends; furthermore, he was unable to dispose of his interest in the company without the consent of N and G; all those matters led to the conclusion that the right course was to dissolve the association by winding up."

7. The next case relied on by Mr. Mukherjee was the case of Clemens v. Clemens Bros. Ltd. [1976] 2 All ELR. The facts of the said case are summarised as follows :

"The plaintiff held 45 per cent, and her aunt 55 per cent, of the issued share capita] of a family company. The company had been incorporated in 1913 and carried on a highly successful business in the building trade. The capital of the company consisted of 200 preference shares, of which the plaintiff and the aunt each held 100, and 1,800 ordinary shares of £ 1 each fully paid, of which the plaintiff held 800 and the aunt 1,000. Under the articles of association members of the company had a right of preemption if another member wished to transfer his shares. The aunt was a director of the company but the plaintiff was not. There were four other directors. The total directors' emoluments exceeded that company's net profits before taxation in each of the years 1971 to 1974. The directors proposed to increase the company's share capital from £2,000 to £3,650 by the creating of a further 1650 ordinary shares all of which were to carry voting rights. The directors other than the aunt would receive 200 shares each, and the balance of 850 shares would be placed in trust for long service employees of the company. The Secretary wrote to the plaintiff on 1st November, 1974 setting out the proposals and enclosing notice of an extraordinary general meeting to be held on 27th November to approve the setting up of a trust for the company's employees, to increase the company's capital and to provide for the proposed allotments. Resolutions to the effect were set out in the notice and a draft of the proposed trust deed was enclosed. On 22nd November the plaintiff's solicitor wrote a letter to the aunt pointing out the scheme would reduce the plaintiff's shareholding to under 25 per cent and stating that the plaintiff was opposed to it. The aunt replied that she was fully aware of the implications of the changes in the company's structure but intended to support the scheme. The plaintiff's solicitor attended the meeting on 27th November as her proxy and proposed an adjournment. The aunt voted against the adjournment, and the three resolutions were then passed. The plaintiff brought an action against the company and the aunt, seeking a declaration that the resolutions were oppressive of the plaintiff and an order setting them aside. The defendant contended that, if two shareholders both honestly held differing opinions, the view of the majority should prevail, and that shareholders in general meeting were entitled to consider their own interests and to vote in any way they honestly believed proper in the interests of the company."

In the said case the Chancery Division held to the following effect :

"The aunt was not entitled as of right to exercise her majority votes as an ordinary shareholder in any way she pleased; her right was subject to equitable considerations which might it unjust to exercise it in a particular way. Although it could not be disputed that she would like to see the other directors have shares in the company and a trust set up for long service employees, the inference was irresistible that the resolutions had been framed in order to put complete control of the company into the hands of the aunt and her fellow directors, to deprive the plaintiff of her existing rights as a shareholder with more than 25 per cent of the votes and to ensure that she would never get control of the company. Those considerations were sufficient in equity to prevent the aunt using her votes as she had, and the resolutions would accordingly be set aside."

8. It does not appear from the petition that any case has been made out in the petition which can bring the instant case within the facts of the cases relied on by Mr. Mookherjee, namely, Ebrahim’s case (supra) and the case of Clemens (supra). The said two cases are cases where there were private limited companies with restrictions on transfer of shares and with a very limited shareholding where it was recognised that there was an equitable supplement to the common rules of the company to be found in its Memorandum and Articles and it was recognised that there might be circumstances in which a mutual right of the members were not exhaustively defined in the Articles, namely, they had entered into a membership of the company on the basis of a personal relationship involving mutual confidence for and understanding as to the extent to which each of the members was to participate in the management of the company's business. In the case of Clemens (supra), there were only two shareholders of one family. The said cases have no application to the facts of the case since no such case has been made out in the petition. Even apart from that the company is a public limited company and its members have free right of transfer of shares and the shareholders consist of persons and/or parties outside the family and even a limited company which is an American company, is a member holding shares to the extent of 25 per cent of the issue capital.

9. So far as the allegations with regard to transfer of shares of Dilip Sen and Ranjit Sen are concerned the same took place in 1983 and the instant suit was filed in 1993. Even apart from that the respondent has stated that Milan Sen one of the plaintiffs was personally present in the Board Meeting in which the transfer was accepted and the Board Resolution was passed unanimously in 1983. Even without taking any other points into account the very fact that this suit has been filed ten years after the actual transfer and the actual transfer having been made with the consent of one of the plaintiffs it is hardly a case for any interim order to be made. For about ten years prior to the institution of the suit the shares are held in the name of Ranjit Sen and he has been receiving all dividends on the said shares without any objections whatsoever. The plaintiffs had no interest in the said shares and furthermore, the suit on that account may even be held to be barred by limitation.

10. One of the allegations of the plaintiffs-petitioners is that Flexaire, a partnership firm of Mrs. Rita Sen, wife of Ranjit Sen, has been given some benefits. Such facilities to use the office against payment of rental was granted in 1976 as is being alleged by the respondent. A Board Resolution was also passed and it has been stated that Kalyan Sen did not participate in the said resolution. It has also been alleged by the respondents that Flexaire was paying rent to the company until the period when all machinery of Flexaire had been purchased by the company and Flexaire is no more enjoying any of their space since quite some time.

11. Milan Sen himself gave guarantee to the United Industrial Bank Limited for the loan taken by Flexaire. The said United Industrial Bank Ltd. is now been merged and is part of Allahabad Bank.

12. It was also submitted on behalf of the petitioner that an American company is holding 25 per cent shareholding of the respondent No. 1. Offer has already been made to the American company for subscribing to the rights issue. Because of the order of injunction and the pendency of the application, no steps could be taken on that score. According to the petitioner if the American Company does not participate in taking the rights issue then the shares may be taken by the others of the group of Kalyan Sen. These are really mere apprehensions and it is up to the American company to decide its course of action if at all the American company choses not to subscribe for the rights issue then the same has to be dealt with in accordance with the provisions of the Companies Act.

It was also submitted that the company did not need additional capital for the rights issue. This is a question which is primarily decided by the directors of the company and if the directors are of the view that further capital in the form of rights issue is required, the Court will be very slow to disturb with the same unless there are extreme circumstances of mala fides or breach of trust.

13. In this connection, the respondents relied on the judgment of the Supreme Court reported in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd. AIR 1981 SC 1298. The Supreme Court in the said case held as follows :—

"107. In Hogg v. Cramphogo Ltd. [1967] 1 Ch 254 it was held that if the power to issue shares was exercised from an improper motive, the issue was liable to be set aside and it was immaterial that the issue was made in a bona fide belief that it was in the interest of the Company. Buckley J. reiterated the principle in Punt [1903] 2 Ch 506 and in Piercy [1920] 1 Ch 77 and observed:

'Unless a majority in a company is acting oppressively, towards the minority, this Court should not and will not itself interfere with the exercise by the majority of its constitutional rights or embark upon an inquiry into the respective merits of the views held or policies favoured by the majority and the minority. Nor will this Court permit directors to exercise powers which have been delegated to them by the company in circumstances which put the directors in a fiduciary position when exercising those powers, in such a way as to interfere with the exercise by the majority of its constitutional rights; and in case of this kind also, in my judgment, the Court should not investigate the rival merits of the views or policies of the parties', (p. 268)

Applying this principle, it seems to us difficult to hold that by issue of the rights shares the Directors of NIIL interfered in any manner with the constitutional rights of the majority. The majority had to disinvest or else to submit to the issue of rights shares in order to comply with the statutory requirements of FERA and the Reserve Bank's directives. Having chosen not to disinvest, an option which was open to them, they did not any longer possess the constitutional right to insist that the Directors shall not issue the rights shares. What the Directors did was clearly in the larger interests of the Company and in obedience to their duty to comply with the law of the land. The fact that while discharging that duty they incidentally trenched upon the interests of the majority cannot invalidate their action. The conversion of the existing majority into a minority was a consequence of what the Directors were obliged lawfully to do. Such conversion was not the motive force of their action.

108. Before we advert to the decision of the Privy Council in Howard Smith Ltd. v. Ampol Petroleum Ltd. 1974 AC 821 we would like to refer to the decision of the High Court of Australia in Harlowe's Nominees (P.) Ltd v. Woodside (Lakes Entrance) Oil Co. 121 CLR 483 and to the Canadian decision of Berger J. of the Supreme Court of British Columbia, in the case of, Teck Corporation Ltd. v. Miller 33 DLR (3rd) 288 both of which were considered by Lord Wilberforce in Howard Smith. On a consideration of the English decision, including those in Punt and Piercy, Barwick C.J said in Harlowe's Nominees:

'The principle is that although primarily the power is given to enable capital to be raised when required for the purposes of the company, there may be occasions when the directors may fairly and properly issue shares for other reasons, so long as those reasons relate to a purpose of benefiting the company as a whole as distinguished (from a purpose for example of maintaining control of the company in the hands of the directors themselves or their friends. An inquiry as to whether additional capital was presently required is often most relevant to the ultimate question upon which the validity or invalidity of the issue depends but that ultimate question must always be whether in truth the issue was made honestly in the interests of the company.’ (p. 493)

** ** **

'. .. The purpose found by the Judge is simply and solely to dilute the majority voting power held by Ampol and Bulkships so as to enable a then minority of shareholders to sell their shares more advantageously……..'

** ** **

"109 ... If the power to issue further shares is exercised by the directors not for the benefit of the company but simply and solely for their personal aggrandisement and to the detriment of the company, the Court will interfere……… in such a case is the existence of the relationship of a trustee and of cestui que trust as between the directors and the company...." (p. 1338)

14. The Supreme Court in the said case ultimately held that the test is the same, namely, whether the issue of shares is simply or solely for the benefit of Directors. If the shares are issued in the larger interest of the company, the decision to issue share cannot be struck down on the ground that it has incidentally benefited the Directors in their capacity as shareholders. In the instant case, I am not prime facie satisfied that the rights issue of shares for any personal aggrandisement or for detriment to the company. I am also not satisfied that the said issue is for simply or solely for the benefit of the directors. The petitioner is at liberty to subscribe to the rights issue and maintain its percentage of shareholding. This sort of incidence is always there in rights issues and I am not satisfied prime facie that the rights issue is not in the larger interests of the company.

15. I am not satisfied that any case has been made out for issue of any interim injunction in this case either in respect of the rights issue of shares or in respect of the transfer made in 1983 or in respect of the benefits for use of land given to Flexaire in 1976.1 am not satisfied that any prime facie case has been made out for issue of any interim injunction, on any other grounds as alleged or as argued or at all.

16. The application is therefore dismissed and all interim orders made in this application are vacated. The respondent No. 1 company will be entitled to proceed with the issue of the rights shares. If however any existing shareholder does not offer or subscribing to the rights issues, his shares may be offered to all the existing shareholders proportionately within a fortnight from the expiry of the last date of the non-receipt of offer in accordance with the provisions of the Companies Act. The time during which the order of injunction was in force will not be taken into account in giving effect to the impugned resolution.

17. This judgment and order disposes of the application made by the plaintiffs and verified by the affidavit of Milan Sen on 3-5-1993 and the connected notice of motion in relation thereto.

18. Stay of operation of this order is asked for and is declined.

19. Parties will be at liberty to obtain the signed copy of the operative portion of this judgment and order on usual undertaking.

[1996] 85 COMP CAS 111 (MAD)

HIGH COURT OF MADRAS

Maxwell Dyes and Chemicals (P.) Ltd.

v.

Kothari Industrial Corporation Ltd.

SRINIVASAN AND AR. LAKSHMANAN, JJ.

O.S.A. NOS. 127 TO 134 OF 1995

SEPTEMBER 27, 1995

Mohan Parasaran and Satish Parasaran for the Appellants.

Anil Diwan, T.V. Padmanabhan and S. Madhavan and R. Krishnamurthi, for the Respondent.

JUDGMENT

AR. Lakshmanan, J.—The common order, which is appealed against was passed by Govardhan J.span style='color:black'> in respect of the prayers for interim reliefs. The facts, which are the foundation for filing the present appeals are also closely interconnected with the reliefs sought for. The respondents in all the appeals are common. Hence, all the appeals were heard together.

The first appellant has instituted C.S. No. 1128 of 1994 seeking for a declaration that the notice issued by the first respondent calling for the 25th annual general meeting of the company on September 12, 1994, for the purpose of considering and passing items Nos. 10, 11 and 12 under the caption "special business" in the agenda is illegal, void and unenforceable and for permanent injunction restraining the respondents, their officers, subordinates, etc., from considering and passing resolutions Nos. 10, 11 and 12 set out in the agenda in the notice for the 25th annual general meeting of the first defendant-company under the caption "special business" to be held on September 12, 1994, or any other date. The second appellant has filed the suit for declaring that the notice issued by the first respondent calling for the 25th annual general meeting of the company on September 12, 1994, for the purpose of considering and passing items Nos. 10, 11 and 12 under the caption "special business" in the agenda, as illegal, void and unenforceable, and for a permanent injunction restraining the respondents, their officers, subordinates, etc., from considering and passing resolutions Nos. 10, 11 and 12 set out in the agenda in the notice for the 25th annual general meeting of the first respondent-company under the caption "special business" to be held on September 12, 1994, or on any other future date.

The first respondent which was formerly known as Kothari (Madras) Limited had been incorporated under the Companies Act on July 1, 1970. It proceeded to change its name to Kothari Industrial Corporation Limited in April, 1984. The first respondent-company was formed, incorporated and controlled by the family of the Kotharis who have been carrying on business in the city of Madras and elsewhere for several decades. The family of the Kotharis first established its business, namely, Kothari and Sons, in the year 1918 and the said companies had been formed and founded by Mr. C.M. Kothari who was the founder of the Kothari group of companies. The founder, C.M. Kothari, had two sons, namely, Sri D.C. Kothari and H.C. Kothari. They had entered the family business in the years 1933 and 1936 respectively. Both of them acquired vast business interests including tea and coffee estates, acquired spinning mills in the State of Andhra Pradesh, established a sugar factory under the name and style of Kothari Sugars and Chemicals Limited and also started various other businesses. Many of the businesses which were started by them were carried on jointly till the year 1982 and in the said year D.C. Kothari and H.C. Kothari decided to separate their business interests and accordingly a scheme was worked out as a result of which some of the companies went to the control of D.C. Kothari and some went to the control of H. C. Kothari. However, no express agreement was reached among the family of the promoters, namely, Sri D.C. Kothari and H.C. Kothari, with regard to the first respondent-company. H.C. Kothari passed away in early 1992 and soon, thereafter, in June, 1992, Sri D.C. Kothari also passed away which resulted in the management of the H.C. Kothari group of companies coming into the hands of B.H. Kothari and the management of the D.C. Kothari group of companies coming into the hands of P.D. Kothari, the second respondent herein.

The shareholding pattern in the first respondent-company was divided approximately as follows:

(i) Unit Trust of India, LIC, GIC
and their subsidiaries	: 34 per cent, of the share capital.
(ii) Sri P.D. Kothari and his group	: 14 per cent.

The appellant along with ten other group companies along with Investment Trust of India and another Reliance group company, Reliance Capitals, had substantial stakes in the share capital of the company which is almost equivalent to the holding of the second respondent and his associates.

According to the appellants, the second respondent, who was in the management of the first respondent-company, wanted to secure control and management of the first respondent-company and exclude any role by the appellants and other companies which were supporting the second respondent's cousin, B.H. Kothari, and which had also allowed various acts of oppression and mismanagement. According to the appellants, when the appellants and other companies had acquired substantial stakes in the company by acquiring about 4,77,560 equity shares approximately amounting to 6.23 per cent. of the equity capital of the company between June, 1991, and September, 1992, the respondents, with a mala fide intention of removing the names of the appellants and other companies from the registers, had moved the Company Law Board for rectification of the share registers, in spite of transfers having duly taken place and rights having accrued in favour of the appellants and other companies. It is the case of the appellants that the attempt of the respondents for rectification of the share register was particularly made with a mala fide and oblique motive in view of the fact that the first respondent company had resorted to a rights issue of partly convertible debentures to the existing shareholders by its letter of offer dated October 15, 1992. The appellants and other investing companies which had acquired shares in the first respondent-company had applied not only for the rights issue to which they are entitled but also for partly convertible debentures on additional rights basis before the closure of the issue on December 15, 1992. It is their case that it was only after the closure of the issue that the respondents proceeded to institute company petitions as stated above before the Company Law Board seeking for rectification of the share register for deletion of the names of the appellants and other companies which was ultimately not accepted in the light of the judgment of the single judge and the Division Bench of this court (see [1996] 85 Comp Cas 79). The judgment of the Division Bench of this court has not been stayed by the Supreme Court.

According to the appellants, the respondents made attempts seeking permission of this court to have deployment of the proceeds raised from the shareholders for the implementation of a project relating to manufacture of beer, in the State of Andhra Pradesh; for raising the equity capital from non-resident Indians by way of foreign subscriptions for an aggregate value of Rs. 4.5 crores; and to raise the stake of the existing promoters of the company, namely, P.D. Kothari and his relatives, associates and associate companies from the present level of 14 per cent, to 51 per cent, in the equity share capital of the company. The further case of the appellants is that the appellants, after having been unsuccessful in the interlocutory applications and having lost in the Letters Patent Appeals, the respondents proceeded to call for the annual general meeting of the first respondent-company for September 12, 1994, at 10.30 a.m. at the Music Academy, Madras. In the said meeting, among other things, three important items were to be considered and transacted. They were (1) utilisation of the proceeds from the issue of rights issue of partly convertible debentures for the beer project; (2) offering of shares to non-resident Indians and overseas bodies corporate; and (3) to increase the stakes of the existing promoters and his relatives, associates. Inasmuch as items Nos. 10, 11 and 12 under the caption "special business" in the agenda for the meeting which was to be held on September 12, 1994, according to the appellants challenging the action of the respondents was illegal, they filed the suits for the reliefs.

This court by interim order, dated September 7, 1994 (AR. Lakshmanan J.) in O.A. Nos. 849 and 850 of 1994 in C.S. No. 1128 of 1994 and O.A. Nos. 855 and 856 of 1994 in C.S. No. 1132 of 1994 filed by both the appellants herein found that, prima facie, a case has been made out by them for the grant of interim injunction. But, however, before this court, an undertaking was given by learned counsel who appeared for the respondents that the consideration of resolutions Nos. 10, 11 and 12 set out as special business in the notice for the 25th annual general meeting of the first respondent-company, which was to be held on September 12, 1994, or on any other future date will be deferred until further orders from this court. Accordingly, it was ordered that the meeting will go on with the other resolutions listed for consideration except resolutions Nos. 10, 11 and 12. After giving that undertaking, however, the respondent moved transfer petitions before the Supreme Court of India and the Supreme Court of India by order dated September 9, 1994, considering the facts and circumstances of the case and to avoid any prejudice to the large body of shareholders, permitted the meeting to take place by also allowing the appellants to vote not only in respect of the disputed but also undisputed shares in terms of the statements furnished to the Supreme Court. But, however, the Supreme Court of India directed that the result of voting will not be declared nor will any decision about the passing of the said resolutions be taken on the basis of the said voting until further orders. The Supreme Court directed the results of the voting to be intimated to it.

However, it is contended by the appellants that at the meeting held on September 12, 1994, the second respondent proceeded to illegally adjourn the meeting only in respect of resolution No. 12 and allowed the voting to take place in respect of resolutions Nos. 10 and 11 which is the subject-matter of the suit. In fact, the adjournment itself was ex facie illegal as it was done without there having been a motion brought in for adjournment and without there being a proposal or seconding for the adjournment and without even the consent of the shareholders. Further, the second respondent himself could not at all have been the chairman even in respect of the decision for adjournment of the meeting in respect of resolution No. 12 in which he was directly interested.

The results of the voting on resolutions Nos. 10 and 11 were sent to the Supreme Court of India. Liberty was also sought for by the respondents to hold the adjourned meeting on September 27, 1994. But the Supreme Court of India declined the request for permitting resolution No. 12 to be taken up at the meeting on September 27, 1994, and held that resolution No. 12 will not be put to vote at the meeting scheduled to be held on September 27, 1994, till further orders. As regards resolution No. 12, it was indicated that the said resolution was not put to vote at the meeting on September 12, 1994, but however, an order was passed on September 23, 1994, prohibiting the said resolution being taken up for consideration and to be put to vote at the next meeting which was to be held on September 27, 1994. It was directed by the Supreme Court that it will now be open to the respondents to request this court to permit them to put the said resolution for consideration at any subsequent adjourned meeting of the company and that this court will proceed to pass orders uninfluenced by the order of the Supreme Court, dated September 23, 1994, in so far as resolution No. 12 was concerned. This court was directed to consider expediting the hearing of the matter. Pursuant to the orders of the Supreme Court of India, there was one other consent order passed in respect of voting rights which was passed on January 3, 1995.

While matters stood thus, in the meanwhile the respondents filed Applications Nos. 7152 and 7154 of 1994 in C.S. Nos. 1128 and 1132 of 1994 filed by the appellants seeking for permission of this court to hold the adjourned annual general meeting to consider and to put to vote resolution No. 12 of the notice dated August 5, 1994, issued by the respondents to its shareholders by allowing the 11 Reliance companies to exercise their voting rights in the same manner as exercised by them in respect of resolutions Nos. 10 and 11. This court by order dated February 15, 1995, after taking note of the earlier orders passed by the Supreme Court of India and other facts, granted permission for holding the adjourned annual general meeting for consideration of resolution No. 12 as prayed for in the light of the orders passed by the Supreme Court of India and further directed that the said meeting could be held on March 20, 1995. However, it was directed that the result of the voting on resolution No. 12 would not be declared but should be kept in a sealed envelope and intimated to this court. This court further held that merely because permission was given to the respondents to hold the meeting, the appellants herein will not lose their right to challenge the validity of the meeting. It was held by this court that it was always open to the appellants to challenge the validity of the meeting itself or the results thereof, when the subject is taken up by this court for consideration.

Based on the said orders of this court, the respondents proceeded to issue notices by enclosing proxy forms.

In view of the subsequent developments which took place in the matter, the appellants herein had filed applications seeking for amendment of the pleadings in the plaint, amendment of the cause title, relief sought for and also furnished various other documents supporting the claims for amendment. In fact, the first appellant filed O.A. No. 435 of 1995 in C.S. No. 1128 of 1994 and the second appellant filed O.A. No. 436 of 1995 in C.S. No. 1132 of 1994 seeking for injunction restraining the respondents, their men, officers, subordinates or any one claiming under them from giving effect to or implementing resolutions Nos. 10, 11 and 12 said to have been passed on September 12, 1994, and March 20, 1995, as is evident from the resolutions which were disclosed before the Supreme Court of India and this court. The respondent companies had filed Application No. 7151 of 1994 in C.S. No. 1128 of 1994 and Application No. 7153 of 1994 in C.S. No. 1132 of 1994 seeking for permission for the implementation of resolutions Nos. 10 and 11 approved by the general body of the company held on September 12, 1994. They also filed Application No. 1628 of 1995 in C.S. No. 1128 of 1994 and Application No. 1631 of 1995 in C.S. No. 1132 of 1994 seeking for opening of the sealed envelope in this court and causing the results of the poll to be known to the respondents and its shareholders and if the results indicate that resolution No. 12 has been passed by the requisite majority as per the provisions of the Companies Act, to allow the respondents to implement the same. The appellants also took out O.A. No. 220 of 1995 in C.S. No. 1128 of 1994 and sought for injunction restraining the respondents from in any manner proceeding to further implement the beer project or from carrying out any construction for the beer project or from carrying on any manufacturing activities or trading activities either directly or indirectly in beer. One other Application No. 1312 of 1995 in C.S. No. 1128 of 1994 was filed by the first appellant seeking for directing the respondents to keep the monies earmarked for the beer project in a separate bank account pending disposal of the suit and the decision by this court on the legality and validity of resolution No. 10 of he notice dated August 5, 1994, and implementation thereof in the light of the directions of the Supreme Court.

All the applications were posted for hearing before the learned judge. Time for filing counter was given by the learned single judge in respect of the application seeking for amendment of the plaints and pleadings and the said applications were adjourned for further hearing after vacation. In the submission of the appellants even for deciding the entire interim applications under appeal, the decision on the applications seeking for amendment of the plaint based on subsequent events was vital and relevant for determination of the issues and to assess the prima facie case and balance of convenience.

The learned single judge proceeded to hear the applications and was pleased to pass common orders on May 16, 1995, allowing all the applications filed by the respondents and dismissing the applications filed by the applicant companies, thus in effect paving the way for implementation of resolutions Nos. 10, 11 and 12 and also for the implementation of the beer project and thus overriding the various objections which were raised by the appellants.

Mr. Mohan Parasaran contended that the order of the learned single judge is erroneous and the learned judge ought to have appreciated that the applicants/appellants have established not only a strong prima facie case for grant of injunction restraining the implementation of resolutions Nos. 10, 11 and 12 but also in respect of the implementation of the beer project and for deposit of monies in a separate bank account earmarked for the beer project in the light of the reports that the monies earmarked for some other projects were diverted for the beer project illegally, which was the subject-matter of enquiry under section 209A of the Companies Act. Learned counsel contended that the learned single judge was in error in not granting injunction with regard to the implementation of resolution No. 10 for establishing the beer project in the State of Andhra Pradesh and that the learned judge ought to have seen that prima facie there is a strong case for grant of injunction in the light of the fact that in respect of the very same beer project, there was already an investigation under section 209A, which was ordered by the Central Government to be conducted with regard to diversion of funds and must have further seen that the beer project had been implemented even prior to getting the approval of the shareholders. According to the appellants, the learned judge had. committed an error in holding that the beer project could not have been envisaged as on the date of the letter of offer on October 15, 1992, since the letter of intent by the Central Government was issued to the sister concern of the respondent only on December 15,1992. The company failed to produce fund flow statements for the beer project which it was implementing in the State of Andhra Pradesh even during the pendency of the suit and prior to the institution of the suit which would have clearly shown the utilisation of funds and the source for implementation of the beer project.

It is contended that the learned judge has not given due weight to the enquiry under section 209A directed to be instituted by the Central Government in respect of the very beer project and has also failed to prove that the company has discharged its burden to the court by showing that there was no diversion of funds by not having kept the money earmarked for the beer project in a separate account from out of the monies collected for a different project. According to Mr. Mohan Prasaran, without the approval of the shareholders the company was in error in proceeding to implement the beer project and even in the counter filed by the respondents in Application No. 220 of 1995 this question about utilisation of the funds for the implementation of the beer project is quite evasive. In so far as resolution No. 11 which pertains to allotment of shares on preferential basis to overseas bodies corporate and non-resident Indians, it is the case of the appellants that the respondents cannot resort to private placements in a rights issue and resolution No. 11 was sought to be brought in so as to bring in investment from non-resident Indians Dr overseas bodies corporate, who are none other than the associates or relatives of the persons in the management of the respondent and this would only mean that what actually the respondent was seeking was to provide private placements with foreign bodies which, as per the understanding of the appellants, is quite contrary to the guidelines issued by the Securities and Exchange Board of India In terms of which it could be inferred that private placements could only be tagged to public issues and not to rights issues and allotment could be made only in accordance with the prescribed percentage as part of a single composite issue and, therefore, the respondents could have only resorted to a fresh public issue and could not have resorted to preferential issues in respect of resolution No. 11.

In so far as resolution No. 12 was concerned, Mr. Mohan Parasaran, contended that the learned judge was in error in seeking to distinguish the judgment of the Supreme Court in Needle Industries' case [1981] 51 Comp Cas 743; AIR 1981 SC 1630. According to learned counsel, mala fides were writ large which was the basis for resolution No. 12 as evident from several facts including the attempt on the part of the respondents to resort to rectification of the share register after the closure of the rights issue resorted to by them in October, 1992, so as to completely throw out from the share register the appellants and other group companies thereby reducing their holdings and resulting in the banishment of opposition against the management of the second respondent. It is contended that the learned single judge was in error in relying upon the Division Bench ruling of this court which was given in a different factual background where admittedly in that case, the appellants who were before this court were not qualified minority shareholders and, therefore, it is incorrect on the part of the learned judge to have held that sections 397 and 398 will not apply to listed public limited companies. That question was not decided by this court in the context of proving mismanagement.

Mr. Mohan Parasaran then contended that the original adjournment of consideration of item No. 12 itself was clearly illegal and invalid, in view of the fact that the adjournment of the meeting for consideration of item No. 12 was done without there having been any proposal or seconding of the said proposal that the resolutions for adjournment have not been put to vote. Secondly, the decision to adjourn was taken and implemented by the chairman, who himself was biased and interested in respect of resolution No. 12 and such a decision was taken in the light of the financial institutions withdrawing their support for resolution No. 12.

Mr. Mohan Parasaran contended that in the present case, the record of the company shows that there were serious allegations of mismanagement and oppression which are the subject-matter of proceedings before the Company Law Board and investigation has been ordered into the accounts of the company under section 209A of the Act by the Central Government. As regards use of funds for productive purposes, the implementation of the beer project in the State of Andhra Pradesh is not feasible and cannot be said to be productive as there is complete prohibition with regard to not only consumption but also manufacture of liquor and further in fact a family dispute was pending which was the result of the litigation including the one started by P.D. Kothari in seeking for rectification of the share register which is pending before the Supreme Court.

Mr. Mohan Parasaran then contended that essentially the dispute between the two cousin brothers was the backbone of the litigation and it is not a proxy fight but it is a direct fight between two cousin brothers which was not properly appreciated by the learned judge. It is submitted that the appellants have a strong prima facie case for grant of injunction in respect of the implementation of resolutions Nos. 10, 11 and 12 and the balance of convenience also lies in granting injunction.

In fine, Mr. Mohan Parasaran contended that in so far as resolution No. 10 is concerned, prima facie, the resolution which is stated to have been passed on September 12, 1994, is illegal and cannot be implemented in view of the fact that there was already a diversion of monies for the beer project even without the approval of the shareholders, which is evident from the enquiry, which has been ordered by the Central Government, into the accounts of the company under section 209A of the Companies Act.

It is contended that in so far as resolution No. 11 is concerned, again a prima facie case and balance of convenience lie in granting the injunction and the illegality is apparent in this regard. It is argued that the action of the respondents in bringing in resolution No. 12 is a clear case of mismanagement and is contrary to the decision of the Supreme Court in the case of Needle Industries' [1981] 51 Comp Cas 743. Further, resolution No. 12 is deemed to have lapsed because consideration of the said resolution and the adjournment of the said resolution for subsequent consideration at the meeting held on September 12, 1994, is illegal.

Lastly, it is submitted that the monies which have been collected for different projects in October, 1992, and not implemented have to be kept under a separate bank account and even the funds which have been earmarked for the beer project have to be kept under a separate account which has not been done and they have merely taken the objections that this being a rights issue, they had no objection to keeping the monies in a separate bank account; but, when there are serious acts of mismanagement and allegations of diversions, a duty is cast upon the respondents to keep the monies under a separate account even assuming that section 73(3) of the Companies Act is not attracted.

Our attention was drawn to the entire pleadings and the documents filed by both the parties and also the orders passed by this court and the Supreme Court. Our attention was also drawn to certain passages in Companies Act by A. Ramaiya, particularly with reference to the directors' fiduciary duties and the chairman's power to adjourn the meeting and issue of further capital and propriety in rights issue, and also para 7.04 of Law and Practice of Meetings by Shackleton, seventh edition.

Mr. Anil Diwan, learned senior counsel and Mr. R. Krishnamurthi, learned senior counsel, appearing on behalf of respondents Nos. 1 and 2, respectively, drew our attention to certain passages in the plaint, counter-affidavits and rejoinders. Mr. R. Krishnamurthi invited our attention to the various findings given by the learned single judge with reference to resolutions Nos. 10 to 12 and argued that the learned judge has gone through the entire records and evidence placed before him and held that each and every institution and authority, both governmental and financial institutions, have approved the proposal for the beer project, and has also elaborately dealt with the various contentions of the appellants. He would further submit that the voting on the resolutions is a clear testimony of the fact that 94 per cent, of the shareholders are supporting the respondents and have totally rejected the stand of the appellants and that the shareholders who supported the resolutions include the financial institutions of this country, namely, the Unit Trust of India, Life Insurance Corporation of India Ltd., General Insurance Co. Ltd., ICICI and the subsidiaries of the General Insurance Company, viz., New India Assurance Co. Ltd., Oriental Fire Insurance Co. Ltd., United India Insurance Co. Ltd., and the National Insurance Co. Ltd., who, in the aggregate, hold about 34 per cent, of the voting power. He also denied that resolution No. 12 was brought with an ulterior motive. As regards resolution No. 12, Mr. R. Krishnamurthi contended that the proceedings of the meetings were duly recorded and the copy of the minutes was given to the appellants and they at no time questioned the minutes and, therefore, it is too late for the appellants to raise this point before the appellate court. Concluding his arguments, Mr. R. Krishnamurthi said that the learned single judge has rightly held that the balance of convenience is in favour of the respondents' implementing the shareholders' decision and cannot be against such implementation especially when the appellants have not established as to how their rights would be affected if the decisions are implemented and even if the appellants' rights are alleged to have been affected, in corporate democracy, the appellants have to sail with the majority and cannot dictate terms to the company after the majority approval has been obtained. Therefore, he prayed for the dismissal of all the appeals.

Mr. Anil Diwan, learned senior counsel, while inviting our attention to the relevant passages in the plaint, counter-affidavits and other documents and also the letter of intent given to the first respondent for the beer factory, and the letter of intent issued by the Government of India and the letter to the ICICI by the first respondent dated August 19, 1993, and the letter from the ICICI to the first respondent dated November 22, 1993, in regard to the utilisation of the proceeds of partly convertible debentures submitted that while considering the request of the first respondent for approval for the change in the scope of the proposal and utilisation of the proceeds of partly convertible debentures of Rs. 1,918 lakhs, the ICICI agreed to the proposed changes as indicated in the annexure subject to certain conditions mentioned in their letter dated November 22, 1993. Mr. Anil Diwan also relied on the letter dated February 23, 1994, sent by the second respondent to the Chairman, Securities and Exchange Board of India, Bombay, requesting him to consider and fix a suitable premium taking into consideration the peculiar circumstances of the case mentioned in the said letter.

While answering the argument of Mr. Mohan Parasaran with reference to the letter dated May 1,1995, of the Regional Director of the Department of Company Affairs, learned senior counsel, Mr. Anil Diwan, pointed out that the said letter was not addressed to the first respondent. With regard to the enquiry under section 209A of the Companies Act directed to be instituted by the Central Government in respect of the beer project, learned senior counsel contended that the section 209A inspection is in no way relevant to decide the legality of the resolution. He said that utilisation of funds for the beer project spent from debentures so far has seen the approval of the debenture-holders and the debenture trustees, and the only dispute before this court is the deployment of funds from the share capital.

We have perused the letters and the other correspondence. As a matter of fact, the ICICI, the lead institution had specifically approved the beer project and the deployment of the funds. Therefore, it is contended that the appellants' stand is untenable being one of obstruction in the progress and development of the company, which is desired by a vast majority of shareholders representing 94 per cent, or 87 per cent., as the case may be, and all the debenture-holders, the debenture trustees and the public financial institutions having about 34 per cent, stake in the company. He also invited our attention to paragraph 39 of the common counter-affidavit dated July 10, 1995.

We have already seen that every institution and authority, both governmental and financial, has approved the proposal for the beer project and the learned single judge has also elaborately dealt with the various contentions' of the appellants. The licence for beer had been suspended by the Central Government for a considerable period and it was available for licensing only in the year 1989. However, there was no letter of intent with the company at the time when the partly convertible debentures issue was made by the company. The matter was pending consideration by the Ministry of Industry. The company could not have any intention of manufacturing beer without a letter of intent. Since the Controller of Capital Issues insisted upon appraisal of the project covered under the letter of offer, the ICICI, one of the premier financial institutions of the country and who are the company's lead institution, had appraised the projects covered under the letter of offer and the company had also indicated this fact in their application to the Controller of Capital Issues. Only based on the statement, consent was accorded. When the proposal for the beer project came through, the company sought the permission of the shareholders for re-deployment of a part of the funds raised through the letter of offer for the beer project and 94 per cent, of the shareholders voted in favour of the resolution.

While answering the contention of Mr. Mohan Parasaran that there has been diversion of funds for the beer project without the approval of the shareholders, Mr. Anil Diwan contended that the said contention is totally false. According to him, all monies spent for the beer project have been out of the company's own funds and debentures after obtaining the consent of the debenture-holders, and all the facts and materials relating to the beer project were furnished before the learned single judge. In fact, some of the representatives of the appellants have also spoken in the general meeting against resolution No. 10. Despite this, the resolution was passed with 94 per cent, of the votes polled. Therefore, as rightly pointed out by learned senior counsel for the respondents, the arguments of learned counsel for the appellants regarding the implementation of the beer project are totally irrelevant. In fact, it is stated in paragraph 7 of the common counter-affidavit filed on behalf of the respondents dated July 31, 1995, as to how the said resolution was passed by the shareholders in regard to the implementation of the beer project as well as the implementation and approval of the shareholders accorded for resolution No. 10, which is already in progress.

As already seen, resolution No. 10 of the notice dated August 5, 1994, accords the consent of the company for change in the purpose of utilisation of the proceeds from the issue of partly convertible debentures for certain projects, instead of as originally proposed in the letter of offer dated October 15, 1992. One of such projects for which change in the purpose of utilisation of the proceeds has been consented to overwhelmingly by the shareholders is the brewery project, for which a sum of Rs. 12.16 crores has been earmarked in the said resolution. The resolution was placed before the shareholders and the approval of the shareholders was sought for utilising a sum of Rs. 12.16 crores out of Rs. 18.28 crores, being the funds contributed by them by subscription to partly convertible debentures issued by the company in October, 1992, for the beer project as against certain other projects originally envisaged in October, 1992, by the company. The board of directors of the company, after receiving the letter of intent for the beer project in April, 1993, decided to utilise the partly convertible debentures funds for the manufacture of beer instead of spending the same for the projects for which the partly convertible debentures funds were raised. Accordingly, a letter dated August 19, 1993.was addressed to ICICI, which is the lead institution and also the debenture trustee, in terms of the loan arrangement, seeking its concurrence for change in the utilisation of funds by revising the earlier projects as follows:

(a) Deferring the implementation of 10,080 spindle mills;

(b) Implementation of granite tiles project;

(c) Implementation of brewery project in Andhra Pradesh.

We have already noticed the letter addressed to ICICI. The board of directors have informed ICICI of the reasons for undergoing changes in the priorities of implementation of the projects originally envisaged in the letter of offer. The company has also informed ICICI of the conditions imposed in the letter of intent dated December 15, 1992, which include non-availing of loans from financial institutions and collecting 20 per cent, of the project cost of brewery, viz., Rs. 450 lakhs, from non-resident Indians, in foreign exchange. It is also not in dispute that the project originally envisaged had to undergo a change in the opinion of the board of directors of the company in view of the developments subsequent to' the issue of letter of offer, which developments have been gone into by the lead institution, viz., ICICI, before according its approval to the company for the revised utilisation of funds. We have already seen that the change in the utilisation of funds as envisaged in resolution No. 10 has been approved by the lead institution, debenture holders, trustee of debenture holders and the shareholders of the company. As rightly pointed out by Mr. Anil Diwan, it is the duty and responsibility of the company to implement the said resolution in the interests of those who had voted for it and in the interests of the company as well. In our view, the appellants have no legal right to stand in the way of implementation of resolution No. 10.

In fact, the implementation of the project commenced immediately after the letter of intent was received by the company in April, 1993, and as per the records placed before us, the company had incurred a total expenditure of Rs. 15.45 crores up to May 16, 1995, and a sum of Rs. 16.48 crores as on July 24, 1995, and steps had already been taken to implement the beer project and to utilise the funds raised from the debenture holders. Out of the said expenditure of Rs. 16.48 crores as of July 24, 1995, a sum of Rs. 1.34 crores had been contributed from internal accruals of the company and a sum of Rs. 9.97 crores has been borrowed from hire purchase and leasing companies by way of lease finance. A sum of Rs. 5.17 crores has been spent from the proceeds of partly convertible debentures, pursuant to the approval granted by ICICI by its letter dated November 22,1993. Under these circumstances, we are of the view that the implementation of the beer project as well as the implementation of the approval of the shareholders accorded in resolution No. 10, which is already in progress, is, therefore, essential in the circumstances of the case.

Mr. Mohan Parasaran sought directions to keep the monies collected pursuant to the letter of offer dated October 15, 1992, in a separate bank account. We are of the view that such a request is not sustainable either in law or on facts. In fact, the monies collected pursuant to the letter of offer dated October 15, 1992, have been merged with the general funds of the company after the allotment of the partly convertible debentures and as a result, the company's liabilities to its bankers in the cash credit account had decreased and the company is saving about 18.75 per cent, interest on such decrease in cash credit borrowings, and if, as claimed by the appellants, the funds are kept separately in a bank account, it will not fetch any interest more than 11 per cent, and such an action on the part of the company will be detrimental to the interest of the company as well as its shareholders and debenture holders, who had reposed confidence in the management of the company.

Admittedly, the appellants have not contributed a single rupee to the funds of the company by way of subscription to partly convertible debentures pursuant to the letter of offer dated October 15, 1992, and whatever subscriptions they have made pursuant to the said offer are lying with their bankers to their own credit in stock invests yielding interest to the appellants. When the monies of the appellants are not at all with the company, they have no locus standi to expect the company not to utilise the funds contributed by others and not by themselves, especially when those who had contributed had given their approval. Mr. Anil Diwan, learned senior counsel, at the time of hearing, in fact, has offered to the appellants to take back the amounts lying in the form of stock invests with their bankers if they are not inclined to approve the beer project. Mr. Mohan Parasaran, learned counsel for the appellants, has not accepted the said offer. In fact, the appellants have rejected the offer of the respondents, vide their letter dated October 10, 1994.

It is also not in dispute that certain developments took place politically in the State of Andhra Pradesh subsequent to August 5, 1994, and as a result of the change in the political field, in December, 1994, an ordinance was issued prohibiting the consumption of liquor in the State' of Andhra Pradesh. This ordinance was the subject-matter of challenge before the Andhra Pradesh High Court, which finally held that manufacture of liquor was not banned but only consumption of liquor was banned in the State. It is stated that the matter is in appeal before the Supreme Court and in the meanwhile, the Andhra Pradesh Government had recently issued a fresh Ordinance banning even the manufacture of liquor in the State. As rightly pointed out by Mr. Anil Diwan, these developments are beyond the control of the company and the company had to take steps, in the light of these developments, for relocating its beer project in some other State. The company, in fact, took steps to obtain approval from the Maharashtra Government for setting up the beer project in the State of Maharashtra, and from the Central Government for permission to relocate the project. The Government of Maharashtra recommended to the Central Government the proposal of the company to shift the project from Andhra Pradesh to Maharashtra, based on which the Central Government by its Letter No. LI: 560(92)/95-Amendment, dated July 28, 1995, permitted the shifting of the location for setting up the brewery unit from Andhra Pradesh to Maharashtra.

Mr. Anil Diwan, learned senior counsel, submitted that out of the total expenditure of Rs. 16.48 crores incurred by the company on the beer project so far, the expenditure on plant and machinery alone amounts to Rs. 10.85 crores. This plant and machinery can be moved to the new location immediately. This apart, the company had incurred an expenditure of Rs. 80 lakhs on the technical know-how paid to colloborators and Rs. 75 lakhs on pre-operative expenses. The company had also incurred interest and lease rentals amounting to Rs. 2.03 crores on leased items of plant and machinery and has deposited a sum of about Rs. 10 lakhs with various authorities.

Mr. Mohan Parasaran contended that in view of the impossibility of putting up the beer project in the State of Andhra Pradesh, resolutions Nos. 10 and 11 are to be stayed or not given effect to. We are unable to countenance the said request. In our opinion, the said request is most unreasonable and unfair, as the beer project could be put up anywhere in India with the approval of the Central Government and the concerned State Government. This situation had arisen to the company not because of the company's own fault or action but on account of political changes taking place in the country developments consequent to which have to be considered by the company with a view to change its own plans and business activities accordingly. As rightly urged by Mr. Anil Diwan, learned senior counsel, any commercial and business decisions are in the absolute domain of the board of directors of the company and, therefore, the court would not interfere with such commercial decisions. We, therefore, have no hesitation in rejecting the contention of Mr. Mohan Parasaran in regard to resolution No. 10 and upholding the contentions of the respondents for the reasons stated supra.

As regards resolution No. 11, it was argued that the said resolution gives approval to the board of directors of the company to issue, offer and allot, by private placement, not exceeding 9,00,000 equity shares of Rs. 10 each at a premium to be calculated in accordance with the guidelines of the Securities and Exchange Board of India dated August 4, 1994, and such other amendments as may be made thereto in respect of calculation of the premium on the shares and to offer such shares to non-resident Indians/overseas corporate bodies as the board in its absolute discretion may decide. In this connection, our attention was drawn to the letter of the second respondent dated February 23, 1994, addressed to the chairman of the Securities and Exchange Board of India, Bombay, and the reply received from the Securities and Exchange Board of India dated March 7, 1994. The letter dated March 7, 1994, was sent by the Division Chief, Primary Market Department, Securities and Exchange Board of India, to the second respondent. In that letter it was proposed to collect a sum of Rs. 4.50 crores from non-resident Indians and overseas corporate bodies and that the same was proposed to be done through private placements and by way of preferential allotments to identified non-resident Indians and overseas corporate bodies. The Securities and Exchange Board of India replied saying that the second respondent is free to do so and determine the terms thereof including pricing after obtaining the consent of the shareholders under the Companies Act, as also subject to other guidelines relating to the issue of shares to non-resident Indians and overseas corporate bodies.

Resolution No. 11 also further states that the said shares so allotted shall have a lock-in period of five years from the date of allotment and that the number of shares, viz., 9,00,000 equity shares, mentioned in the resolution, have been calculated on the basis of an estimated premium of Rs. 40 per share, and the number of shares will vary based on the calculation of the premium in accordance with the Securities and Exchange Board of India guidelines.

The learned single judge, while considering this aspect of the matter, has observed as follows (at p. 105 supra):

"Learned counsel appearing for the plaintiff would argue that the letters of intent and financial institutions no doubt permit the promoter to issue debenture shares in favour of non-resident Indians, but it should not be against law. When learned counsel contends that the issue of shares could not be against law and yet the first defendant proposed to issue shares in favour of non-resident Indians, it is for the plaintiffs to show how the issue of debentures in favour of non-resident Indians is against law. There is no such evidence placed before the court".

At the time of hearing, it is stated that after the judgment of the learned single judge permitting the implementation of resolution No. 11, the board of directors had issued and allotted 6,60,598 equity shares of Rs. 10 each at a premium of Rs. 58.12 per share to an overseas corporate body and the company had issued the allotment letter to the said allottee on June 20, 1995. A return in Form No. 2 prescribed under the Companies Act in respect of this allotment was filed with the Registrar of Companies, Madras, on June 21, 1995. It is stated that the value of this allotment works out to Rs. 450 lakhs, which is 20 per cent of the original cost of the beer project, viz., Rs. 22.50 crores, which the company had to raise from abroad in foreign exchange as per the terms and conditions of the letter of intent for the beer project issued to the company, which details have been fully gone into by ICICI, the lead institution and the debenture trustee.

It is contended by Mr. Anil Diwan that the issue of preferential shares to non-resident Indians has fetched more foreign exchange to the country. It is not in dispute that the shares have been purchased by non-resident Indians at a very high price of Rs. 68.12 per share when the price of share of the first respondent-company in the secondary market was less than Rs. 40, by which, undisputedly, the company and in turn, its members would be much benefited. The appellants, in our view, have no case in so far as resolution No. 11 is concerned since the said resolution has already been implemented. We also see merit in the contention of learned senior counsel for the respondents and, therefore, we reject the contention of the appellants in this regard.

In reply to the arguments of Mr. Mohan Parasaran on resolution No. 12, Mr. Anil Diwan, learned senior counsel, submitted that the notice empowers the board of directors of the company to issue, offer and allot not exceeding 1,01,04,000 equity shares of Rs. 10 each at a premium to be calculated in accordance with the guidelines of the Securities and Exchange Board of India. The resolution also states that the investment of the promoters group in the said shares shall not exceed a limit of 51 per cent, of the equity capital of the company. It is not disputed that resolution No. 12 was approved overwhelmingly by the shareholders of the company on March 20, 1995, i.e., at the adjourned annual general meeting. After the judgment of the learned single judge delivered on May 16, 1995, the company had issued and allotted an aggregate of 24,74,569 shares of Rs. 10 each at a premium of Rs. 53.27 per share to the second respondent and his group and after this issue and allotment to the promoters group, the total number of shares held by the promoters group in the share capital of the company amounts to 26 per cent. We are, therefore, of the view that the resolution, as passed by the shareholders, was fully implemented and the promoters group today holds 26 per cent, in the equity capital of the company which is well within the norms/guidelines applicable for such investment and issued by the Securities and Exchange Board of India and others.

This apart, the financial institutions holding about 34 per cent, in the capital of the company had specifically approved the said issue and allotment. They had also voted in favour of resolution No. 12 at the adjourned meeting held on March 20, 1995, which shows their faith in the good management of the first respondent/company. The company had complied with the guidelines issued by the financial institutions even though such guidelines are not statutory or mandatory in nature, as they are not issued under any law in force. A return in Form No. 2, prescribed under the Companies Act in respect of this allotment, was filed with the Registrar of Companies on May 16, 1995, under cash receipt No. 5934 issued by the Registrar of Companies. Learned senior counsel appearing for the respondents denied the allegation of the appellants that resolution No. 12 was brought with an ulterior motive. He said that the promoters have been permitted to increase their shareholding up to 51 per cent, and it was in pursuance of this policy, resolution No. 12 was proposed. The very fact that 94 per cent, of the shareholders voted in favour of this resolution at the meeting is sufficient rebuttal of the various allegations of the appellants.

Mr. Mohan Parasaran contended that the original adjournment of the meeting for consideration of item No. 12 itself was clearly illegal and invalid in view of the fact that the adjournment of the meeting for consideration thereof was done without there having been any proposal or seconding of the said proposal and that the resolutions for adjournment have not been put. to vote. In reply to this contention, Mr. Anil Diwan contended that the appellants and associates did demand a poll on certain resolutions but never asked for a poll on the question of adjournment when the matter was put up to the meeting. Having not raised a demand for poll on the question of adjournment, the appellants cannot raise this point of the adjournment not being legal, before this court.

It is contended by Mr. Anil Diwan, learned senior counsel, that the proceedings of the meetings were duly recorded and a copy of the minutes was also given to the appellants and the appellants admittedly at no point of time questioned the minutes. Therefore, as rightly urged by learned senior counsel for the respondents, it is too late in the day for the appellants to raise this point before the appellate court. It is not in dispute that the minutes being authenticated documents under the provisions of the Companies Act, no adverse view is possible. The learned single judge himself has held that the oral submission made by the appellants in this regard has no basis.

In this regard, learned senior counsel for the respondents invited our attention to articles 76 and 78 of the memorandum and articles of association of the first respondent-company, which read as follows:

"76. The chairman, if any, of the board of directors, shall preside as chairman at every general meeting of the company.

78. The chairman may, with the consent of any meeting at which a quorum is present (and shall if so directed by the meeting), adjourn that meeting from time to time and from place to place, but no business shall be transacted at any adjourned meeting other than the business left unfinished at the meeting from which adjournment took place. When a meeting is adjourned for thirty days or more, notice of the adjourned meeting shall be given as nearly as may be as in the case of an original meeting. Save as aforesaid, it shall not be necessary to give any notice of an adjournment or of the business to be transacted at an adjourned meeting".

In fact, on the adjourned meeting held on March 20, 1995, poll was taken and two scrutineers were also appointed. In fact, the second respondent did not preside over that meeting and one Mr. P.G. Daftary presided over the meeting. Our attention was drawn to the minutes of the annual general meeting held on September 12, 1994, at 10.30 a.m. at the Music Academy, Madras. No objection was taken to the second respondent presiding over that meeting. No poll was also demanded. Regarding item No. 12, it is seen from the minutes of the meeting dated September 12, 1994, that the chairman (Pradip D. Koth-ari) informed the members that the financial investment institutions, viz., the Life Insurance Corporation of India, the General Insurance Corporation of India and the Unit Trust of India holding substantial equity shares in the company had, by their letter of UTI No. UT/D01/10-36/3219/93-94, dated March 18, 1994, countersigned by LIC and GIC, permitted the company to make a preferential offer to the promoters to increase their equity stake to 51 per cent. It is also seen from the said minutes that poll was demanded for other items.

The minutes of the adjourned 25th annual general meeting held on March 20, 1995, at 10 a.m. at Music Academy, Madras, is available at page 181 of the typed set volume 3. The chairman of the company Pradip D. Kothari welcomed the members and informed that since he was personally interested in the proposed resolution, he would not chair the meeting and requested the members to elect a chairman for the meeting. Thereupon, Mr. V. Thirupathi, nominee director of the Industrial Credit and Investment Corporation of India, a shareholder of the company, proposed the name of P.G. Daftary, director as chairman for the meeting, which was seconded by Mr. Halasyam, a shareholder. The proposal was put to vote and Mr. P.G. Daftary was elected unanimously to chair the meeting. Thereupon, Pradip D. Kothari vacated the chair and Mr. P.G. Daftary occupied the chair.

In that meeting, Mr. T.V. Padmanabhan, legal adviser of the company, informed the members that the High Court had permitted the company to convene the meeting to consider resolution No. 12 of the notice dated August 5, 1994, and, therefore, the resolution could be considered. The representatives of the Skylab Detergents (P.) Ltd. mentioned that the court had only ordered the meeting to be held on March 20, 1995, and the contents of the resolution were not approved by the court. Further, he also said that there was material change in the resolution already circulated, in that, as per the institutional guidelines, the promoters could subscribe only up to 26 per cent, and not 51 per cent, as per the resolution circulated. He also contended that as there was a material change, the original resolution could not be considered at the adjourned meeting, and a fresh meeting had to be convened for the purpose. He also pointed out that the original proxies lodged for the annual general meeting held on September 12, 1994, would be used for the adjourned meeting. A fresh meeting, in his view, was required to be convened.

The chairman of the meeting, thereupon requested the legal adviser of the company, who was present on invitation, to clarify the points raised by the members. After some discussion, Mr. Janakiram, a shareholder, said that he did not want a poll to be conducted since the resolution could be passed by show of hands as the shareholders had complete confidence in the management. Mr. Pradip D. Kothari, while thanking him for the sentiments expressed, advised that the poll was required to be conducted since in terms of the orders of the High Court, the results should not be declared but had to be submitted to the High Court in a sealed envelope. Thereupon, the chairman appointed two persons as scrutineers of the poll. The chairman asked the company secretary to arrange for distribution of ballot papers and then the scrutineers took charge of the poll. The chairman of the meeting mentioned that since the result of the poll could not be announced at the end of the meeting in view of the court's order, the -meeting would stand terminated as soon as the results of the poll were received by him in a sealed cover from the scrutineers. The chairman declared the polling as closed at 1 p.m. The chairman received a sealed cover from the scrutineers at 9.15 p.m., and informed the members that he would arrange to file the same with the High Court. The meeting thereafter terminated with the vote of thanks to the chair.

In fact, article 79 of the memorandum and articles of association of the first respondent-company provides that a resolution put to the vote of the meeting shall be decided on a. show of hands, unless a poll is demanded in accordance with the provisions of section 179 of the Companies Act. Unless a poll is to be demanded, a declaration by the chairman that a resolution has, on a show of hands, been carried unanimously or by a particular majority or lost and an entry to that effect in the books of the proceedings of the company shall be conclusive evidence of the fact without proof of the number or proportion of the votes recorded in favour of or against that resolution.

The further argument of Mr. Mohan Parasaran in regard to calling for fresh proxies is also baseless for the simple reason that fresh proxies ought to be called for as it is a matter of right to the shareholders to change their respective proxies for the adjourned meetings and for the new shareholders to give their own proxies for the adjourned meeting. It is also stated that in order to enable the shareholders to exercise their rights, the notice of the adjourned meeting was enclosed with the proxy form. We are unable to understand as to how it could be categorised as an unlawful act on the part of the first respondent-company. It is suffice to state that the adjourned meeting shall transact only the business left untouched in the original meeting and no new business could be transacted. In accordance with this principle, resolution No. 12 alone was to be transacted and, therefore, the notice of the meeting was issued with the same wording as that of the previous notice of meeting dated August 5, 1994.

The further argument of Mr. Mohan Parasaran, learned counsel for the appellants, that there is a material change in the resolution as it was proposing for 26 per cent, in the place of 51 per cent, and that it is a new resolution altogether, has no basis. The learned single judge has considered this point also in his order. The original resolution envisages for an increase of promoters stake up to 51 per cent, and the proposal to increase up to 26 per cent, is within the arithmetic figure of 51 per cent, and as such, there is no deviation from the original resolution. Therefore, we are of the view, that the various reasons cited by Mr. Mohan Parasaran to contend that the adjournment was not valid have no basis at all. Further, the fact that the overwhelming majority of the shareholders voted for this resolution also shows that the shareholders were in full agreement with the resolution. The reference to the guidelines issued by the Central Government is not correct and the appellants were not able to produce any such guidelines before this court. As contended by learned senior counsel for the respondents, it is for the shareholders to decide these issues and they have decisively and overwhelmingly approved the resolution. Merely because a shareholder acting as a proxy has alleged mismanagement, it cannot be contended that these resolutions cannot be voted upon by the shareholders.

In regard to the argument of Mr. Mohan Parasaran that investigation had been ordered under the Companies Act by the Central Government, the respondents have specifically denied the same. They also further said that the Central Government has not addressed any letter to the respondents in this regard. According to learned senior counsel for the respondents, it is only an investigation and the Central Government is entitled to investigate into the matter pertaining to any company.

Section 176 of the Companies Act deals with proxies. Articles 88, 89 and 90 of the articles of association of the first respondent-company, which deal with proxies, read as follows:

"88. On a poll, votes may be given either personally or by proxy. A company or other body corporate entitled to vote may vote in accordance with the provisions of section 187 of the Act.

89.(a) The instrument appointing a proxy shall be in writing under the hand of the appointer or of his attorney duly authorised in writing, or if the appointer is a corporation either under the common seal or under the hand of an officer, or attorney so authorised. Any person may act as proxy whether he is a member or not.

(b) A corporate body (whether a company within the meaning of the Act or not) may, if it is a member or a creditor or a debenture holder of the company by the resolution of its board of directors or other governing body, authorise such person as it thinks fit to act as its representative at any meeting of the company or at any meeting of any class of members of the company or at any meeting of any creditors of the company held in pursuance of the Companies Act or any rules made thereunder or in pursuance of the provisions contained in any debenture or trust deed, as the case may be. The person so authorised by resolution as aforesaid shall be entitled to exercise the same rights and powers including the right to vote by proxy on behalf of the body corporate which he represents as he could exercise if he were a member, creditor or holder of debentures of the company.

(c) So long as an authorisation under sub-clause (b) above is in force, the power to appoint a proxy shall be exercised only by the person so appointed as representative.

90. The instrument appointing a proxy and the power of attorney or other authority, if any, under which it is signed or a notarially certified copy of that power or authority shall be deposited at the registered office of the company not less than forty-eight hours before the time for holding the meeting or adjourned meeting at which the person named in the instrument proposed to vote in the case of a poll, not less than twenty- four hours before the time appointed for the taking of the poll and in default, the instrument of proxy shall not be treated as valid".

Therefore, we reject the contention of Mr. Mohan Parasaran in regard to calling for fresh proxies since it is a matter of right given to the shareholders to give their own proxies for the adjourned meeting, as has been held by us in paragraphs supra.

Mr. Mohan Parasaran finally requested this court at least to maintain status quo till the disposal of the suit with regard to resolution No. 12. In reply to the said argument, it was vehemently contended by learned senior counsel appearing for the respondents that the appellants made attempts to convince the other shareholders to vote against the resolution and in spite of such opposition, the shareholders overwhelmingly approved the resolution rejecting the plea of the appellants at the meeting, and having failed in their attempt to defeat the resolution at the meeting, the appellants have now come to this court to oppose the implementation of the said resolution. We are of the view that the appellants having participated in the meeting actively and intensively, it does not lie in their mouth to say that the meetings were illegal. As pointed out by learned senior counsel for the respondents, such allegations against the resolutions and the meetings are only lame excuses to enable the appellants to continue the proxy litigation in courts. The appellants, in our view, have no case at all, leave alone a prima facie case, for the grant of injunction. The learned single judge had appreciated all the materials, placed before him before deciding the issue involved. It is incorrect on the part of the appellants to state that the learned judge has not appreciated the facts placed before him while coming to the conclusion that resolutions Nos. 10 to 12 are implementable. A perusal of the judgment of the learned single judge would go to show that the learned judge has gone through the entire evidence and records placed before him before deciding the issues involved and has held that each and every institution and authority, both governmental and financial institutions, have approved the proposal for the beer project, and has also elaborately dealt with the various contentions of the appellants.

We are also unable to appreciate the contention of Mr. Mohan Parasaran that the implementation of the resolution should be stayed since the proceedings under sections 397 and 398 of the Companies Act are pending before the Company Law Board. We are of the view that the pendency of the proceedings before the Company Law Board cannot be relied on to stall the implementation of the resolutions. The Company Law Board will make appropriate enquiries and decide the petitions on their own merits. In fact, it is brought to our notice that the Company Law Board has refused to stay the consideration of the resolutions by the shareholders.

On a consideration of the entire evidence on record and the arguments of learned counsel appearing on either side, we are of the view, that the adjourned meeting for consideration of resolution No. 12 was valid and proper. This apart, this court alone had permitted the meeting to take place on March 20, 1995, and the appellants had also participated in that meeting and voted against the resolution. It is, therefore, not now open to the appellants to contest the same. Since the resolutions have been passed by the shareholders in an overwhelming majority, it is not for this court to interfere with the decision of the shareholders. In so jar as resolution No. 12 is concerned, the same has been implemented and shares to the extent of 26 per cent, have already been allotted to Pradip D. Kothari and others and thus, the said resolution had been implemented. Therefore, we are of the view, that the present application for injunction to restrain the implementation of resolution No. 12 is liable to be rejected.

The company has already commenced implementation of its projects and is continuing. Substantial sums of money had already been invested in the beer project and it will not be in the company's interest or in public interest not to proceed with the project by diverting part of the funds as approved by resolution No. 10. There is no obligation on the part of the company to keep the money in a separate account and there can never be such an obligation after the listing of partly convertible debentures by stock exchanges. The appellants have not made out any case for the grant of interim orders. In our considered view, the order passed by the learned single judge is correct.

This court, in the decision in Vivek Goenka v. Manoj Sonthalia [1995] 83 Comp Cas 897, 908 rendered by one of us, viz., AR. Lakshmanan J., held as follows :

"It is the duty of this court to recognise the corporate democracy of a company in managing its affairs. It is not for this court to restrict the powers of the board of directors. The board of directors in various resolutions have appointed the sixth defendant as executive director, managing editor and chairman. It will not be open to this court to interdict the functions of the board-managed company. As rightly contended by Mr. P. Chidambaram, the learned senior advocate, it will not be open to this court to interfere with the day-to-day functions, management and administration of a company unless it is established that the decisions taken by the board are ultra vires the Act or the articles of association of the company. At this interlocutory stage this court is concerned only with the prima facie case and balance of convenience as disclosed by the documents produced by both parties. It is for the plaintiff to let in oral evidence at the time of trial and establish his case".

We have considered all the contentions urged by the parties on a prima facie view. It is not necessary for us to deal with each and every contention urged by the parties as most of them relate to the merits of the suit. Both sides cited a number of decisions in support of their respective contentions. We do not think it is necessary for us to refer to all of them as we have decided these appeals on the facts and circumstances of the case. Therefore, we confine ourselves only to one decision of this court which is directly on point. None of the grounds raised and argued by the appellants merit any consideration.

For the foregoing reasons we hold that all the appeals fail and are dismissed. However, there will be no order as to costs.

HIGH COURT

[1994] 2 SCL 271 (DELHI)

HIGH COURT OF DELHI

Prem Seth

v.

National Industrial Corpn. Ltd.

P.K BAHRI, J.

C.A. NO. 562 OF 1994 IN C.P. NO. 51 OF 1991

MAY 17, 1994

Section 81, read with section 434, of the Companies Act, 1956 - Further issue of capital - While winding up petition filed by petitioner-shareholders of respondent-company was at show-cause notice stage in Court, respondent-company sought to issue fresh rights shares worth Rs. 50 lakhs being in dire need of additional funds for working capital resulting from steep increase in cost of raw material - Petitioners filed application seeking to restrain respondent from raising further capital as it would dilute their shareholding -Respondent explained that there was no question of such dilution as rights offer was made in one-to-one ratio of existing shares - Respondent was paying considerable interest on loan already raised to meet working capital needs Whether it could be said that there was any mala fide act on part of respondent in trying to raise funds by rights issue and, hence, application of petitioner was to be upheld - Held, no

FACT

The four petitioners, who were shareholders in the respondent-company, had filed a petition for winding up of the respondent which had not yet been admitted and was at the show-cause stage. Meanwhile, the respondent sought to raise further capital by making a rights issue of equity shares worth Rs. 50 lakhs in order to meet its dire need of working capital resulting from a sharp increase in the cost of raw materials. The petitioners thereupon made an application seeking to restrain the respondent from making the rights issue, contending that the issue was in violation of the provisions of section 81 and that in fact there was no genuine need for raising any capital for which necessity could arise for issuing of fresh right shares as proposed. It was also argued that the holding of the petitioners was sought to be diluted by resorting to issuance of the aforesaid right shares. The respondent explained that there was no question of any dilution of the shareholding of the petitioners inasmuch the shares were being offered for subscription at par by way of rights to the existing ordinary shareholders in the ratio of 1 ordinary share against each ordinary share held by them. The respondent also submitted that it had received huge orders worth Rs. 2 crores and had to buy raw material at a sharply increased price in order to meet the order and that it had already secured loans on which it was paying a considerable amount as interest. The rights issue, according to the respondent, was meant to get funds on which no interest would have to be paid.

HELD

In the instant case, it was quite evident that while issuing the right shares, in case the petitioners exercised their right to obtain the aforesaid right shares, the percentage of their shareholding would not be diluted in any manner. As far as the law was concerned, it was quite evident that the directors of the company act in a fiduciary capacity and if they in their discretion decide to issue shares for purposes of raising funds, the only question for decision would be whether such issuance of the shares was in the interest of the company.

From the material brought on record by the respondent, it was quite evident that the company had to incur huge expenses for purchasing the raw material and that it was already paying a large amount as interest on loans. It was not possible to accept the bald contention of the petitioners that for raising funds for working capital, no company had any legal right to issue shares, and funds for working capital must be raised only by raising loans from banks. Indisputably, raising of funds by issuance of the shares would not involve any payment of interest, while by raising bank loans, the company would have to pay interest at quite a high rate of 21 per cent. Thus, there was no mala fide act on the part of the company in trying to raise funds by issuance of right shares. The application of the petitioner was, therefore, dismissed

CASES REFERRED TO

Nanalal Zaver v. Bombay Life Assurance Co. Ltd. [1950] 20 Comp. Cas. 179 (SC) and Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp. Cas. 743 (SC).

P.C. Khanna and Ms. Moushmi Chopra for the Appellant. Daljlt Singh, M.S. Vinayak and K.C. Dua for the Respondent.

JUDGMENT

Bahri, J. - I have heard arguments for disposing of this application.

2. The prayer made in this application is that the respondents be restrained from issuing 20,05,000 shares.

3. The petitioners, who are four in number and are shareholders of the respondent No. 1 company, have brought a petition under section 397/398 read with section 151 of the Companies Act, 1956 ('the Act') seeking certain reliefs and, in the alternative, have sought winding-up order under section 434 read with section 439 of the Act.

4. Vide (an) elaborate judgment dated 2-2-1993, it was held that the petition under sections 397 and 398 is not maintainable and the matter regarding prayer of winding up was directed to be dealt with separately. The petition for winding up has yet not been admitted and the same is at the show cause stage.

5. The learned counsel for the petitioner/applicant has contended that the respondent No. 1 company has sought to issue fresh right shares in violation of provisions of section 81 of the Act and, secondly, in fact, there is no genuine need for raising any capital for which necessity could arise for issuing of the fresh right shares which would only fetch about Rs. 50 lakhs to the company. It is argued that the holding of the petitioners is sought to be diluted by resorting to issuance of aforesaid right shares.

6. The learned counsel for the respondent, on the other hand, has argued that there is no question of any dilution of the shareholding of the petitioners inasmuch the shares are being offered for subscription at par by way of rights to the existing ordinary shareholders in the ratio of 1 ordinary share against each ordinary share held by them. Admittedly, there are about 19,95,000 shareholders and out of the proposed 20,05,000 shares 19,95,000 shares would be given to the existing shareholders in the ratio of 1 share to ordinary share against each ordinary share held by the shareholder. The remaining 10,000 ordinary shares are to be issued again to the existing shareholder in proportion of additional shares applied by them. So, it is contended on behalf of the company that there is no proposal to dilute the shareholding of any person inasmuch as if the existing shareholders exercise their option to accept the rights shares then their ratio of their existing shareholding would not get diluted in any manner. It is also contended on behalf of the respondent No. 1 company that the necessity for issuing the fresh shares had arisen on account of the fact that the company is in dire need of additional funds for working capital inasmuch as the cost of raw material has substantially increased because of decontrol policy introduced by the Government in respect of molasses. The price of the said raw material has shot up from Rs. 14 per quintal to Rs. 250 per quintal with consequential increase in excise duty and sales tax, which is again 20 per cent each. It is emphasised that now only 1/4th of the quantity required by the respondent company would be available at control rate which is also gone up from Rs. 14 per quintal to Rs. 70 per quintal. It is emphasised that this decontrol has become effective with effect from 1-4-1994, although policy of the decontrol was announced in November 1993, but the Government was liberal enough to allow the control process to remain in force for three months to enable the companies to execute their existing orders. It is emphasised that the company has the requirement of raw material in order to meet the huge order received from the State Government, paramilitary, civil and defence services. That order is to the tune of Rs. 2 crores. It is then contended by the learned counsel for the respondent that earlier, the company had proposed to increase the shareholding by issuing right shares of the value of only Rs. 8 lakhs or so but at that time neither the Government policy had changed with regard to the supply of molasses nor the company had received any such huge order and negotiations for obtaining the aforesaid order took place in early March 1994, and, thereafter, the company thought it fit to issue shares in question in order to make available funds for which no interest is liable to be paid, whereas the company had already secured loans and huge amount of interest every year is being paid, which amount is increasing every year.

7. The learned counsel for the petitioner has made reference to Nanalal Zaver v. Bombay Life Assurance Co. Ltd. [1950] 20 Comp. Cas. 179 (SC), wherein it has been held that it is well settled that in exercising their powers, whether general or special, the directors must always bear in mind that they hold a fiduciary position and must exercise their powers for the benefit of the company and for that alone and that the Court can intervene to prevent the abuse of a power whenever such abuse is held proved, but it equally settled that where directors have a discretion and are bona fide acting in the exercise of it, it is not the habit of the Court to interfere with them. It may be noticed that when the company is in no need of further capital, directors are not entitled to use their power of issuing shares merely for the purpose of maintaining themselves and their friends in management over the affairs of the company, or merely for the purpose of defeating the wishes of the existing majority of shareholders.

8. In this very judgment, it was also laid down by the Supreme Court, while giving interpretation to section 105C of the previous Companies Act, which is pari materia with section 81 of the present Companies Act, that the directors have a discretion in the matter of the increase of the capital when it says 'when the directors decide to increase capital of the company', it means that it is within their absolute discretion to take the decision whether to increase the capital or not. It is also within their discretion to say what limit and to what extent they will increase the capital and it is also for them to decide how many shares and of what value they will issue and once that decision has been taken, only then section 105C comes into operation.

9. It is quite evident that while issuing the right shares, in case the petitioners exercised their right to obtain the aforesaid right share, the percentage of their shareholding would not be diluted in any manner.

10. In Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp. Cas. 743, the Supreme Court has again emphasised at page 816 that it is necessary to clear misunderstanding in regard to the power of directors to issue shares. It is not the law that the power to issue shares can be used only if there is need to raise additional capital. It is true that the power to issue shares is given primarily to enable capital to be raised when it is required for the purpose of the company, but that power is not conditioned by such need.

11. As far as the law is concerned, it is quite evident that the directors of the company act in fiduciary capacity and if they in their discretion decide to issue shares for purposes of raising the funds, the only question for decision is whether the issuance of the shares for the purposes of raising funds is in the interest of the company.

12. The learned counsel for the petitioners had drawn my attention to the annual return and accounts of the company for the year ending 31-3- 1993, copy of which is annexed as Annexure-C filed along with the application, which shows that the company had sales of about (Rs.) 22,28,42,956 in the current years, i.e., up by 14 crores or so from the previous year and the company had about (Rs.) 1,52,70,603 as reserve funds. By merely raising of Rs. 50 lakhs by issuing right shares the company would not be having any material effect for carrying on its business. The learned counsel for the petitioners has argued that no material has been placed by the respondent company before this Court to show as to how much financial expenditure would be for purchasing the raw material of molasses keeping in view the increase in the price of the said raw material. He has also argued that it is not shown by the company as to how much raw material in a year is required by the company and what would be its investment for purchasing the said raw material in a particular year.

13. The aforesaid balance sheet of the company also shows that on molasses and other raw material, the company incurred expenditure of Rs. 2,46,77,888, on previous prices, which was up by about 41 lakhs from the previous year. The company has also placed on record an invoice dated 27-4-1994, showing that the company had made purchases of molasses at the rate of Rs. 250 per quintal and a total value in respect of such purchases is Rs. 1,75,1014. So it is quite evident that the company had now to incur huge expenses for purchasing the said raw material of molasses in this financial year. The said balance sheet of the company also shows that the company is already paying Rs. 77,30,982 as interest which is up by about Rs. 3 lakhs from the previous year. The company has about Rs. 2,37,00,000 cash credit loan and about Rs. 23,76,000 medium term loan and Rs. 24,96,000 as term loan of Rs. 7,08,000 and about Rs. 2,33,000 as cash loan and about Rs. 45 lakhs as loan from sources other than bank.

14. Could it be said that in view of this picture of the company when the company had in its discretion thought it proper to raise Rs. 50 lakhs by issuing right shares, the company had acted in any mala fide manner. It is not possible to accept the bald contention of the learned counsel for the petitioners that for raising the funds for the working capital, no company had any legal right to raise such funds by issuance of shares and funds for working capital must be raised only by raising loans from the banks. It is not disputed before me that raising of funds by issuance of the shares would not involve any payment if interest, while by raising bank loans, the company had to pay interest at quite a high rate of 21 per cent p.a. or so.

15. In view of the above discussion, I find that there is no mala fide act on the part of the company in trying to raise the funds by issuance of right shares in question. The mere fact that the company had earlier tried to raise funds by issuance of right shares in 1993, does not mean that the present decision of the company in issuing the right shares is actuated by any ulterior motives and is not bona fide exercise of the discretion in the interest of the company. I find no merit in this application, which I, hereby, dismissed.

BOMBAY HIGH COURT

[2005] 61 scl 217 (bom.)

HIGH COURT OF BOMBAY

Tony Francis Guineess

v.

Indekka Software (P.) Ltd.

D.G. KARNIK, J.

NOTICE OF MOTION NO. 2825 OF 2004

IN SUIT NO. 2814 OF 2004

FEBRUARY 2, 2005

Section 81 of the Companies Act, 1956 - Share capital - Further issue of - Plaintiff, who resided outside India, filed suit contending that he being a shareholder of defendant company was entitled to be offered new equity shares, which were proposed to be issued in pursuance of resolution of board of directors, but new shares were not offered to him nor was he informed of further issue of shares by defendant-company - Defendants claimed that letter containing offer of shares was sent by ordinary post - Whether where an important communication like offer of additional shares was not sent by company to plaintiff-shareholder by either electronic mail or by courier or by registered post or even under certificate of posting, though all previous communications were sent by electronic mail or by courier, it prima facie raised a serious doubt about that communication - Held, yes - Whether prima facie, defendants had not proved that offer was sent to plaintiff and hence, this was a fit case for grant of an ad interim relief - Held, yes

Case referred to

CDT Financial Services (Mauritius) Ltd. v. BPL Communications Ltd. [2004] 56 SCL 665.

Shyam Mehta, C.K. Bahadha and S. Kasliwal for the Petitioner. Gautam Mehta and S. Srikrishna for the Defendant.

Judgment

1. Heard the learned counsel for the plaintiff and defendant Nos. 1, 2 and 3 who appears on private notice.

2. In view of the decision of the Division Bench of this Court in CDT Financial Services (Mauritius) Ltd. v. BPL Communications Ltd. [2004] 56 SCL 665, the learned counsel for the defendant does not object to the jurisdiction of this Court to entertain and try this suit.

3. After entering into the shareholders agreement, the plaintiff and defendant No. 2 formed the defendant No. 1 company. Article 50 of the Articles of Association prescribes that the Board would take decisions by simple majority with a proviso that certain decisions could be taken only if both the plaintiff and the defendant or their nominees had voted in favour of that resolution. The said article also provides that increase of the share capital of the Company including the issuance of further shares would require consent both of the plaintiff as well as of the defendant expressed in the form of positive votes on the resolution. It is the contention of the plaintiff that a resolution for issuance of a further share capital was passed without his consent and he or his nominee director has not voted in favour of the resolution and, therefore, further issuance of share capital by the plaintiff is contrary to article 50 of the Articles of Association.

4. In the alternative, the plaintiff submits assuming that a resolution for further issuance of a capital has been validly passed, that the resolution has not been followed and shares are issued contrary to the conditions of the resolution. The resolution, a copy of which has been produced on page 148 of the compilation produced by the defendant, resolves that every holder of equity share of the company would be offered two new equity shares for every one equity shares held by him on the date of offer. According to the plaintiff, he being a shareholder was entitled to be offered new equity shares which were proposed to be issued in pursuance of the said resolution but that the new shares were not offered to him. In paragraph No. 32 of the plaint, the plaintiff has pleaded that plaintiff was not informed of the further issue of the share by the defendant No. 1 company and he was not offered the new shares. In paragraph No. 53 of the affidavit in reply, the defendants have denied this and have stated :

“I say that in any event, plaintiff was also informed of the further issue of additional share capital of the defendant No. 1 company.”

The plaintiff resides outside India. The letter containing alleged offer of shares to the plaintiff was not sent to the defendant by registered post or even under a certificate of posting. The learned counsel for the defendants states that the letter was sent by ordinary post. The learned counsel for the plaintiff invites my attention to some previous correspondence and points out that all previous correspondence was sent by electronic mail as well as by courier. Such an important communication as an offer of additional shares has not been sent by either electronic mail or by courier or by registered post or even under certificate of posting. This prima facie raises a serious doubt about the communication. Prima facie, I am satisfied that the defendants have not proved that the offer was sent to the plaintiff. There is prima facie breach of Article 53(3) of the Articles of Association. Hence, this is a fit case for grant of an ad-intrim relief.

5. Accordingly, the defendants are restrained by an injunction from in any manner utilising, using or exercising any rights in respect of or under the new shares issued to the defendant Nos. 2 and 3 or in any manner dealing with the new shares till the disposal of this motion.

6. Motion is made returnable early.

[1969] 39 Comp. Cas. 347 (Raj)

HIGH COURT OF RAJASTHAN

Mahalaxmi Mills Co. Ltd.

v.

State

C.B. Bhargava, J.

S.B. CRIMINAL REVISION NO. 254 OF 1967

May 9, 1968

Kistoormal Singhvi for the petitioner.

G.M. Mehta for the Respondent.

JUDGMENT

This is an application in revision by Mahalaxmi Mills Company Limited, Beawar, its four directors, viz., Pannalal Kothari, Navratanmal Kothari, Kastur Chand Mehta, Amarchand Kothari and Deo Dutt Takiar, Secretary, against the order of the City Magistrate, Jaipur, dated August 27, 1966, by which they, with the exception of Amarchand, were sentenced to a fine of Rs. 200 each for their default in giving notice of increase in share capital to the Registrar as required under section 97(1) and (2) of the Companies Act (hereinafter called the Act) and which is punishable under clause (3) of the said section.

The company was registered under the Indian Companies Act VII of 1913 with authorised capital of Rs. 25,00,000 divided into 25,000 shares of 100 each. According to the articles of association of the company, its capital could be increased in accordance with the regulations of the company and the legislative provisions for the time being in force in this behalf and the increased capital must be divided into shares of rupees hundred or less or more, as the board of directors may deem fit. On 31st October, 1960, the company passed a special resolution making new memorandum and articles of association applicable to the company and the said memorandum and articles of association contained the following clause :

''The capital of the company is Rs. 1,00,00,000 (one crore), to be divided into 1,00,000 (one lakh) shares of Rs. 100 each".

In pursuance of this special resolution, it is alleged by the Registrar of Companies that the share capital was increased from Rs. 25,00,000 to Rs. 1,00,00,000 and it was the statutory obligation of the company and its officers to file with the Registrar a notice of increase of capital in Form No. 6 prescribed under rule 3 of the Companies (Central Government's) General Rules and Forms, 1956, with filing fee of Rs. 5,625 calculated in accordance with clause (3), Schedule X to the Companies Act, 1956, latest by November 15, 1960, i.e., within 15 days from the date of passing the resolution authorising the increase in the share capital of the company. It was also alleged in the complaint that the petitioners had not filed the return in spite of service of notices upon them in that behalf. The counsel for the petitioners, who was appearing on their behalf before the trial court, admitted in his statement that the share capital was increased from 25,00,000 to Rs. 1,00,00,000 and was divided into one lakh shares of Rs. 100 each. He also admitted that no notice as provided in section 97 of the Act was given to the Registrar. It was further stated that after passing of the resolution actual capital was not increased and he had also intimated to the Registrar about the said resolution although it had not been done in the prescribed form along with the prescribed fee. On the basis of the above admission the trial court found the petitioners guilty and sentenced them as stated above. The petitioners preferred an appeal against their conviction in the Court of the Sessions Judge, Jaipur City, but did not put in appearance at the time of hearing and so the learned Sessions Judge, after considering the ground taken in the memo of appeal, rejected it.

In this court learned counsel for the petitioners has contended that the share capital of the company could only be increased in the manner provided in section 94 and unless this is so done it cannot amount to an increase of share capital. In other words, the argument is that, unless the new shares are issued as provided in section 94(1)(a), there is no increase in the share capital within the meaning of section 97 of the Act and, as such, if the petitioners failed to give notice of increase of share capital to the Registrar, they did not commit any offence. It is pointed out that the new shares are issued in the manner provided in section 81 of the Act. It is urged that so far the company has not done anything towards the issuing of shares beyond passing the said resolution on 31st October, 1960.

Before discussing the above contention it is necessary to refer to the provisions of sections 94 and 97 of the Act which are as follows :

"94. Power of limited company to alter its share capital.—(1) A limited company having a share capital, may, if so authorised by its articles, alter the conditions of its memorandum as follows, that is to say, it may—

(a) increase its share capital by such amount as it thinks expedient by issuing new shares ;

(b) consolidate and divide all or any of its share capital into shares of larger amount than its existing shares ;

(c) convert all or any of its fully paid up shares into stock, and reconvert that stock into fully paid up shares of any denomination;

(d) sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the memorandum, so however, that in the sub-division the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share from which the reduced share is derived;

(e) cancel shares which, at the date of the passing of the resolution in that behalf, have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled.

(2) The powers conferred by this section shall be exercised by the company in general meeting and shall not require to be confirmed by the court.

(3) A cancellation of shares in pursuance of this section shall not be deemed to be a reduction of share capital within the meaning of this Act.

97. Notice of increase of share capital or of members.—(1) Where a company having a share capital, whether its shares have or have not been converted into stock, has increased its share capital beyond the authorised capital, and where a company, not being a company limited by shares, has increased the number of its members beyond the registered number, it shall file with the Registrar, notice of the increase of capital or of members within fifteen days after the passing of the resolution authorising the increase; and the Registrar shall record the increase and also make any alterations which may be necessary in the company's memorandum or articles or both.

(2) The notice to be given as aforesaid shall include particulars of the classes of shares affected and the conditions, if any, subject to which the new shares have been or are to be issued.

(3) If default is made in complying with this section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to fifty rupees for every day during which the default continues".

It would also be relevant to refer to Form No. 6 for giving a notice of increase in the share capital in Appendix (A), pursuant to section 97 which is as under :

"No. of Company............

Nominal Capital Rs..........

THE COMPANIES ACT, 1956.

Notice of Increase in Share Capital

Pursuant to section 97

Name of Company Limited/PrivateLimited/

Presented by

To the Registrar of Companies................

...Limited/Private Limited/hereby gives you notice pursuant to section 97 of the Companies Act, 1956, that by (a) resolution of the company dated the day of 19 the share capital of the company has been increased by the addition thereto of the sum of Rs. beyond the present authorised capital of Rs.

Dated the day of 19 .

The additional capital is divided as follows :—

Number of shares Class of shares Nominal amount of each share

The conditions (e.g., voting rights, dividend rights, winding up rights, etc.) subject to which the new shares have been or are to be issued are as follows :—

(if any of the new shares are preference shares, state whether they are redeemable or not).

Signature

Dated the…………………………day of……………………………19. Designation (b)

(a) State whether 'Ordinary', or 'Special'.

(b) State whether Director, Managing Director, Managing Agent, Secretaries and Treasurers, Manager or Secretary".

It would appear from sub-clause (1) of section 97 that a notice of the increase of the share capital is to be given to the Registrar within 15 days after the passing of the resolution authorising the increase. Sub-clause (2) of section 97 also says that the notice shall include particulars of the classes of shares affected and the conditions, if any, subject to which the new shares have been or are to be issued. Form No. 6 also requires the conditions (e.g., voting rights, dividend rights, winding-up rights, etc.) subject to which the new shares have been or are to be issued, to be mentioned in the notice. From clause (2) of section 97 and Form No. 6 it would be obvious that at the time of giving notice it is not necessary that the new shares should have already been issued because sub-clause (2) as well as Form No. 6 clearly contemplate notice even though the new shares have not been issued. Section 94 of the Act corresponds to section 61 of the English Companies, 1948, and it is provided in sub-clause (1)(a) that:

"Section 61.—(1) A company limited by shares or a company limited by guarantee and having a share capital, if so authorised by its articles, may alter the conditions of its memorandum as follows, that is to say, it may—

(a) increase its share capital by new shares of such amount as it thinks expedient".

But under the Act in sub-clause (a) it is provided that it may increase its share capital by such amount as it thinks expedient by issuing new shares.

Nowthe question is as to when can a company be said to have increased its share capital. Whether by actual allotment of shares or registration of the names of the shareholders in the books of the company or by merely creation of new shares, whether they have been offered to the shareholders or not. As would appear from section 81 of the Act that the offer of further shares to the persons who, at the date of the offer, are holders of the equity shares of the company, in proportion, as nearly as circumstances admit, to the capital paid up on those shares at that date is to be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days from the date of the offer which must necessarily precede allotment of shares to the shareholders and tht registration of their names in the register of companies. If for increase of share capital the whole process of offer, allotment and registration of names of the shareholders in the books of the company had to be gone through, it could not have been provided in section 97 that a notice of the increase of the share capital is to be given to the Registrar within 15 days after the passing of the resolution authorising the increase. It would then be not possible to give notice of the increase of capital within 15 days after passing of the resolution authorising the increase. As already stated, sub-clause (2) to section 97 and Form No. 6 show beyond any doubt that a notice is required to be given of the increase of share capital to the Registrar whether the new shares have been or are to be issued. If the interpretation sought to be put by the learned counsel for the petitioners is accepted, it would render the provisions of section 97(1) and (2) nugatory. This is further clear from the fact that under section 75 of the Act a company is also required to file a return with the Registrar of the allotment of its shares. I am, therefore, of the view that increase of share capital within the meaning of section 97(1) takes place by creation of new shares simpliciter and it is not necessary that the new shares should have been offered, allotted or the names of the shareholders be registered in the books of the company. I also derive support for my view from the following observations of Dass J., as he then was, in Nandlal Zaver v. Bombay Life Assurance Co. Ltd. at page 188 :

"It is true that 272 4/5 shares remain in hand. At best although issued they have not been offered to anyone".

So, even though the shares have not been offered or allotted to anyone, they are still "issued" within the meaning of section 94(1)(a) of the Act when they have been created by special resolution of the company and consequently its share capital has been increased and default by the petitioners in giving a notice as required by section 97(1) and (2) is punishable under sub-clause (3) of the said section.

But it is clear from the statement of Babulal (P.W. 1) as also the reply dated 25th August, 1965, given by the company to the Registrar, exhibit D-1, that they had been showing the increase of share capital in all the returns filed by them since 1960 though they had not given it as provided in Form No. 6 and had also not paid the fees. In view of their interpretation of section 94(1)(a), a punishment of nominal fine would meet the ends of justice.

The revision application is partly accepted, conviction of the petitioners maintained, but the fine imposed upon petitioners Nos. 2 to 5 is reduced from Rs. 200 to Rs. 100 each and the fine imposed on petitioner No. 6 is reduced from Rs. 100 to Rs. 50. The sentence of fine imposed on petitioner No. 1 is maintained, and the petitioners are directed to file the return with necessary filing fee within 30 days' time of this order. The order awarding Rs. 200 as costs to the complainant is also maintained. One month's time is allowed to the petitioner to deposit the fine.

KERALA HIGH COURT

[1999] 19 SCL 82 (KER.)

HIGH COURT OF KERALA

Amison Foods Ltd.

v.

Registrar of Companies

K.A. MOHAMED SHAFI, J.

CRL. M.C. NO. 1434/AS 1997-B

SEPTEMBER 18, 1998

Section 97 of the Companies Act, 1956 read with section 482 of the Code of Criminal Procedure, 1898 - Share capital - Conversion of shares into stock - Petitioner company enhanced its authorised share capital from Rs. 7 crores to Rs. 32 crores in AGM held on 29-9-1994 but in AGM held on 23-9-1996 reduced it back to Rs. 7 crores - Petitioner filed Form No. 23 but did not file Form No. 5 or pay prescribed fee - Registrar of Companies filed complaint on 31-3-1997 invoking provisions of section 482 for offence punishable under section 97(3) - Whether petitioners will be absolved from liability to file Form No. 5 alongwith fee, within 30 days of adoption of resolution to increase share capital on ground that share capital was not in fact enhanced ultimately - Held, no - Whether since default contemplated under section 97 being continuing default arising on each day until requirements of provisions are satisfied, complaint filed against petitioners was within time and not barred by limitation - Held, yes - Whether since absolutely no ground was made out by petitioners to quash criminal proceedings launched against them, criminal Miscellaneous case had to be dismissed - Held, yes

FACTS

The petitioner company in its annual general meeting dated 29-9-1994 adopted a special resolution under section 97 to enhance its authorised share capital from Rs. 7 crores to Rs. 32 crores. It filed Form No. 23 before the respondent - Registrar of companies intimating about the said resolution, but did not file the notice in Form No. 5 alongwith prescribed fees within specified 30 days as required by section 97(2) nor did they alter the memorandum and articles of association. In the balance sheets as on 31-3-1995 and 31-3-1996 the authorised share capital of the company was stated as Rs. 32 crores. Subsequently in the annual general meeting dated 23-9-1996 the company adopted another resolution to reduce the authorised share capital to Rs. 7 crores. The respondent being not satisfied with the replies to show-cause notice, filed a criminal complaint on 31-3-1997 before the Addl. CJM against the petitioners for offences punishable under section 97(3). The petitioner contended that since the earlier resolution to enhance the share capital was revoked by the subsequent resolution, there was no violation of 6ection 97(2) punishable under section 97(3). The petitioners also contended that since the share capital was not actually increased, there was no necessity to file Form No. 5. It was further contended that since section 97(3) contemplated single default and not continuing default, limitation ran from the 30th day of adoption of the resolution dated 29-9-1994 to increase the authorised share capital and, therefore, the prosecution launched against the petitioner was barred by time.

HELD

The contention of the petitioner that there was no necessity to file Form No. 5 was not sustainable. If in fact, the petitioners hadadopteda resolution to increase the share capital and immediately within a short time had decided either to rescind that resolution or to reduce the share capitaland intimated that fact to the respondent, there would have been some force in the contention raised by the petitioners. But in view of the fact that the petitioners adopted the resolution to enhance the share capital on 29-9-1994 and after more than two years and mentioning in the Balance sheets ason31-3-1995 and 31-3-1996 that the share capital of the company was Rs. 32 crores, decided to reduce the share capital by the resolution dated 23-9-1996, the contention of the petitioners that since the share capital was not in fact enhanced from Rs. 7 crores to Rs. 32 crores, filing of Form No. 5 notice and payment of the fee amounting to Rs. 7.5 lakhs, causing heavy loss to the company, could not be countenanced, since the petitioners were liable to file notice in Form No. 5 before the Registrar intimating the increase of share capital alongwith the prescribed fee within 30 days after the passing of the resolution increasing authorised share capital. Therefore, the subsequent cancellation of the resolution to increase the share capital or adoption of the resolution to reduce the share capital could not absolve the petitioners from their liability to file Form No. 5 notice alongwith the prescribed fee before the registrar of companies within 30 days of adoption of the resolution to increase the share capital Therefore, the contention raised by the petitioners was of no substance. The petitioners contended that the complaint was barred by limitations.

From the judgment of a Division Bench of the Kerala High Court in the case of Rani Joseph v. Registrar of Companies [1995](1) KLT 14 which followed the decision of the Supreme Court in State of Bihar v. Deokaran AIR 1973 SC 908 and Bhagirath Kanonia v. State of HP AIR 1984 SC1988 it is clear that the default under section 220 is a continuing default and not a single default as contended by the petitioners. Since the provisions of section 97 are also identical to that of the provisions of section 220 the principles laiddown by the Court in the aforesaid decision were applicable to the facts of instant case coming under section 97. Therefore, thedefault contemplated under section 97 being continuing default arising on each day until the requirements of the provisions are satisfied, the above complaint filed by the respondent against the petitioners was within time and not barred by limitation.

The petitioners were bound by the provisions of the Act and the rules framed thereunder while dealing with the affairs of the company. The fact that enforcement of any of the provisions of the Act against the company would be harsh, was not a matter for consideration by the Court in the above petition filed by the petitioners under section 482 to quash the criminal proceedings launched against them for non-compliance of the provisions of the Act. Whether the petitioners were liable for the penalty as contemplated undersection 97(3) or whether there wereany extenuating or mitigating circumstances by which the petitioners could be absolved from the liability, had to be considered by the Magistrate's Court.

Therefore, absolutely no ground was made out by the petitioners to quash the criminal proceedings launched against the petitioners by invoking the provisions of section 482 and hence the Criminal Miscellaneous Case was dismissed.

CASES REFERRED TO

National Cotton Mills v. Asstt. Registrar of Companies [1984] 56 Comp. Cas. 222 (Cal.), Shivalik Ice Factory v. Registrar of Comapnies [1988] 64 Comp. Cas. 113 (Punj. & Har.), K.K. Mehra v. Registrar of Companies [1991] 71 Comp. Cas. 669 (Delhi) and Rani Joseph v. Registrar of Companies [1995] (1) KLT 14 (Ker.).

C.N. Ramachandran Nair and Antony Dominic for the Applicant, C.C. Thomas for the Respondent.

ORDER

1. This Criminal Miscellaneous case is filed by the accused in S.T.No. 80 of 1997 pending before the Addl. Chief Judicial Magistrate's Court (Economic Offences) Ernakulam to quash the complaint filed by the registrar of companies.

2. The respondent - Registrar of companies filed a complaint against the petitioners alleging offence punishable under section 97(3) of the Companies Act, 1956 ('the Act') on the ground that the petitioners herein failed to file Form No. 5 being the notice of increase of authorised share capital within 30 days after the passing of the resolution to increase the capital in terms of section 97(1) with the prescribed fee and additional fee and, therefore, they have committed the offence punishable under section 97(3).

3. The petitioners who are the accused before the Additional Chief Judicial Magistrate's Court (Economic Offences), Ernakulam are the company, its Chairman and managing director and its secretary respectively. Though the 1st petitioner-company was incorporated as a private limited company in the year 1987 it was converted into a public limited company in the year 1992. Though the authorised share capital of the company was initially Rs. 5 crores divided into 5,000 equity shares of Rs. 100 each, subsequently, the authorised share capital of the company was increased to Rs. 7 crores by the resolution adopted on 30-4-1993.

4. In the annual general meeting held on 29-9-1994 of the 1st petitioner a special resolution was adopted resolving to enhance the share capital of Rs. 7 crores to Rs. 32 crores and to make necessary alterations in the articles of association of the company. The resolution was passed under section 97 and the petitioners filed Form No. 23 as required under section 192 of the Act before the respondent, the registrar of companies intimating about the resolution adopted by the company to increase the authorised share capital.

The petitioners did not file the notice in Form No. 5 alongwith the fee prescribed to be paid amounting to Rs. 7,50,000 either within 30 days of the passing of the resolution or subsequently to record the increase and to make necessary alterations in the memorandum and articles of association of the company. Therefore, the respondent sent show-cause notice to the petitioners and dissatisfied with the reply sent by the petitioners, the respondent has filed Annexure D complaint before the Additional Chief Judicial Magistrate's Court (Economic Offences), Ernakulam against the petitioners.

5. The petitioners have contended that though the petitioners had adopted a resolution in the annual general meeting held on 29-9-1994 resolving to enhance the authorised share capital from Rs. 7 crores to Rs. 32 crores, subsequently due to various reasons including financial constraints of the company and general recession in the trade it was decided that the 1st petitioner need not increase its share capital and it was resolved in the 9th annual general meeting held on 23-9-1996 to reduce the share capital of the company to Rs. 7 crores. Therefore, according to the petitioners, the resolution passed on 29-9-1994 was cancelled by the resolution dated 23-9-1996 and a copy of that resolution dated 23-9-1996 was filed before the respondent. Therefore, according to the petitioners, the authorised share capital of the company continued to be Rs. 7 crores as it originally stood. Therefore, according to them, they have not violated the provisions of section 97(3) as alleged by the respondent.

6. Though various contentions are raised by the petitioners in the criminal miscellaneous case when it came up for hearing the counsel for the petitioners mainly urged two contentions. The first contention is that since the petitioners have revoked the earlier resolution to enhance the share capital by the subsequent resolution, there is no violation of section 97(2) punishable under section 97(3). The fact that the petitioners passed resolution dated 29-9-1994 to increase the authorised share capital from Rs. 7 crores to Rs. 32 crores and the petitioners had filed Form No. 23 before the registrar of companies in respect of the resolution to increase the authorised share capital from Rs. 7 crores to Rs. 32 crores is admitted. It is also admitted that in the balance sheets as on 31 -3-1995 and 31-3-1996 the authorised share capital of the company was stated as Rs. 32 crores. The fact that the notice in form No. 5 alongwith the prescribed fee which is liable to be filed before the respondent within 30 days of adopting the resolution dated 29-9-1994 is not filed is also not in dispute. But the contention of the petitioner is that since the share capital was not actually increased from Rs. 7 crores to Rs. 32 crores and the resolution enhancing the share capital was subsequently rescinded by adopting another resolution in the annual general meeting held on 23-9-1996, there was no necessity to file Form No. 5 alongwith the prescribed fee without any purpose and causing huge monetary loss to the company. This contention of the petitioners is not sustainable. Admittedly the resolution to enhance the share capital was adopted in the annual general meeting held on 29-9-1994 and that resolution was cancelled by resolution dated 23-9-1996 by resolving to reduce the authorised share capital from Rs. 32 crores to Rs. 7 crores. If in fact, the petitioners had adopted a resolution to increase the share capital and immediate within a short time had decided either to rescind that resolution or to reduce the share capital and intimated that fact to the respondent, there would have been some force in the contention raised by the petitioners. But in view of the fact that the petitioners adopted the resolution to enhance the share capital on 29-9-1994 and after more than two years and mentioning in the balance sheets as on 31 -3-1995 and 31-3-1996 that the share capital of the company is Rs. 32 crores, decided to reduce the share capital by the resolution dated 23-9-1996, the contention of the petitioners that since the share capital was not in fact enhanced from Rs. 7 crores to Rs. 32 crores, filing of Form No. 5 notice and payment of the fee amounting to Rs. 7.5 lakhs causing heavy loss to the company, cannot be countenanced since the petitioners are liable to file notice in Form No. 5 before the registrar intimating the increase of share capital alongwith the prescribed fee within 30 days after the passing of the resolution increasing authorised share capital. Therefore, the subsequent cancellation of the resolution to increase the share capital or adoption of the resolution to reduce the share capital will not absolve the petitioners from their liability to file Form No. 5 notice alongwith the prescribed fee before the registrar of companies within 30 days of adoption of the resolution to increase the share capital. Therefore, the contention raised by the petitioners is of no substance.

7. The next contention raised by the petitioners is that the complaint is barred by limitation. Section 97(3) imposes a punishment of fine which may extend to Rs. 50 for every day during which the default continued and no imprisonment is provided under the section. The counsel for the petitioners submitted that under section 498 of the Code of Criminal Procedure, 1898 the period of limitation in cases where only punishment of fine is prescribed is six months from the date of occurrence. Therefore, according to the petitioners the above complaint filed by the respondent dated 31-3-1997 alleging offence punishable under section 97(3) is hopelessly barred by limitation. The counsel for the petitioners vehemently argued that section 97(3) contemplates single default and it does not contemplate continuing default and, therefore, limitation runs from the 30th day of the adoption of the resolution dated 29-9-1994 to increase the authorised share capital and, therefore, the prosecution launched against the petitioners is barred by time. In support of this argument, the learned counsel for the petitioners relied upon the decisions of the various High Courts including the decisions in National Cotton Mills v. Assistant Registrar of Companies [1984] 56 Comp. Cas. 222 (Cal.); Shivalik Ice Factory v. Registrar of Companies [1988] 64 Comp. Cas. 113 (Punj. & Har.), and K.K. Mehra v. Registrar of Companies [1991] 71 Comp. Cas. 669.

8. The decisions relied upon by the counsel for the petitioners lay down that the default committed under section 220 in not filing the balance sheet before the registrar. The punishment imposed for the default under section 220(3) is as provided under section 162 of the Act. The punishment provided under section 162(1) and section 97(3) is similar which stipulates a fine extending up to Rs. 50 for every day for which the default continues. Therefore, the counsel for the petitioners argued that the above decisions though rendered considering the provisions of section 220 are applicable to the facts of this case coming within the ambit of section 97.

9. But this argument advanced by the counsel for the petitioners relying upon the aforesaid decisions and other decisions of various High Courts cannot be accepted or followed by this Court since the principles enunciated in those decisions are in conflict with the judgment of this Court in Rani Joseph v. Registrar of Companies [1995] (1) KLT 14 wherein a Division Bench after considering various decisions of various High Courts including the decisions relied upon by the counsel for the petitioners found that those decisions cannot be followed in view of the decisions of the Supreme Court. In para 18 of the judgment the Division Bench observed as follows:

"We have carefully gone through the judgments referred to above. In view of the authoritative pronouncement of the Supreme Court in State of Bihar v. Deokaran AIR 1973 SC 908 and in Bhagirath Kanoria v. State of M.P. AIR 1984 SC 1688, we cannot agree with the view expressed by the High Courts of Calcutta, Karnataka, Delhi and Punjab & Haryana. The only possible conclusion which we can legitimately arrive at is that the offences which are the subject-matter of the complaint for violation of the provisions of sub-section 159 and 220 of the Act are continuing in nature and until and unless the legal requirements contained in the provisions mentioned above are complied with, the Company and the personnel incharge of the Company are liable to be prosecuted and the complaints are not liable to be quashed on the ground of limitation. Fresh period of limitation starts on each day until the requirements of the provisions are satisfied. We can take only this interpretation bearing in mind the social object of the legislation which is intended to be achieved."

10. From the above judgment of the Division Bench of this Court it is clear that the default under section 220 is a continuing default and not a single default as contended by the petitioners. Since the provisions of section 97 are also identical to that of the provisions of section 220 the principles laid down by the Division Bench of this Court in the aforesaid decision are applicable to the facts of this case coming under section 97. Therefore, the default contemplated under section 97 being continuing default arising each day until the requirements of the provisions are satisfied, the above complaint filed by the respondent against the petitioners was within time and not barred by limitation. Therefore, this contention of the petitioners is not sustainable.

11. The counsel for the petitioners submitted that section 94 of the Act deals with increase and reduction of share capital and the 1st petitioner- company has passed resolution to increase the share capital as contemplated under section 94(1)(a) to enhance the share capital on 29-9-1994 and subsequently the company adopted the resolution dated 23-9-1996 to reduce the share capital as per section 94(1)(e). He argued that there is no provision under the Act to rescind or cancel the resolution already passed under section 94(1)(a) enhancing the share capital and section 94(1)(e), only provides for reduction of share capital. Therefore, according to him the subsequent resolution passed by the company reducing the share capital to Rs. 7 crores tantamounts to cancellation of the previous resolution enhancing the share capital and, therefore, it will be very harsh if the company is directed to pay Rs. 7.5 lakhs for nothing as fee provided under the Act for enhancement of share capital from Rs. 7 crores to Rs. 32 crores which never came into existence.

12. The petitioners are bound by the provisions of the Act and the rules framed thereunder while dealing with the affairs of the company. The fact that enforcement of any of the provisions of the Act against the company will be harsh, is not a matter for consideration by this Court in the above petition filed by the petitioners under section 482 of the Code of Criminal Procedure to quash the criminal proceedings launched against them for non-compliance of the provisions of the Act. Whether the petitioners are liable for the penalty as contemplated under section 97(3) or whether there are any extenuating or mitigating circumstances by which the petitioners can be absolved from the liability has to be considered by the Magistrate's Court.

In view of what is stated above, absolutely no ground is made out by the petitioners to quash the criminal proceedings launched against the petitioners by invoking the provisions of section 482 and, hence, the Criminal Miscellaneous case is dismissed.

BOMBAY HIGH COURT

[2003] 42 SCL 115 (Bom.)

HIGH COURT OF BOMBAY

Shaily Engineering Plastics Ltd., In re

R.J. Kochar, J.

Company Petition No. 674 of 2002

In Company Application No. 228 of 2002

November 18, 2002

Section 97, read with section 394, of the Companies Act, 1956 - Share capital - Notice of increase of - Whether it cannot be said that section 97 will not apply when increase in share capital is a consequence of scheme of amalgamation - Held, yes - Whether where as result of amalgamation share capital of transferee-company stands increased, transferee-company has to pass a resolution of Board of directors to increase share capital by mentioning that it is as a result of scheme of amalgamation and has to give a notice to authority so that records can be updated - Held, yes

Facts

The petitioner-company (transferee) in a scheme of amalgamation, took out a summons for direction for convening meetings of shareholders, members and creditors which was dispensed with. The transferor-companies had also taken out a summons for direction in the High Court. All relevant procedures were followed as per directions. The Regional Director recorded that the scheme was not prejudicial to the interest of the creditors and shareholders and also recorded that the transferee-company would apply to the Regional Director for change of name and transfer of registered office. The Regional Director further stated that the transferee-company would file the prescribed Form No. 5 with the Registrar of Companies along with the Central Government for increase of authorised share capital of the transferee-company in terms of section 97. The petitioner-company objected to this procedure. The Regional Director had sought appropriate orders from the Court in this regard.

Held

Section 97 provides for two contingencies, viz., increase in share capital and increase in the number of its members beyond the registered numbers. If both the events occur, the company has to file with the Registrar notice of the increase of capital or of its members after passing of resolution authorising increase. Under this section the Registrar is obliged to record the increase of the share capital or increase in the number of members and to effect alterations in the company/s memorandum or articles or both.

According to Regional Director, in the instant case, as a consequence of the amalgamation scheme, the share capital of the transferee-company would increase and, therefore, it was mandatory under section 97 to send the prescribed notice of the increase of the capital. The transferee-company was required to pass a resolution to that effect and communicate the same within 30 days to the Registrar of the Companies who would modify the records of the transferee-company.

It cannot be said that section 97 will not apply when the increase in the share capital is a consequence of the scheme of amalgamation.

It is true that when two companies get amalgamated, the share capital of the transferor-company is transferred to the transferee-company as a result of which the total authorised share capital of the transferee-company is bound to increase as a result of the scheme of amalgamation. There is absolutely nothing in sections 391 to 394 or thereafter in the chapter which carves out an exception to compliance of section 97.

It nowhere says that if under the scheme, the share capital of the transferee-company increases, it is not necessary to comply with section 97. If any provision of law is not to be complied with, the Legislature always makes it clear by providing for such exception or dispensation of the provisions of law to be complied with. The petitioner had not pointed out any specific provision of law to that effect. Both the provisions have separate field of operation. Section 97 provides for a procedure to be followed in case of an increase in the authorised share capital. It does not carve out an exception to the increase in share capital as a result of scheme of amalgamation. Section 97 includes even that contingency. This section is absolute in its effect that whenever there is increase in share capital or increase in members, the company has to pass a resolution authorising such increase and it has to notify the said increase to the Registrar. The increase in the share capital or increase in the number of members may be for any purpose or may be as a result of the scheme of amalgamation or any other arrangement arrived at between the two companies; section 394(b) no doubt provides for transfer of the entire property of the transferor-company to the transferee-company. It does not make an exception in any respect. Under the said provision, the consequence of the amalgamation is provided for, that the entire property of the transferor-company shall stand transferred to the transferee-company. Section 97 would enter thereafter. After the scheme of amalgamation, the share capital of the transferee-company would increase and, therefore, a separate board resolution is provided for.

Section 97 does not take any objection to the ensuing result of the amalgamation, it merely casts an obligation on the transferee-company to pass a resolution in respect of increase in capital or increase in the number of members and notify the said resolution to the Registrar of Companies to enable him to effect necessary alterations in the records of the department.

One has to give effect to other provisions made by the Legislature. If section 97 is not be complied with, when there is scheme of amalgamation, it would be reduced to redundancy. Such a construction of two provisions is not permissible. In fact, there is absolutely no clash or conflict between the said two provisions. Section 97 is only a procedural part which a company has to comply with, when there is an increase in the share capital or increase in the number of its registered members, regardless of how such increase takes place.

It is not possible to hold that section 97 can be ignored by the transferee-company when its share capital is bound to increase after the scheme of amalgamation. Section 97 is only calling upon the transferee-company to pass a resolution to that effect and give notice to the authority so that the records can be updated.

There is absolutely no doubt that as a result of amalgamation, the share capital of the transferee-company stands increased. That, however, does not mean that the transferee-company is exempted from complying with section 97. The transferee-company has to pass a resolution of the Board of Directors to increase the share capital by mentioning that it is result of the scheme of amalgamation. It has to merely forward this resolution to the Registrar with a request to alter the records.

Thus, the scheme of amalgamation was sanctioned subject to the petitioner-company complying with section 97.

Ms. Chandurkar for the Petitioner. C.J. Joy, D.A. Dube and T.C. Kaushik for Regional Director, Department of Company Affairs, Maharashtra. S.R. Kom, Official Liquidator.

Judgment

1. The petitioner company, being transferee-company, Anmol Trading Company Ltd., seeks sanction of the Scheme of Amalgamation under sections 391 and 394 of the Companies Act, 1956 with the transferor companies. The amalgamation is intended for better rationalisation in respect of manufacture of products and business, the assets and properties of the petitioner company and each of the transferor companies to be put to better use and considerable economy with a view to increase the productivity and profitability of the combined unit to the advantage of the company’s shareholders and the creditors.

2. It appears that the petitioner company took out a summons for direction being Company Application No. 228 of 2002 and by an order dated 19th April, 2002 the convening and holding of the meetings of the shareholders, members and creditors was dispensed with.

3. It further appears that the transferor companies have also taken out a summons for direction in the High Court at Gujarat and orders in respect of the applications filed were passed by that Court.

4. The learned Counsel appearing for the petitioner company has filed affidavit proving service of notice of hearing upon the Regional Director and also affidavit proving publication of notice of the date of hearing of the petition. The petitioner company has also filed affidavit proving service of notice on shareholders. All the three affidavits have been taken on record and marked as Exhibits A, B and C colly. Pursuant to the publication of the company petition, it appears that one Shri N.H. Thakkar addressed a letter to the petitioner company objecting to the scheme of amalgamation and requesting the company to pay off his dues appearing in the books. He had also forwarded a copy of his letter to this Court. It further appears that his misunderstanding was cleared and he addressed another letter dated 13th August, 2002 to the petitioner-company that there was misunderstanding on his part and since it was cleared he had no objection to the scheme.

5. Pursuant to the notice received, the Regional Director, has filed an affidavit dated 11th September, 2002. The Regional Director has averred that after making appropriate enquiries from the concerned Registrar of companies and after examining the report submitted by the concerned Registrar and after examining various points viz., shareholders interest, creditors interest, the Regional Director has recorded that the scheme is not prejudicial to the interest of the creditors and shareholders. He has also recorded that the transferee-company shall apply to the Regional Director for change of name and the Registrar of Companies shall consider the application under the Companies Act, 1956. He has also recorded that the transferee-company shall apply to the Company Law Board having jurisdiction to shift the registered office of the company from the State of Maharashtra to the State of Gujarat. In para 7 of the affidavit, which is the main bone of contention in this matter, the Regional Director has stated that the transferee-company shall file the prescribed Form No. 5 with Registrar of Companies along with Central Government being for increase of authorised share capital of the transferee-company in terms of section 97 of the Companies Act, 1956. Since, the petitioner company has objected to this procedure, the Regional Director has sought appropriate orders in this respect. The said affidavit is taken on record and marked as Exh. “D”.

6. Ms. Chandurkar the learned counsel appearing for the petitioner company has taken serious exception to the requirements prescribed by the Regional Director, that the petitioner should comply with section 97 of the Act. According to her, it was not necessary for the petitioner company to comply with section 97 of the Act as sections 391 to 394 are the self-contained code for the schemes of arrangement, compromise. According to the learned Counsel, the scheme of amalgamation provides for the contingency which is prescribed in section 97 and, therefore, the transferee-company was not obliged to separately comply with the provisions of section 97 of the Act. The learned Counsel has placed reliance on section 349(1)(b) of the Act. As a result and consequence of the scheme of amalgamation, the entire share capital of the transferor companies shall stand transferred to the transferee-company and as such transfer of the entire share capital of transferor company is only a consequence of the scheme of amalgamation, section 97 will not be attracted, says the learned Counsel. The increase in the authorised share capital of the transferee-company is by virtue of the scheme of amalgamation and, therefore, it would not be necessary for the transferee-company to undergo the procedure prescribed for increase in the authorised share capital as it is not independently seeking to increase its authorised share capital, submits the learned Counsel for the petitioner. The share capital of the transferor company get merged with that of the transferee-company as a result of the lawfully permissible scheme of amalgamation of the two companies, submits Ms. Chandurkar. She further contends that having fully complied with the mandatory provisions of sections 391 to 394, there is no legal requirement to once again formally duplicate the work. She also relied upon an unreported judgment of the Andhra Pradesh High Court in Company Petition No. 56 of 2002 between M/s. Godrej Plant Biotech Ltd. and Godrej Aggrovate Limited.

7. Shri Dube, the learned Counsel for the Regional Director submits that requirements of section 97 is an independent condition to be separately satisfied by the transferee-company. The learned Counsel pointed out that the Board of Directors of the transferee-company has to pass a resolution after giving due notice of the increase of the share capital which would ensue as a consequence of the scheme of Amalgamation.

8. To appreciate the controversy, it would be relevant to reproduce section 97 as well as section 394 of the Act.

“Section 97. Notice of increase of share capital or of members.—(1) Where a company having a share capital, whether its shares have or have not been converted into stock, has increased its share capital beyond the authorised capital, and where a company, not being a company limited by shares, has increased the number of its members beyond the registered number, it shall file with the Registrar, notice of the increase of capital or of members within thirty days after the passing of the resolution authorising the increase; and the Registrar shall record the increase and also make any alterations which may be necessary in the company’s memorandum or articles or both.

(2) The notice to be given as aforesaid shall include particulars of the classes of shares affected and the conditions, if any, subject to which the new shares have been or are to be issued.

(3) If default is made in complying with this section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to fifty rupees for every day during which the default continues.”

“Section 394. Provisions for facilitating reconstruction and amalgamation of Companies.—(1) Where an application is made to the Court under section 391 for the sanctioning of a compromise or arrangement proposed between a company and any such persons as are mentioned in that section, and it is shown to the Court :—

(a) that the compromise or arrangement has been proposed for the purposes of, or in connection with, a scheme for the reconstruction of any company or companies, or the amalgamation of any two or more companies; and

(b) that under the scheme the whole or any part of the undertaking, property or liabilities of any company concerned in the scheme (in this section referred to as a ‘transferor company’) is to be transferred to another company (in this section referred to as ‘the transferee-company’);

the Court may, either by the order sanctioning the compromise or arrangement or by a subsequent order, make provision for all or any of the following matters :

(i) the transfer to the transferee-company of the whole or any part of the undertaking, property or liabilities of any transferor-company;

(ii) the allotment or appropriation by the transferee-company of any shares, debentures, policies or other like interests in that company which, under the compromise or arrangement, are to be allotted or appropriated by that company to or for any person;

(iii) the continuation by or against the transferee-company of any legal proceedings pending by or against any transferor-company;

(iv) the dissolution, without winding up, of any transferor company;

(v) the provision to be made for any persons who, within such time and in such manner as the Court directs, dissent from the compromise or arrangement; and

(vi) such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out:

Provided that no compromise or arrangement proposed for the purposes of, or in connection with, a scheme for the amalgamation of a company, which is being wound up, with any other company or companies, shall be sanctioned by the Court unless the Court has received a report from the Company Law Board or the Registrar that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest :

Provided further that no order for the dissolution of any transferor-company under clause (iv) shall be made by the Court unless the Official Liquidator has, on scrutiny of the books and papers of the company, made a report to the Court that affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest.

(2) Where an order under this section provides for the transfer of any property or liabilities, then, by virtue of the order, that property shall be transferred to and vest in, and those liabilities shall be transferred to and become the liabilities of, the transferee-company; and in the case of any property, if the order so directs, freed from any charge which is, by virtue of the compromise or arrangement, to cease to have effect.

(3) Within thirty days after the making of an order under this section, every company in relation to which the order is made shall cause a certified copy thereof to be filed with the Registrar for registration.

If default is made in complying with this sub-section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to fifty rupees.

(4) In this section—

(a) ‘property’ includes property, rights and powers of every description; and ‘liabilities’ includes duties of every description; and

(b) ‘transferee-company’ does not include any company other than a company within the meaning of this Act; but ‘transferor company’ includes any body corporate whether a company within the meaning of this Act or not.”

9. Section 97 provides for two contingencies viz., increase in share capital and increase in the number of its members beyond the registered numbers. If both the events occur, the company has to file with the Registrar, notice of the increase of capital or of its members after passing of resolution authorising increase. Under this section the Registrar is obliged to record the increase of the share capital or increase in the number of members and to effect alterations in the company’s memorandum or articles or both. According to the Regional Director, in the present case, as a consequence of the amalgamation scheme, the share capital of the transferee company would increase and, therefore, it is mandatory under section 97 of the Act to send the prescribed notice of the increase of the capital. The transferee-company is required to pass a resolution to that effect and communicate the same within 30 days to the Registrar of the Companies who shall modify the records of the transferee-company.

10. I fail to understand how it can be said that this section will not apply when the increase in the share capital is a consequence of the scheme of amalgamation. It is true that when two companies get amalgamated, the share capital of the transferor company is transferred to the transferee-company as a result of which the total authorised share capital of the transferee-company is bound to increase as a result of the scheme of amalgamation. There is absolutely nothing in sections 391 to 394 or thereafter in the chapter which carves out an exception to compliance of section 97 of the Act. It nowhere says that if under the scheme, the share capital of the transferee-company increases, it is not necessary to comply with section 97 of the Act. If any provision of law is not to be complied with, the legislature always makes it clear by providing for such exception or dispensation of the provisions of law to be complied with. The learned counsel has not pointed out any specific provision of law to that effect. Both the provisions have separate field of operation. Section 97 provides for a procedure to be followed in case of an increase in the authorised share capital. It does not carve out an exception to the increase in share capital as a result of scheme of amalgamation. Section 97 includes even that contingency. This section is absolute in its effect that whenever there is increase in share capital or increase in members, the company has to pass a resolution authorising such increase and it has to notify the said increase to the Registrar. The increase in the share capital or increase in the number of members may be for any purpose or may be as a result of the scheme of amalgamation or any other arrangement arrived at between the two companies. Section 394(b) no doubt provides for transfer of the entire property of the transferor company to the transferee company. It does not make an exception in any respect. Under the said provision, the consequence of the amalgamation is provided for, that the entire property of the transferor company shall stand transferred to the transferee company. Section 97 would enter thereafter. After the scheme of amalgamation, the share capital of the transferee-company would increase and, therefore, a separate board resolution is provided for. Section 97 does not take any objection to the ensuing result of the amalgamation. It merely casts an obligation on the transferee-company to pass a resolution in respect of increase in capital or increase in the number of members and notify the said resolution to the Registrar of Companies to enable him to effect necessary alterations in the records of the department. We have to give effect to other provisions made by the Legislature. If we are to accept the submissions of Ms. Chandurkar that section 97 need not be complied with, when there is scheme of amalgamation, section 97 would be reduced to redundancy. Such a construction of two provisions is not permissible. In fact, there is absolutely no clash or conflict between the said two provisions. Section 97 is only a procedural part which a company has to comply with, when there is an increase in the share capital or increase in the number of its registered members, regardless of how such increase takes place.

11. It is not possible to hold that section 97 can be ignored by the transferee-company when its share capital is bound to increase after the scheme of amalgamation. Section 97 is only calling upon the transferee-company to pass a resolution to that effect and give notice to the authority so that the records can be updated.

12. I fail to understand how the judgment of the Andhra Pradesh High Court is helpful to the learned counsel in any way. The learned Judge was not at all called upon to interpret section 97 in the light of section 394. From the said judgment, it does not appear that the learned judge was faced with the issue which is raised before me that a transferee-company is not required to comply with section 97 of the Act when there is increase in the share capital as a result of the scheme of amalgamation. In the said case before the learned Judge, it appears that the objection raised by the Central Government was in respect of absence of provision in the memorandum of association to enter into any agreement or arrangement between the company or any contract with any other company etc. The learned Judge found that the memorandum of association of that company did contain such provisions and, therefore, the learned Judge held that the objection of the Central Government was not tenable. The learned Judge while dealing with the objections raised by the official liquidator in that matter in respect of compliance of sections 95 to 97 has not decided that whenever, there is increase in share capital as a result of amalgamation of two companies, section 97 need not be complied with. There is absolutely no doubt that as a result of amalgamation, the share capital of the transferee-company stands increased. That, however, does not mean that the transferee-company is exempted from complying with section 97 of the Act. I do not see any difficulty in the way of the transferee- company to comply with section 97 of the Act. The transferee-company has to pass a resolution of the board of directors to increase the share capital by mentioning that it was a result of the scheme of amalgamation. It has to merely forward this resolution to the Registrar with a request to alter the records.

13. I, therefore, do not find any substance in the contention raised by Ms. Chandrukar that the transferee-company is not required to comply with section 97 of the Act. The Regional Director has not raised any other objection. He has merely cautioned the transferee-company to comply with section 97 of the Act which the petitioner in the circumstances must comply.

14. The scheme of amalgamation is sanctioned subject to the petitioner company complying with section 97 of the Act. The petition is made absolute as above in terms of prayer clauses (a) and (b).

15. Cost of Rs. 2,500 to the Regional Director and Official Liquidator each to be paid by the petitioner within four weeks.

ANDHRA PRADESH HIGH COURT

[2004] 50 SCL 261 (AP)

HIGH COURT OF ANDHRA PRADESH

R.K.S. Motors Private Ltd., In re.

T.Ch. Surya Rao, J.

COMPANY PETITION NOS. 150 to 152 OF 2002

MARCH 28, 2003

Section 397 of the Companies Act, 1956 - Share capital - Notice of increase of - Whether when certified copy of order sanctioning scheme by Court under section 394 is required to be filed before Registrar for purpose of its registration, there is no reason as to why it shall not be treated as notice to Registrar as envisaged under sections 95 and 97 - Held, yes

Facts

The petitioner-companies sought sanction of the scheme of amalgamation which provided that on and from the effective date, all the properties, assets and liabilities of the transferor-companies were to stand vested with the transferee-company but all the employees of the transferor-companies were to be the employees of the transferee-company without any interruption in service on the basis of continuity of service. The meeting of the shareholders and the creditors of the companies were dispensed with by the Court. The publication was effected and no objections were received against the proposed scheme. The Board of Directors of all the companies approved the scheme. However, pursuant to the notice issued to the Registrar, he raised two objections, viz., (i) that the companies should be directed to modify the scheme by making provisions for cancellation of equity investment held by the first transferor-company in the second transferor-company upon amalgamation and (ii) that the transferee-company was to comply with the requirements under sections 95 and 97 for enhancement of authorised capital.

Held

As could be seen from the memoranda and articles of the association of all the companies except the shareholders of the transferee and transferor-companies, none else was interested or effected by the terms of the scheme of arrangement. The creditors of the transferee-company were also not affected by the scheme in any way. All the shareholders had consented to the proposed scheme and for the increase in the share capital of the transferee-company by issuing one share of the value of Rs. 100 of the transferee-company at two shares of the value of Rs. 100 each of the transferor-companies. A perusal of sections 95 and 97 shows that in respect of consolidation of share capital or conversion of shares into stocks, notice has got to be issued to the Registrar by the Companies within 30 days after such consolidation or conversion, in which event the Registrar shall record such notice and make necessary alterations in the memorandum or articles of association. The default entails penal consequences under sub-section (3) of the said section. Similarly, notice in the event of increase of share capital of the members shall be given to the Registrar of Companies within 30 days after passing of the resolution by the Board of Directors authorizing the increase, and upon receiving such notice, the Registrar shall include the particulars and class of shares affected and conditions, if any, subject to which the new shares are to be issued. The default on the part of the company again entails penal consequences under sub-section (3) of section 97. The object of sections 95 and 97 seems to be to keep the Registrar informed about the changes and to incorporate the same in the memorandum or articles of association or both of the respective companies. [Para 9]

The scheme of arrangement or amalgamation if it was sanctioned, the certified copy of the order of the Court was required to be filed before the Registrar within 30 days from the date of the order under sub-section (3) of section 394 of the Act for the purpose of its registration. The object behind such intimation, which is required under law either under section 95 or under section 97 or under section 394(3), appear to be one and the same. Again the default in not filing certified copy of the order of the Court before the Registrar within 30 days entails penal consequences. When the certified copy of the order sanctioning the scheme by the Court is required to be filed before the Registrar for the purpose of its registration, there was no reason as to why it should not be treated as notice to the Registrar as envisaged under sections 95 and 97. Inasmuch as the object being the same, the necessary changes that are required to be made in the concerned register by the Registrar of Companies can be effected after receiving the certified copy of the order of the Court sanctioning the scheme. The sanction of the scheme by the Court has its own effect. It is not a mere act of the parties individually and volitionally. The scheme upon being sanctioned by the Court, becomes operational by virtue of the orders passed by the Court. In other words, by operation of law, such changes would come into effect. Therefore, it has statutory genesis and statutory character, but not mere individual acts of the companies. In that view of the matter, no separate notice informing the Registrar under section 95 or 97 needs to be given, unlike the other cases which do not require the sanctions of the Court, inasmuch as the scheme is required to be sanctioned by the Court and such sanction is required to be registered with the Registrar of Companies by filing the certified copy of the order of the Court. Therefore, there had been no infraction of the provisions of section 95 or section 97, as the case might be, in any manner. [Para 10]

Having regard to the same, the second objection raised by the Registrar of Companies merited no consideration. As regards the first objection as to the cancellation of equity investment, the scheme should be suitably modified by making it conditional by incorporating that objection. [Para 11]

Having regard to the fact that the Board of Directors of the respective companies had passed the necessary resolutions and having regard to the fact that except for the shareholders of the respective companies, none else was interested and all the shareholders had given their consent and the affairs of the companies had not been conducted in any manner which was prejudicial to the interests of the members of the companies or public interest, and as the scheme had taken care of the interest of the employees of the companies, the scheme had to be sanctioned, subject to one condition as raised by the Registrar of Companies. [Para 12]

Case referred to

Telesound India Ltd., In re [1983] 53 Comp. Cas. 926 (Delhi) (para 10).

C. Kodanda Ram for the Petitioner.

Order

1. All the three petitions can be disposed of together conveniently. The petitioner in C.P. No. 150 of 2002 is the transferee company. The petitioners in C.P. Nos. 151 and 152 of 2002 are transferor companies. The above petitions are filed seeking sanction of the scheme of amalgamation under section 394 of the Companies Act, 1956.

2. The transferee company was incorporated on 3-9-1985 with its registered office at Somaliguda, Hyderabad. The authorised capital of the company is Rs. 1,47,50,000 divided into 1,47,500 equity shares of Rs. 100 each. The issued, subscribed and paid-up capital of the company is Rs. 1,35,00,000 divided into 1,35,000 equity shares of Rs. 100 each. The main object of incorporating the company as set out in the Memorandum of Association annexed to the petition is to carry on the business of purchase and sale of mopeds, scooters, three wheelers, motor-cycles, lorries, bicycles and generally all kinds of vehicles of transport.

3. The petitioner in C.P. No. 151 of 2002 namely, the transferor company was incorporated on 19-1-1994 as Private Limited Company with its registered office at Ramkote, Hyderabad.

The authorised capital of the company is Rs. 50,00,000 divided into 50,000 equity shares of Rs. 100 each. The issued, subscribed and paid-up share capital of the company is Rs. 40,00,000 divided into 40,000 equity shares of Rs. 100 each. The main object of incorporating the said company as set out in the Memorandum of Association annexed to the petition, is to carry on business of leasing and hire purchase to acquire, provide on lease or to provide on hire purchase basis all types of industrial and office furniture, plant, equipment, machinery, vehicles, buildings and the real estates.

4. The petitioner in C.P. No. 152 of 2002, namely, the second transferor company was incorporated on 11-2-1991 with its registered office at Ramkote, Hyderabad. The authorised capital of the company is Rs. 25,00,000 divided into 25,000 equity shares of Rs. 100 each. The issued, subscribed and paid-up capital is Rs. 25,00,000 divided into 25,000 equity shares of Rs. 100 each fully paid. The main object of incorporating the company as set out in the Memorandum of Association annexed to the petition, is to carry on business of leasing and hire purchase to acquire, provide on lease or to provide on hire purchase basis all types of industrial and office furniture, plant, equipment, machinery, vehicles, buildings and real estates.

5. The transferee company has nine shareholders whereas each of the transferor companies has seven shareholders. The meetings of the shareholders and the creditors of the companies have been dispensed with in C.A. Nos. 816 and 817 of 2002 by an order dated 10-10-2002 by this Court. In accordance with the provisions contained in section 391 of the Companies Act, the publication has been ordered to be made in newspapers and has been effected accordingly pursuant to the said orders. In response thereto, no objections whatsoever have been received from any corner for the proposed scheme. The Board of Directors of the transferee company and the Board of Directors of the transferor companies have at their respective meetings held on 5-4-2002 approved the scheme of arrangement.

6. The scheme, inter alia, provides that since the businesses of transferee and transferor companies are complementary to each other, the amalgamation of transferor companies with the transferee company will lead to greater consolidation of focus in business. Furthermore, the business operations would be more advantageously, conveniently and economically carried on if the scheme of amalgamation is approved and the market facilities could be utilised to the optimum extent. Furthermore, the operating costs would be reduced and the economies of scale would be leading to long-term competency and business synergy. The scheme further postulates that on and from the effective date, all the properties - assets and liabilities of the transferor companies would stand vested with the transferee company. The scheme further postulates that all the employees of the transferor companies shall be the employees of the transferee company without any interruption in service and on the basis of continuity of service.

7. Pursuant to the notice issued to the Registrar of Companies in accordance with section 394A of the Companies Act, the Registrar of Companies filed common affidavit raising, inter alia, two objections, viz.:

(a) that the transferor company No. 1 and the transferee company shall be directed to modify the scheme suitably by making provisions for cancellation of equity investment held by the transferor company No. 1 in transferor company No. 2 upon amalgamation;

(b) that the transferor companies and the transferee company shall be directed to modify the scheme suitably by deleting the averments made under clause 10 of the scheme, which is against the provisions of the Companies Act, 1956 and further direct the transferee companies to comply with the requirements under sections 95 and 97 of the Companies Act, 1956 for the enhancement of the authorised capital.

8. The Official Liquidator attached to this Court filed a report stating, inter alia, that the affairs of the companies have not been conducted in a manner prejudicial to the interests of the members and to the public interest.

9. As can be seen from the Memoranda and Articles of Association of all the companies, annexed to the petitions, except the shareholders of the transferee and transferor companies, none else is interested or affected by the terms of the scheme of arrangement. The creditors of the transferee company are also not affected by the scheme in any way. All the shareholders have consented to the proposed scheme and for the increase in the share capital of the transferee company by issuing one share of the value of Rs. 100 of the transferee company at two shares of the value of Rs. 100 each of the transferor companies. Having regard to the objections raised by the learned Registrar of Companies, it is appropriate here to consider sections 95 and 97 of the Companies Act. A perusal of both the provisions shows that in respect of consolidation of share capital or conversion of shares into stock, notice has got to be issued to the Registrar by the company within 30 days after such consolidation or conversion, in which event the Registrar shall record such notice and make necessary alterations in the Memorandum or Articles of Association. The default entails penal consequences under sub-section (3) of the said section. Similarly, notice in the event of increase of share capital of the members shall be given to the Registrar of Companies within 30 days after passing of the resolution by the Board of Directors authorising the increase and upon receiving such notice, the Registrar shall include the particulars and class of shares affected and conditions if any subject to which the new shares are to be issued. The default on the part of the company again entails penal consequences under sub-section (3) of section 97 of the Companies Act. The object of sections 95 and 97 of the Companies Act seems to be to keep the Registrar informed about the changes and to incorporate the same in the Memorandum or Articles of Association or both of the respective companies.

10. The present scheme of arrangement or amalgamation if it is sanctioned by this Court, the certified copy of the order of this Court is required to be filed before the Registrar within 30 days from the date of the order under sub-section (3) of section 394 of the Companies Act, for the purpose of its registration. The object behind such intimation, which is required under law either under section 95 or under section 97 or under section 394(3) of the Companies Act, appears to be one and the same. Again the default in not filing certified copy of the order of this Court before the Registrar within 30 days entails penal consequences. Well, when the certified copy of the order sanctioning the scheme by this Court is required to be filed before the Registrar for the purpose of its registration, there is no reason as to why it shall not be treated as notice to the Registrar as envisaged under sections 95 and 97 of the Companies Act. Inasmuch as, as discussed hereinabove, the object being the same, the necessary changes that are required to be made in the concerned Register by the Registrar of Companies can be effected after receiving the certified copy of the order of this Court sanctioning the scheme. The sanction of the scheme by this Court has its own effect. It is not a mere act of the parties individually and volitionally. The scheme upon being sanctioned by this Court, it becomes operational by virtue of the orders passed by this Court. In other words, by operation of law, such changes would come into effect. Therefore, it has statutory genesis and statutory character, but not mere individual acts of the companies. In that view of the matter, no separate notice informing the Registrar under section 95 or 97 of the Companies Act need be given, unlike the other cases which do not require the sanctions of the Court, in my considered view, inasmuch as the scheme is required to be sanctioned by this Court and such sanction is required to be registered with the Registrar of Companies by filing the certified copy of the order of this Court. Therefore, I am of the considered view that there has been no infraction of the provisions of section 95 or section 97, as the case may be, in any manner. I am reinforced in my above view by the judgment of a learned Single Judge of this Court in C.P. Nos. 149 and 150 of 2001 dated 4-1-2002. The learned Single Judge of this Court extracted a passage from the judgment of Delhi High Court in Telesound India Ltd., In re [1983] 53 Comp. Cas. 926 upon which reliance has been placed. The same passage may be profitably extracted hereunder, thus:

“Amalgamation of a company with another or an amalgamation of two companies to form a third is brought about by two parallel schemes of arrangements entered into between one company and its members and the other company and its members and the two separate arrangements bind all the members of the companies and the companies when sanctioned by the Court. Amalgamation is, therefore, an absorption of one company into another or merger of both to form a third, which is not a mere act of the two companies or their members but is brought about by virtue of a statutory instrument and to that extent has statutory genesis and character, and to that extent it is distinguishable from a mere bilateral arrangement to merge or join in a common endeavour, an undertaking or enterprise....” [Page 942]

11. Having regard to the same, the second objection raised by the learned Registrar of Companies merits no consideration. As regards first objection as to the cancellation of equity investment, the scheme shall be suitably modified by making it conditional by incorporating this objection.

12. Having regard to the fact that the Board of Directors of the respective companies have passed the necessary resolutions and having regard to the fact that except the shareholders of the respective companies, none else is interested and all the shareholders have given their consent and the affairs of the companies have not been conducted in any manner which is prejudicial to the interests of the members of the companies or public interest, and as the scheme has taken care of the interest of the employees of the companies, I am of the considered view, that the scheme shall have to be sanctioned, subject to one condition as raised by the learned Registrar of Companies in his common affidavit under clause 4(a).

13. The company petitions are ordered accordingly, Certified copy of this order shall be filed within 30 days from the date of its receipt, for its registration. The order of this Court shall be drafted as per Form No. 42 with necessary modifications as indicated hereinabove in the scheme.

[1952] 22 COMP. CAS. 299 (MAD.)

HIGH COURT OF MADRAS

Srivilliputtur Permanent Fund Ltd., In re.

KRISHNASWAMI NAIDUT, J.

O.P. NO. 75 OF 1951

SEPTEMBER 4, 1951

 N. Rajagopala Ayyangar and K.S. Tirumalai, for the Petitioner.

C.S. Sundararaja Ayyangar, for the Respondents.

JUDGMENT

Krishnaswami Naidu, J.—This is a petition on behalf of the Srivilliputtur Permanent Fund Ltd. under Section 12 of the Indian Companies Act for confirmation of the special resolutions Nos. 1 and 2 altering the memorandum of association. The capital of the company was originally Rs. 1,09,956 divided into 1,309 shares of Rs. 84 each to be paid in monthly instalments of one rupee and this was subsequently raised to Rs. 21,00,000 divided into 25,000 shares. Under the rules of the company, the shareholders who subscribe regularly at Re. 1 per month for 84 months should be paid a sum of Rs. 100, the difference between Rs. 84 and Rs. 100 representing the interest on the deposits of Re. 1 which they pay every month towards the share capital. This is what is generally termed as recurring deposits in Nidhis and funds where a subscriber who subscribes one rupee a month for 84 months would be entitled to receive from the company a sum of Rs. 100. The result is that the share capital so formed is liable to be repaid to the shareholders, whereas under the Indian Companies Act, such shares cannot be repaid on demand since they form the capital of the company. In view of this anomaly and since the Nidhi was registered under the Indian Companies Act, the attention of the company was drawn to this defect in the memorandum of association and they were asked to rectify it by providing for a permanent share capital and the present amendments to the memorandum of association, it is stated, will satisfy the requirements of the Indian Companies Act. There can be no doubt that this system of holding share capital is not in accordance with law and the provisions of the Indian Companies Act. If recurring depositors who are wrongly termed as shareholders after completion of the 84 months demand what they are entitled to and recover Rs. 100 each and if there are no other recurring depositors, there will be no share money with the company to constitute its capital. It has therefore become necessary for this company to alter the capital structure and to provide for a permanent capital.

The present alteration is to substitute in para. 5 of the memorandum the following, viz., "that the share capital of the company was to be 1,00,000 divided into 1,00,000 shares of rupee one each". The second resolution is that the Fund may increase or reduce its share capital in such modes as they may be deemed necessary from time to time. By reason of the aforesaid alterations the company can now be assured of a share capital of Rs. 1,00,000 which would not be repayable to the depositors as is now the case. This is one of the defects, as pointed out by Coutts Trotter, C.J., in The Madras Native Permanent Fund Ltd. v. Natesa Sastri that arise when these funds are turned into limited companies, because their articles are usually drawn without regard either to the provisions of the memorandum or to the general law embodied in the Companies Act. It is to rectify this defect that the company has called for a meeting and passed the resolutions altering the memorandum of association.

The respondents are husband and wife and they claim to be members of the company. They oppose the application on two grounds; firstly that the extraordinary meeting has not been properly called for and no notices of the meeting as required have been served on the members, that the respondents had no notice and that therefore the resolutions passed at such a meeting are irregular and the same should not be approved. The second objection is that the result of the alteration of the memorandum of association is in fact to reduce the capital and the proper procedure should be to file an application under Section 55 of the Indian Companies Act when notice of the meeting should be given not only to members but also to creditors and depositors and the question of reduction of share capital could be gone into.

As regards the first of the objections, in so far as the first respondent is concerned, his name is stated to have been removed from the list of shareholders and he is therefore not entitled to the notice. There appear to have been certain legal proceedings between himself and the company regarding such removal. With reference to the second respondent, wife of the first respondent, it is stated on affidavit, that a notice has been served on her in accordance with the mode prescribed in the rules of the company. In the reply affidavit of the petitioner, it is stated that the bill collector of the fund was entrusted with the serving of the notices of the meeting and in the return submitted by him he had made an endorsement to the effect that the notice of the meeting had been served upon her by being left in her residence. In the endorsement made by the bill collector, it is found as against the name of the second respondent that the notice was personally handed over to her. What is required under the rules is that copies of notices should be given in the houses occupied by the respective shareholders. So long as the notice is served at the residential house of a member, that would be sufficient compliance of the rules and in this case the bill collector has stated that he handed over the notice to the second respondent personally. No doubt,, there is no acknowledgement. But, there is nothing to disregard the statement in the affidavit and the endorsement of the bill collector that such a notice had been handed over to her and left in the house in which she was residing. I therefore consider that notice of the meeting has been served on the second respondent. There is no other complaint from any of the shareholders excepting from these two persons who are husband and wife, and in view of the strained relations between the first respondent and the company's management, I am unable to attach much weight to the objection raised on behalf of the first respondent that notices of the meeting were not properly served on the members.

The second objection is that the petition is filed under Section 12 of the Indian Companies Act and since the alteration in the memorandum of association involves the reduction of the share capital the procedure laid down in the Indian Companies Act for reduction of the share capital should have been followed, and the company having failed to adopt the procedure so laid down, the resolutions could not be said to have been validly passed and therefore they should not be confirmed by this court. The question therefore is whether this alteration amounts to a reduction of the share capital. It may at first sight appear to be a case of reduction of share capital, since the original share capital of Rs. 21,00,000 divided into 25,000 shares has been now altered into a share capital of Rs. 1.00,000 divided into 1,00,000 shares of Re. 1 each. But one has to consider whether in fact there was really a share capital to the company under the existing system. The share capital of Rs. 21,00,300 divided into 25,000 shares cannot be said to really constitute the share capital, since it is under provision made by the company for receipt of deposits for a member of months—in this case 84 months-and will be payable to the depositors not only the amounts which they paid but the interest added to them amounting to Rs. 100. It may be that if the depositors who contribute Re. 1 each per month for 84 months regularly receive back each Rs. 100 as they are entitled to under the memorandum of association, there will be no share capital left at all unless there are other depositors who are prepared to come and pay Rs. 1 each on the same terms, even which could not be secured to the company as its capital. The present structure of share capital cannot really be called the capital of the company. The company is now adopting a precarious system of having capital which is likely to disappear and automatically reduce itself under circumstances over which the company could have no control. It is to change this and bring into existence a permanent system of share capital that this alteration in the memorandum of association has been decided upon. It is also in pursuance of the several demands and reminders sent by the Registrar of Joint Stock Companies that the Fund should take steps for converting the share capital system, now in vogue in the Nidhi into a permanent share capital system that the company has thought it necessary to have the memorandum of association altered. I therefore consider that it could not in any view be taken to be a case of reduction of capital. It is introducing into the company a system of share capital as required under the company law, in effect, regularising what has been irregularly carried on all this time. In this view, the proper course for the company is to alter the memorandum of association giving notice to its members and applying to the court under Section 12 of the Indian Companies Act. I therefore consider that this alteration is necessary to carry on the business of the company more efficiently and economically and in accordance with the existing law governing the companies. I am satisfied that the alterations of the memorandum of association are necessary in the interests of the company and its creditors and depositors, since there is now 3 permanent share capital assured to those whose interests may be considered to be safe. The resolutions stated in the petition are therefore confirmed. Prayer (a) is ordered. Petitioner will have its taxed costs from out of the estate.

[1972] 42 COMP. CAS. 563 (MAD.)

HIGH COURT OF MADRAS

T. Durairajan

v.

Waterfall Estates Ltd.

VEERASWAMI, C.J.

AND RAGHAVAN, J.

O.S. APPEALS NOS. 9 TO 13 OF 1971

MARCH 3, 1972.

V.K.T. Chart S.V. Subramanian and R. Srinivasan for the Appellants.

R. Narasimhachariar for the Respondents.

JUDGMENT

Veeraswami, C.J.—Original Side Appeal No. 9 of 1971 is from a judgment of Palaniswamy J., allowing certain company petitions under sections 391(2) and 394 of the Companies Act, 1956, to accord sanction to the scheme of amalgamation of Adoni Spinning and Weaving Company Ltd., Balmadies Plantations Ltd., Blue Mountain Estates and Industries Ltd., Kothari Textiles Ltd. and Waterfall Estates Ltd., with Kothari (Madras) Ltd. The requisite majority in respect of each of the amalgamating companies had agreed to the amalgamation. The meetings of shareholders of each of these companies were held under the directions of the court, and the voting position in this regard has been set out in a tabulated form by Palaniswamy J., in paragraph 10 of his judgment which shows the number of persons who voted in person or by proxy for the resolution, the number of votes, the percentage of votes for amalgamation in relation to the total votes polled, and the percentage of voting for the scheme in relation to the paid-up capital. The dissentient shareholders in Waterfall Estates Ltd. opposed the related petition for sanction of the scheme of amalgamation on certain grounds which the learned judge declined to accept as valid. In respect of the other amalgamating companies, no objection to the petitions would appear to have been raised before him. The Regional Director, Company Law Board, in an affidavit filed by him had pointed to the provisions of section 23 of the Monopolies and Restrictive Trade Practices Act, 1969, and to the necessity of notice to the official liquidator under section 394 of the Companies Act for his report as to the affairs of the company. On a consideration of the fact that the authorised capital of the new company will be Rs. 5,00,00,000 the learned judge found that section 23 of the Monopolies and Restrictive Trade Practices Act, 1969, did not stand in the way of the proposed amalgamation and the affidavit of the Regional Director, Company Law Board, did not also bring out any ground to withhold sanction to the scheme. The appeal before us has been filed in respect of Waterfall Estates Ltd. which has reiterated at the hearing the first two objections which did not find favour in the first instance.

In the judgment under appeal, the facts relating to each of the amalgamating companies have been noticed in extenso, and we do not think it necessary to reiterate them. Adoni Spinning and Weaving Company Ltd. and Kothari Textiles were incorporated respectively in 1954 and 1937 for the primary objects of carrying on the business of ginning, spinning, weaving or manufacturing or dealing in cotton or other fibrous substances. The other three amalgamating companies were incorporated in 1943, and their main objects were to acquire, by purchase or otherwise, and to carry on the business of estate owners, cultivators, planters, growers and manufacturers, sellers and dealers in all kinds of coffee, tea, cardamom, etc. Blue Mountain further engaged itself in the business of manufacture, import, export and sale of fertilisers of all kinds, including chemical and natural fertilisers and mixtures thereof. Almost all the amalgamating companies have been sound. The new company, Kothari (Madras) Ltd., has been incorporated in July, 1970, with its registered office at Madras. Its nominal capital is Rs. 5,00,00,000 divided into 5,00,000 redeemable cumulative preference shares of Rs. 10 each of the total face value of Rs. 50,00,000 and 45,00,000 equity shares of Rs. 10 each of the total face value of Rs. 4,50,00,000. The memorandum and articles of association are stated to have been prepared with the privity and approval of the board of directors of each of the amalgamating companies. The memorandum and articles of association of the new company include provision for appointment of its first directors and as to rights and conditions of redemption of the redeemable preference shares to be issued by the new company. Provision has been made in the scheme for the transfer of the entire undertakings, businesses, properties, rights, powers, claims and liabilities of each of the five amalgamating companies and vesting the same in the new company pursuant to section 394 of the Companies Act, 1956. Accordingly all assets including properties of all kinds, all agreements and claims will be transferred to and vest in the new company, subject to all mortgages, debentures, charges, hypothecations and all charges whatsoever affecting the said properties and the new company will discharge ala liabilities of the amalgamating companies including taxes and public charges. The new company will also take over the services of all employees of all grades in the service of the amalgamating companies without interruption and on the same terms and conditions of their existing service and comply in all respects with the requirements of the proviso to section 25-FF of the Industrial Disputes Act. Provision also has been made in the scheme that in consideration of the transfer to the new company, the latter will allot fully paid-up shares in its capital to the existing members of the amalgamating companies in the manner set out in the statement in compliance with section 393 of the Companies Act. The new company will by payment in cash redeem the redeemable preference shares of Waterfall Estates Ltd. by paying capital paid thereon with a premium of 50 paise per share of Rs. 10 as provided in terms of the issue of the said shares, together with all the arrears of dividend up to the date of the scheme and all the preference shares of Balmadies Plantations Ltd., at par with all arrears of dividend up to the date of the scheme, and all the preference shares of Adoni Spinning and Weaving Company Ltd. by payment at par together with all arrears of dividend up to the date of the scheme. Such payment is to be made within two months from the date of the scheme together with interest at the rate of 61% per annum for the said period of two months on the face value of the said shares. Such payment will be made against surrender to the new company of the relative share certificates. On the scheme coming into effect, the amalgamating companies will be dissolved without winding up. The new company is to carry on the business on its own account of the relative amalgamating companies on their cessation. The advantages of amalgamation have been detailed in the said statement made in compliance with section 393 in which disclosures have also been made of the interest of the board of directors of all the companies.

Two of the objections of the dissentient shareholders of Waterfall Estates which we are called upon to consider are, (1) payment of cash involves reduction in the share capital of the amalgamating companies and without following the procedure prescribed under the Act for such reduction, the petitions should not be allowed; and (2) payment of preference shares would be invalid except in the case of winding-up, and that what is asked for in the petitions is but dissolution without winding-up, and so no payment could be made towards preference shares. In our opinion, neither of these objections has substance. The scheme of sections 101 and 102 of the Companies Act as well as rule 85 of the Companies (Court) Rules, 1959, clearly envisages that reduction in capital is in the context of an existing or continuing company. Where, as in this case, preference shares of amalgamating companies are paid out by the new company under a scheme of amalgamation by the terms of which the amalgamating companies go out of existence by a merger of the same in the new company, it will be hardly appropriate to view the process of such payment as involving reduction of capital of the amalgamating company which, by amalgamation, loses its existence and identity. The object of asking for confirmation by court of reduction of capital is to safeguard the interests of the creditors of the company, and other obligations or rights coming into existence in the light, or on the strength of existing capital structure either fully paid up, or realisable at call. The scheme, in the instant case, involves transfer of the entire assets, rights and liabilities of the amalgamating companies to the new company which becomes, when the scheme takes effect, liable to the creditors of the amalgamating companies to the fullest extent. To such a case the procedure for reduction of share capital, as provided for by sections 100,101 and 102 is hardly applicable. Rule 85, in our opinion, does not contemplate a compromise or arrangement in the nature of a scheme of amalgamation, such as we have here. Trevor v. Whitworth is no authority in support of the objection based on reduction of capital. The company in that case having gone into liquidation, a former shareholder made a claim against it for the balance of the price of his shares sold by him to it before the liquidation and not wholly paid for. Though the articles of the company authorised it to purchase its own shares, the House of Lords ruled that the company had no power under the Companies Act to purchase its own shares. In support of that view, Lord Herschell said this:

"In my opinion, it also follows that what is described in the memorandum as the capital cannot be diverted from the objects of the society. It is, of course, liable to be spent or lost in carrying on the business of the company, but no part of it can be returned to a member so as to take away from the fund to which the creditors have a right to look as that out of which they are to be paid".

Lord Watson's observations which warranted the conclusion of the House of Lords is also worth noting:

"One of the main objects contemplated by the legislature, in restricting the power of limited companies to reduce the amount of their capital as set forth in the memorandum, is to protect the interests of the outside public who may become their creditors. In my opinion the effect of these statutory restrictions is to prohibit every transaction between a company and a shareholder, by means of which the money already paid to the company in respect of his shares is returned to him, unless the court has sanctioned the transaction. Paid-up capital may be diminished or lost in the course of the company's trading; that is a result which no legislation can prevent; but persons who deal with, and give credit to a limited company, naturally rely upon the fact that the company is trading with a certain amount of capital already paid, as well as upon the responsibility of its members for the capital remaining at call; and they are entitled to assume that no part of the capital which has been paid into the coffers of the company has been subsequently paid out, except in the legitimate course of its business."

The context of the decision makes it inapplicable to the facts before us. It is not every extinguishment of shares, as we are inclined to think, that is reduction in capital, unless the company continues to exist. Where by the process of arrangement the company itself is dissolved without winding up, it is hardly a case of reduction in capital as contemplated by the provisions of the Companies Act, 1956. If the object of these provisions is to safeguard creditors who may rely on the capital structure and take a step in advancing money, or concluding other transactions in the company, the scheme in the instant case does not, in any way, defeat or affect it, for, the interests of the creditors have been fully safeguarded by the terms of the proposed amalgamation. We do not think that there is anything in In re St. James' Court Estate Ltd. to persuade us to take a different view. The first objection was rightly overruled.

As to the second objection, it may be that payment of preference shares would be valid only in the case of winding-up of the company in accordance with the provisions of the Act. But it does not follow from it that there is a prohibition anywhere in the provisions of the Act from a scheme, as we have before us, providing for payment of preference shares in the course of amalgamation, resulting in the transfer of all the rights and liabilities of the amalgamating companies and the new company undertaking liability to all their creditors. As Palaniswamy J. has rightly observed, the amalgamating companies are proposed to be dissolved without winding-up and, therefore, the provisions relating to winding-up are not attracted. In rejecting this objection as not tenable, we entirely agree with what Palaniswamy J. has stated.

The appeal is dismissed.

As the other appeals stand on no different footing, they too are dismissed. Costs in none of them. In view of the dismissal of the appeals, the stay will stand dissolved.

[1975] 45 Comp Cas 563 (Cal)

HIGH COURT OF CALCUTTA

Mcleod & Co.

v.

S.K. Ganguly

B.C. MITRA AND GHOSE, JJ.

A.F.O. NO. 89 OF 1973 (G.P. NO. 18 OF 1972)

MARCH 12,1974

Nag for the Appellant.

S.B. Mookherjee for the Respondent.

JUDGMENT

B.C. Mitra, J.—The Craig Jute Mills Ltd. (hereinafter referred to as "the company") was incorporated in 1918 under the Indian Companies Act, 1913. The authorised share capital of the company was originally Rs. 60,00,000 divided into 50,000 preference shares of Rs. 100 each and 3,00,000 ordinary shares of Rs. 10 each. Subsequently, in 1928, the ordinary share capital of the company was reduced to Rs. 7,50,000 divided into 3,00,000 ordinary shares of Rs. 2-8-0. The company's capital was further reduced in 1940 by reducing the face value of the preference shares from Rs. 100 each to Rs. 50 each and by further reducing the face value of the ordinary shares from Rs. 2-8-0 to annas 8 each.

The object for which the company was formed was to carry on the business of spinners, weavers, manufacturers, bailers and pressers of jute, jute cuttings, jute rejections, hemp, cotton, etc. After incorporation, the company commenced its business of manufacturing jute goods and also dealt in raw jute and jute goods of various kinds and carried on such business till March,1943. In that year the company's mills were requisite by the Government of India. The company at that time had a mill known as Craig Jute Mills situated at Jagatdal. Barrackpore, in the District of 24 parganas The company was a lessee under different landlords in respect of he ands on which the mill was situated and other adjoining lands of a total area of 72-09 acres of land.

At all material times Mcleod & Co. Ltd. (appellant No. 1) was the managing agent of the company and also the managing agent of another jute company known as Alliance Jute Mills Co. Ltd., which was in occupation of adjoining lands comprising an area of 72-09 acres.

By notifications dated December 19, 1946, and March 23 1947 the Government of India acquired under the Defence of India Rules 1939 the ands of the company together with all its buildings and machinery at the factory at Jagatdal, as also the land and factory of Alliance Jute Mills Co Ltd The Central Government retained some of the machinery and motors belonging to the jute mills, but most of the plant and machinery remained with the company to be removed from the said requisitioned premises.

A sum of Rs. 46,21,447 was paid as compensation for requisition and acquisition of the property of the said two companies. Out of this sum Rs 30,00,000 was made over to the first appellant as the managing agent of the two companies and the balance was made over by the Central Government to the liquidators of the company, who were partners of. Lovelock and Lewes, auditors of the company.

On March 15, 1949, a special resolution was passed at a meeting of the company for voluntary winding up of the company and the partners of Lovelock and Lewes, the auditors of the company, were appointed liquid actors. The first appellant who were the managing agents of the company handed over all assets, books, papers and documents including the compensation money to the liquidators. It is claimed on behalf of the appellants and indeed it is not disputed, that the debenture-holders of the company have been paid in full. The holders of preference shares of the company of Rs. 50 each have been similarly paid in full in 1949. The holders of ordinary shares of the company of annas 8 each have been paid twice the total amount paid for each share being Rs. 13. According to the appellants, there are no other creditors of the company and no other claims against the company are outstanding.

It is claimed on behalf of the Central Government that a sum of about Rs. 1.47 lakhs have been paid in excess. The appellants claim that from the last available accounts of the liquidators for the period from March15, 1968, to March 14, 1969, a sum of Rs. 10,45,384-68 is lying in their bands as the funds of the company as on March 14,1969 It is claimed that on December 11, 1971, when a meeting of the company was held under section 391 of the Companies Act, 1956 (hereinafter referred to as "the Act"), the sum of money held by the liquidators had increased to Rs. 11.18 lakhs. It is in these circumstances that the scheme was prepared between the company and holders of ordinary shares with a view to revive the company. On July 16, 1971, a meeting of the equity shareholders of the company was directed to be convened for the purpose of considering, and if thought fit, approving the scheme of arrangement. After extensions granted by the court the meeting was ultimately held on December11, 1971, and the scheme proposed was approved by the ordinary shareholders of the company. Thereafter, an application for sanction of the scheme by the court was moved and by a judgment and order dated November 21, 1972, this application was dismissed with costs. Aggrieved by this order of dismissal the appellants have preferred this appeal.

Appearing on behalf of the appellants, Mr. Nag contended that there has been an improvement in the situation for the manufacture of jute goods and also for trade in jute and jute goods, and the prospects of business in manufacture of jute and jute goods are very bright. He also contended that the majority of holders of equity shares of the company were desirous of reviving the company and resuming its business according to the memorandum of association of the company. The company, it was contended, was and still is a solvent concern and had substantial assets and even after providing for the claim for excess payment by the Central Government, substantial assets would be left with the company to carry on business. It was argued that under the memorandum and articles of the company the preference shareholders who have received the full amount of their investment have no claim to participate in the surplus assets and have no say in the proposed scheme.

In order to appreciate this contention it is necessary to refer first of all to clause 5 of the memorandum of association which says that preference shares shall confer the right to a fixed cumulative preferential dividend at 7% per annum on the capital for the time being paid up thereon, and shall rank as regards return of capital in priority to the ordinary shares but shall not confer the right to any further participation in profits or assets. The amended clause 4-A of the articles of association of the company also provides that the preference shareholders shall be entitled to a fixed cumulative preferential dividend at Rs. 5% per annum. Sub-clause (c) of article 4-A provides that in a winding-up the preference shareholders shall have the right to payment of capital in priority to the ordinary shares but they will have no right in a winding-up to any further participation in profits or assets.

Relying on the provisions in the memorandum and the articles mentioned above, Mr. Nag contended that the preference shareholders were in no way affected by the scheme proposed between the company and the ordinary shareholders, as they have been paid back their investment and under the memorandum and articles of the company, which is in liquidation they have no further right to the profits and assets. It was also argued that it is the ordinary shareholders alone who have the right to participate in the surplus assets now in the hands of the liquidators, and since they have decided to revive the company on the terms of the proposed scheme, the preference shareholders cannot be allowed to have any say in the matter of this scheme. In support of this contention reliance was placed by counsel for the appellants on Palmer's Company Law, 21st edition, page 293, for the proposition that the provision in the memorandum and articles dealing with the rights of preference shareholders, the accumulation and participation in dividend was, prima facie, exhaustive and no further rights could be implied unless the articles gave further rights to such shareholders. Reliance was also placed on page 704 for the proposition that the scheme must be such as a man of business would reasonably approve and that in exercising its discretion whether or not to sanction a scheme the court treats it as cardinal that its function does not extend to usurping the views of the members or creditors. The court's duty, according to the learned author, is to see that the scheme is a reasonable one and if the court is of opinion that there is such objection that any reasonable man might say that he would not approve it, the court might refuse to confirm the scheme.

Reliance was placed by Mr. Nag on a decision of the House of Lords in Scottish Insurance Corporation Ltd. v. Wilsons and Clyde Coal Co. Ltd. In that case, under a Nationalisation Act, the colliery assets of the company were transferred to the National Coal Board with the result that the company could no longer pursue the objects for which it was incorporated. At an extraordinary general meeting of the company a resolution was passed for reduction of capital by returning the whole of the paid up capital of the preference stock-holders and also for extinguishing such preference shares. The preference stock-holders objected to the reduction on the ground that it deprived them prematurely of a 7% investment and also it deprived them of the right to participate along with the ordinary shareholders in the surplus assets. After referring to the relevant articles, Viscount Maugham observed that it was clear that subject to payment to preference shareholders of their capital and preferential dividends the whole of the reserve lands and other assets of the company were appropriated to the ordinary shareholders and belonged to them to the exclusion of preference shareholders. It was also held that profits which have been appropriated to the ordinary shareholders to the exclusion of preference shareholders must, in the absence of some other considerations, remain property of the former in a winding-up. Reliance was next placed by Mr. Nag on a decision of the English Court of Appeal in In re hie of Thanet Electric Supply Co. Ltd. In that case a company adopted new articles and under these articles the preference shareholders were given the right to a fixed cumulative preferential dividend at £ 6% per annum in priority to ordinary shares and the right to participate pari passu with the ordinary shares in the surplus profits which in respect of any year it shall be determined to distribute after paying the preferential dividend. The company went into voluntary liquidation. The question that was raised was whether the preference shareholders were entitled to the surplus assets and it was held that the onus lay on the preference shareholders to show that they were entitled to participate therein. Reliance was next placed by counsel for the appellants on In re Tea Corporation Ltd. In that case an application for a scheme of arrangement with creditors and contributories of a company in liquidation came up for consideration. At the meeting of the contributories the majority of preference shareholders voted in support of the proposed scheme but the ordinary shareholders did not vote in favour of it. It was held that since the ordinary shareholders had no interest in the asset their dissent was immaterial. Vaughan Williams L.J. observed at page 23 of the report:

".......if you have the assent to the scheme of all those classes who have an interest in the matter, you ought not to consider the votes of those classes who have really no interest at all. It would be very unfortunate if a different view had to be taken, for if there were ordinary shareholders who had really no interest in the company's assets and a scheme had been approved by the creditors and all those who were really interested in the assets, the ordinary shareholders would be able to say that it should not be carried into effect unless some terms were made with them. "

Our attention was also drawn to a passage in Gore-Browne on Companies, new edition, pages 873-874, for the proposition that it was upon the applicant for sanction of the scheme to determine what class of members and creditors are to be summoned to any meeting as constituting a class and also that in sanctioning a scheme the court might ignore the fact that a class had not consented if it be proved that upon an immediate distribution of the assets none would be available for that class.

Mr. S.B. Mookherjee, appearing for the respondents, contended that under the provisions of section 391(2) of the Act the court's jurisdiction to sanction a scheme was conditional upon approval of the scheme by the members of the company of all different classes being obtained in accordance with the statutory prescribed majority. He argued that the jurisdiction of the court under section 391 of the Act could not be invoked unless a meeting of the preference shareholders of the company was called and held, and in the absence of any such meeting the condition precedent could not be said to have been fulfilled and, therefore, the court had no jurisdiction to sanction the scheme. It was submitted that even assuming that the preference shareholders have been repaid money invested by them in the capital of the company, they still continued to be on the register of members of the company and, as such, their existence could not be ignored. It was argued that they have as much right to express their views with regard to the scheme, because even though they were not entitled to participate in the surplus assets in a winding-up they had a right to express their views since the winding-up was proposed to be stayed and the company was sought to be revived. In support of this contention reliance was placed by Mr. Mookherjee on Buckley, 13th edition, for the proposition that if a company's assets are insufficient for payment of debts the paid up shareholders have no interest and if it presents a petition he must allege and prove that there are assets of such amount as that in winding-up he will have a tangible interest. Reliance was also placed by counsel for the respondents on Palmer, 21st edition, page 702, for the proposition that at a meeting of members held for considering a scheme the court must see that the resolutions are passed by the statutory majority in value and number in accordance with the scheme at a meeting duly convened and held and upon this jurisdiction of the court to confirm the scheme depended.

Attractive though the argument of Mr. Mookherjee appears to be, we are not impressed by it. It must be noticed that section 391 of the Act contemplates a scheme between a company and its creditors or any class of them or between a company and its members or any class of them. The scheme which is now before us in this appeal is a scheme between the company and its ordinary shareholders. It does not concern or involve in any way the preference shareholders of the company. The statute expressly authorises the company to frame a scheme with any class of its members and it cannot be. said that in a proposed scheme between a company and one class of its members, a meeting of all the different classes of members must be held and their approval obtained to the scheme. Such a proposition cannot be upheld having regard to the clear language in section 391(1) of the Act. The rights of the preference shareholders of the company, such as they are remain where they are and are not intended to be interfered with. Keeping in mind the provisions of the memorandum of association of the company and its amended articles, it must be held that the preference shareholders have no right to the surplus assets of the company in the hands of the liquidators, and if with these funds the ordinary shareholders of the company wish to revive the company without in any way curbing the rights of preference shareholders, whatever they are, it cannot in our view be said that the court had no jurisdiction to sanction the scheme, merely because a meeting of the preference shareholders was not called and held, and their views on the scheme were not ascertained.

The next contention of counsel for the respondents was that the scheme involved a reduction of share capital, inasmuch as the capital structure of the company would be the investment to be made by holders of ordinary shares only, leaving out the capital that the preference shareholders had contributed. It was argued that the investment of the preference shareholders was paid back to them and the proposed scheme was a scheme between the company and its ordinary shareholders. The scheme as framed, it was submitted, involved a reduction in the share capital of the company. Originally, the authorised share capital of the company was Rs. 60,00,000. In 1928, the ordinary share capital of the company was reduced to Rs. 7,50,000 comprising 3,00,000 ordinary shares each and this was effected by reducing the face value of ordinary shares from Rs. 10 each to Rs. 2-8-0 each. The capital was further reduced in 1940 by reducing the face value of preference shares from Rs. 100 each to Rs. 50 each and by further reducing the face value of ordinary shares of Rs. 2-8-0 each to annas 8 each. As on the date of voluntary liquidation of the company, the authorised capital was Rs. 16,50,000 and the subscribed and paid up capital was Rs. 6,50,000. It is to be remembered that the company had repaid the capital invested both by the preference and the ordinary shareholders. If instead of paying the preference shareholders in full as has been done, the company had paid them only in part or had repaid the capital of only one class of shareholders, namely, the preference shareholders or the ordinary shareholders and the proposal in the scheme was to carry on business with the existing shareholders, there would certainly have been a reduction of share capital of the company. But, as it is, the proposal in the scheme is that the share capital of the company shall be Rs. 9,00,000 divided into 3,00,000 ordinary shares of Rs. 3 each. No shares of the company proposed under the scheme have been subscribed yet, as indeed it cannot be subscribed, until the scheme has been sanctioned by the court and has come into force. Under the scheme the company does not propose to carry on its business with the share capital subscribed by the shareholders but with the surplus now in the hands of the liquidators after repayment of the capital invested by the shareholders. In our view, therefore, it is not a case of reduction of the share capital as contemplated by sections 100, 101 and 102 of the Act. But the existing provisions in the memorandum of association and articles of association of the company do not reflect the proposed capital structure of the company under the scheme. There should, therefore, be appropriate alteration and amendment of the memorandum and articles of association of the company, to indicate the new capital structure of the company proposed in the scheme.

Our attention was drawn by Mr. Mookerjee to a Bench decision of this court in Hindusthan Commercial Bank Ltd. v. Hindusthan General Electric Corporation . In that case it was held that, where the court called upon to sanction a scheme of arrangement found that it was called upon also to confirm a reduction of capital, the court was bound to follow and observe the formalities which it ought to follow and observe in the case of confirmation of reduction of capital. This decision, in our view, is of no assistance to Mr. Mookeriee as there is no reduction of share capital as such of the company. But, what has happened is that the company has repaid the capital of both the preference and ordinary shareholders of the company, and is proposing to carry on business under the scheme with the surplus now in the hands of the liquidators. The amount now in the hands of the liquidators, which would ultimately go to the company if the scheme is sanctioned, is not the share capital of the company but the suplus assets in the hands of the liquidators. If this amount represented part of the share capital subscribed by the shareholders of either class, and the company proposed to carry on business with this share capital, but at the same time declared that the capital structure would be Rs. 9,00,000 only, the question of reduction of share capital would have arisen. But that is not the case here. There is no reduction in the share capital as such and, therefore, the scheme cannot be rejected on the ground that there is a reduction in the share capital of the company without complying with the provisions in the Act for such reduction.

In our view, however, there is good deal of force in the contention of Mr. Mookherjee that provision should be made to secure the claim of the Central Government for excess payment of compensation. It was argued that the Central Government has claimed Rs. 1,47,605 on account of excess payment to the company. Mr. Mookherjee drew our attention to the letter of the liquidators to the company dated November 19, 1969, from which it appeared that the State Government had claimed this amount to have been paid in excess on account of the claim of the other parties in the compensation paid to the company. It seems to us that this claim of the Central Government ought to be sufficiently secured, so that in the event of it being ultimately found that the amount has in fact been paid in excess, there may be no difficulty with regard to the recovery of the sum received in excess by the company.

It was further argued by Mr. Mookherjee that nearly 50% of the ordinary shareholders of the company cannot be traced as they might either be dead or might have migrated to Pakistan. He argued that under clause 5 of the proposed scheme, the company would offer shares to the existing holders of ordinary shares and upon acceptance of the offer necessary share certificates would be issued by the company, but if no intimation was received within a fortnight from the date of despatch of the notice, the directors of the company would be at liberty to deal with the shares as they might in their absolute discretion think fit and proper. Mr. Mookherjee contended that this arbitrary power ought not to be given to the directors of the company as the directors would be put in a position to control the entire surplus assets of nearly Rs. 11,00,000 without issuing 50% of the ordinary shares of the company. In repelling this contention of counsel for the respondents, Mr. Nag drew our attention to paragraph 9(b) of the affidavit affirmed on behalf of the company by Allen Cook Fotheringham on March 29, 1972. It has been proposed on behalf of the company that, if intimation of acceptance is not received as contemplated by clause 5 of the scheme, the balance of the ordinary shares not issued shall not be dealt with by the directors in exercise of the powers conferred by clause 5 of the scheme, without leave and direction of this court. In our view, the directors of the company ought not to be allowed to deal with, the balance of the ordinary shares without an order of court obtained for that purpose.

There is one other matter, however, which must be taken note of in dealing with the scheme. It is obvious that the memorandum of association and the articles of association of the company remain as they were at the time of commencement of the voluntary liquidation. The memorandum and the articles, as they stand, contemplate two classes of shareholders, namely, preference shareholders and ordinary shareholders. But, under the scheme, there will be only one class of shareholders, namely, ordinary shareholders, and the price of ordinary shares will be Rs. 3 for each share. It is obvious that both the memorandum of association and the articles of association must be altered so as to correctly reflect the capital structure of the company under the scheme. In our view, therefore, steps must be taken by the company to alter its memorandum of association and amend the articles of association to correctly reflect the capital structure of the company under the scheme.

The scheme proposed by the company, therefore, ought to be and is accordingly sanctioned subject to the following conditions :

(1) A sum of Rs. 1,48,000 to be deposited by the company in a fixed deposit account for a term of 5 years with the State Bank of India. Upon adjudication of the claim of the Government of India on account of excess payment made in -respect of compensation money paid to the company, such claim should Le satisfied out of the amount then lying in the fixed deposit account.

(2) The residue of the ordinary shares, after allotment of shares to such of the ordinary shareholders as apply for the same, should not be issued or dealt with by the directors of the company, without obtaining an order of court for that purpose, and upon such terms as the court may impose.

(3) The memorandum of association and the articles of association of the company should be altered and amended, in accordance with the provisions in the Companies Act, 1956, so as to correctly reflect the capital structure of the company under the scheme.

Subject to the conditions mentioned above, the scheme proposed by the company is sanctioned. There will also be an order for stay of winding up of the company and an order directing the respondents to hand over all books, papers, documents and assets including the bank balances and fixed deposits of the company, to its directors and to execute necessary letter of authority in favour of the directors of the company.

In the result, the appeal is allowed. The judgment and order under appeal are set aside. Each party to pay its own costs.

Ghose J.—I agree.

Appeal allowed.

[1997] 88 COMP. CAS. 619 (AP)

HIGH COURT OF ANDHRA PRADESH

Sumitra Pharmaceuticals & Chemicals Ltd., In re

S. DASARADHA RANA REDDY J.

COMPANY PETITION NO. 85 OF 1995

JUNE 14, 1996

S. Ravi for the Petitioner.

P. Raviprasad for the official liquidator.

P. Innayya Reddy for the Central Government.

JUDGMENT

S. Dasaradha Rama Reddy J. — This is a petition filed by Sumitra Pharmaceuticals Limited, Hyderabad, for sanction of this court to a scheme whereby the entire bulk drug division of the petitioner company will be transferred and merged with Nicholas Piramal India Limited (for short "NPIL") in accordance with the scheme of arrangement approved by the members of the company at its meeting held on December 15, 1995, pursuant to the direction of this court in C.A. No. 203 of 1995. According to the petitioner, the petitioner company was incorporated on November 30, 1988, under the Companies Act. The authorised capital is Rs. 35 crores consisting of 3.2 crores equity shares of Rs. 10 each and the issued and subscribed capital is Rs. 24,53,82,000 while the fully paid-up capital is Rs. 19,53,82,000 and partly paid-up capital is Rs. 1,25,00,000. The main objects of the company are to carry on the business of manufacture, buy, sell, import, export and generally deal in all types of chemicals, pharmaceuticals, drugs and intermediaries, dyestuffs and surgical and medical equipment. NPIL is a company incorporated on April 26, 1947. Originally the company was incorporated under the name of Indian Schering Limited. Later its name was changed into Nicholas Laboratories India Limited. It is further changed to Nicholas Piramal India Limited. The authorised capital of NPIL is Rs. 20 crores consisting of 2 crores shares of Rs. 10 each while the issued, subscribed and paid-up capital is Rs. 17,39,05,540. The main objects of. NPIL are to carry on business in all kinds of Pharmaceuticals preparations. As the activities carried on by the petitioner company and NPIL are complementary to each other, the petitioner company thought advisable to dispose of the entire bulk drug business to NPIL, which is a growing concern. The shares of the petitioner company are listed on stock changes of Hyderabad, Bombay, Calcutta, Delhi and Ahmedabad those of NPIL are listed on the Bombay and Ahmedabad stock exchange. The scheme provides that the new equity shares in NPIL issued the shareholders of the petitioner company shall rank for dividend and rights and in all other respects pari passu with the existing shares NPIL, except that they shall be entitled to proportionate dividend for year in which they are allotted. The scheme is to take effect from April 1995, and the share exchange ratio is 5 : 100 in the case of fully paid shares and 5 : 400 in the case of partly paid shares. It also provides that the share capital of the petitioner company shall stand reduced the authorised capital of Rs. 11,07,52,550 and issued and subscribed capital at Rs. 61,34,550 and paid up capital at Rs. 48,84,550 and partly up capital at Rs. 3 lakhs.

Pursuant to the order of this court in connected Company Application No. 203 of 1995, a meeting of the shareholders of the company was held on December 15, 1995, where the scheme-was approved. Notices have been issued to the Regional Director, Company Law Affairs, Madras. The question of issuing notice to the official liquidator does not arise as petitioner company is not going to be dissolved. The Registrar of Companies has filed a counter raising four objections:

(1) In the interest of shareholders of the company, the stock exchange ratio may be fixed at 5 : 50 and 5 : 200 instead of 5 : 100 5: 400 in respect of fully paid and partly paid shares.

(2) A separate application has to be filed before this court under section 100 of the Companies Act for reduction in share capital which cannot be part of the arrangement.

(3) Delisting of shares on the stock exchange can be done with the approval of the concerned stock exchanges and the company cannot unilaterally delist.

(4) The financial competency of the managing director is not shown as to how he can purchase such of the shares of the company as are offered to him at par.

The petitioner has filed a reply saying that the share exchange ratio has been approved by the majority of the shareholders of both the companies and the share valuation was fixed after taking into consideration the valuation report of the reputed chartered accountants, viz., Harbakti and Co. and Gautam Doshi and Company. Regarding the reduction of share capital, it is stated that a separate meeting of the shareholders for approving the reduction of the share capital was held and the shareholders unanimously approved the proposal by passing a special resolution which was filed with the Registrar of Companies accompanied with the requisite fee. It is also stated that as the secured and unsecured loans are being taken over by NPIL, the interests of the creditors are in no way affected. It is further stated that the consortium of financial institutions led by the Industrial Development Bank of India and the consortium of banks led by the State Bank of Hyderabad which are the major secured creditor have given approval to the scheme. Regarding the delisting of shares on the stock exchanges, the reply says that this is given more as information to the shareholders than as a condition of the scheme. Regarding the last objection also it is stated that this is also more by way of information to the shareholders but not a condition of the scheme.

Heard the parties. Regarding the first objection about the share exchange ratio, Mr. Ravi, learned counsel for the petitioner, submits that when the shareholders of both the companies approved the share exchange ratio based On the valuation made by reputed chartered accountants who have taken the average value arrived at by the net asset method, the profit earning capacity method and the market quotation, giving due weightage, the Central Government has no locus standi to object. It is submitted that the role of the Central Government is only to see whether the scheme is prejudicial to the interests of the shareholders. He relied on a decision of the Supreme Court in Hindustan Lever Employees' Union v. Hindustan Ltd. [1995] 83 Comp Cas 30, where it was held that a combination of three well known methods of valuation of shares, namely, the yield method, the net asset value method and the market value method to arrive at the share exchange ratio giving due weightage to each method based on the company's performance, operating losses and future maintainable profits is a fair method to arrive at the average value of the share and that the fact that at the relevant time the book value of the share of one company was higher than that of another is not material. Further, it was held that as the financial institutions which held 41 per cent, shares in one of the companies as well as two independent valuers and the ICICI approved of the valuation there cannot be any objection to the share exchange ratio. Here also the average of the three methods was adopted due weightage. It was approved by the shareholders of the two companies and also by major financial institutions. The only objection of Central Government is while the appointed date is April 1, 1995, the deduction of the share is taken as on August 31, 1995. There is no substance this objection. If the valuation of one company is taken as on one date the other company as on a different date, then there may be a valid deduction. But both are taken as on August 31, 1995. As Mr. Ravi rightly merely because the appointed date is April 1, 1995, the actual of the two companies on the relative date of negotiations cannot ignored while fixing the share exchange ratio.

Regarding the objection about reduction of share capital, learned for the petitioner relies on a decision of this court in Novopan Limited and G.V.K. Hotels Limited, In re [1997] 88 Comp Cas 596 (AP); [1996] 1 ALT 18 (AP), wherein it was held that the requirement setting out the intention to move a resolution as a special resolution for reduction of the share capital cannot be said to be a mandatory requirement, though passing a special resolution is mandatory, that the provision contained in section 391(1)(a) is directory and that it is enough if it is substantially complied with. This supports counsel for the petitioned resolution in the instant case has been approved by the shareholders and this has been intimated to the Registrar of Companies accompanied by the requisite fee. The major secured creditors have also agreed to the proposed reduction of share capital. Further, as NPIL is taking over the liabilities of Sumitra Pharmaceuticals, the interests of the creditors of Sumitra Pharmaceuticals are protected and this objection accordingly no force.

Regarding the third objection, it is obvious that delisting can be done with the approval of the stock exchanges and cannot be done by the petitioner company unilaterally. This is given only as information to the shareholders and is not a part of the scheme. Similarly, the fourth objection also regarding the purchase by the managing director of the share is also more by way of information to the shareholders and is not an essential condition of the scheme. Thus, the third and fourth objection also fail.

In view of the approval of the scheme by an overwhelming majority of the shareholders of the petitioner company and of the major secured creditors, the proposed Scheme is confirmed subject to confirmation by the Bombay High Court on the application filed by the NPIL. The effective date shall be April 1, 1995. A copy of the scheme shall be attached to this order. The parties to the scheme or any other person interested shall be at liberty to approach this court for any direction that may be require for carrying out the scheme. Both the transferor and transferee companies are directed to cause a certified copy of this order to be delivery to the Registrar of Companies within 30 days and on such certified copy being delivered, the Registrar of Companies shall take all necessary consequential action in respect of the transferor and transferee companies.

The company petition is accordingly allowed. No costs.

[1978] 48 COMP. CAS. 312

SUPREME COURT OF INDIA

In The Matter of an Application of Bharat Refineries :

Petitioners In Cosmosteels (P.) Ltd.

v.

Jairam Das Gupta

M.H. BEG, C.J

P.N. BHAGWATI AND D.A. DESAI, JJ.

C.M.P. NO. 7962 OF 1977 IN C.A. NO. 1347 OF 1977.

DECEMBER 16, 1977

Niren De, (S.V. Tambvekar,), for the Applicant.

Shankar Das Ghosh, (J.B. Dadachanji, K.J. John and Shri Narain, for the Appellants.

A.K. Sen and R.P. Bhatt, (E.C. Agrawala, S.S. Khanduja and S. Sahni, for Respondents.

JUDGMENT

D.A. Desai, J.—This miscellaneous petition by interveners raises a short but interesting question in the field of company law.

Briefly stated, the facts leading to the present miscellaneous petition are that Company Petition No. 85 of 1975 was filed by Jairam Das Gupta and others (for short "Gupta group") in the Calcutta High Court under sections 397 and 398 of the Companies Act, 1956, complaining of oppression by the majority, and praying for various reliefs. Respondents in this petition were Cosmosteels P. Ltd. (for short "the company") and three others who would be referred to in this judgment as "Jain group". By an order made by the company judge on 21st April, 1977, the board of directors of the company was superseded and one Mr. Sachin Sinha, advocate, was appointed as administrator to discharge various functions set out in the order. The court also appointed Mr. N. Chakraborty, a chartered accountant and auditor, to investigate into the accounts of the company and one Mr. A.K. Dey, engineer and surveyor, for valuation of the assets of the company and further the auditor and the surveyor after investigation of the accounts and evaluation of the assets of the company were to determine the break-up value of the shares as on the date of the petition and on the determination of such break-up value the administrator was to call upon the Jain group to purchase the shares belonging to the Gupta group within a period of three months from the date of service of notice failing which the administrator was directed to purchase the shares of the Gupta group for the company at the break-up value determined as hereinabove mentioned. A further direction was given that if the company was required to purchase the shares of Gupta group on the failure of the Jain group, the capital of the company would pro tanto stand reduced. There were also some other directions which are not relevant for the purpose of this judgment. Against this order made by the company judge, the Jain group and the company preferred an appeal under the Letters Patent and certain interim reliefs were sought. On an undertaking given on behalf of the Jain group, the order superseding the board of directors and payment of Rs. 7 lakhs to certain parties was stayed but the order directing valuation of the shares was not stayed and the proceeding for valuation was to go on. The company was restrained by an injunction of the court from creating any encumbrance on the assets of the company and dealing with or disposing of its assets or spending any of its money except in the usual course of business with a certain ceiling fixed. This interim relief was modified by the order made on 25th April, 1977, by which the company was directed to carry out the order for payment of Rs. 7 lakhs to the persons named in the order under appeal within a fortnight from the date of the order failing which the administrator appointed by the learned trial judge was to take over possession for the purpose of making payment of Rs. 7 lakhs. The direction for investigation of the accounts of the company was stayed and simultaneously the proceeding for evaluation was also stayed. This order dated 25th April, 1977, was challenged in Special Leave Petition No. 2042 of 1977, preferred by the company and the Jain group. CMP. No. 3801 of 1977 was moved on behalf of the appellants for certain interim reliefs. This court by an order dated 12th May, 1977, granted stay of the order of the Division Bench dated 25th April, 1977, directing refund of Rs. 7 lakhs by the company and in default by the administrator. The order of injunction granted by the learned trial judge and confirmed by the Division Bench was kept alive, subject to the same condition about not encumbering the assets of the company. The appellants then sought liberty to amend the special leave petition by including a prayer for special leave against the order of the learned company judge dated 21st April, 1977, which was granted by the court and also special leave to appeal was granted. The appeal came to be numbered as Civil Appeal No. 1347(N) of 1977. The parties settled the dispute as per the consent terms and requested this court to make an order in terms of the consent terms. The court accordingly made an order on 31st May, 1977, disposing of the appeal in terms of the consent terms. The only term relevant for the present purpose is the one by which the company was directed to purchase 1,300 shares held by the Gupta group. The price of the shares was to be determined by Messrs. Price Water House and Peat, Chartered Accountants and Auditors, as on the date of the filing of the petition under sections 397 and 398 on the basis of the existing as also contingent and anticipated debts, liabilities, claims, payments and receipts of the company. The chartered accountants were to determine the value of the shares after examining accounts and calling for necessary explanations and after giving opportunity to both the groups to be heard in the matter and the determination of the value by the chartered accountants was to be final and binding and not open to any challenge by either side on any ground whatsoever. On the value being so determined the company had to purchase the shares and, on such purchase, the share capital of the company was to stand reduced pro tanto.

After the appeal was thus disposed of on 31st May, 1977, the interveners filed the present miscellaneous petition on 22nd August, 1977, requesting the court to permit them to intervene in the proceedings pending in Civil Appeal No. 1347 of1977 and to postpone the purchase of shares by the company until such time as the company adopts proceedings in a competent court by following the procedure laid down by the Companies Act, 1956, and particularly sections 100 to 104 for reduction of the share capital. In the alternative there was a prayer for safeguarding the claims of interveners by modifying the order dated 31st May, 1977.

The interveners claim to be the creditors of the company to the tune of Rs. 40 lakhs. They say that the "Cosmos Pioneer", an oil tanker, belonged to the company. By a Tanker Time Charter Party executed on 21st November, 1972, between the company on the one hand and Burmah Shell Oil Storage and Distribution Co. of India Ltd., and Esso Eastern Inc., on the other, the vessel "Cosmos Pioneer" was chartered in Indian coastal waters for carriage of petroleum products. Pursuant to this contract the vessel was loaded at Bombay Port on 15th June, 1973, for carrying cargo to the port of Kandla. On the voyage the vessel ran aground and was stranded on 18th June, 1973, and the vessel and the cargo were abandoned. Intervener No. 2 is the underwriter with whom the charterers had effected an insurance covering the marine adventure of the aforesaid cargo and presumably on payment of the loss the underwriter has been subrogated. The interveners have filed two suits, being Suit No. 729 of 1974, by the intervener/petitioners and another Suit No. 933 of 1976, by Bharat Refineries Ltd. and Hindustan Petroleum Corporation, against the company and the total amount sought to be recovered in the two suits comes to Rs. 40 lakhs. Both the suits are pending. The interveners say that they are thus creditors of the company and before any reduction in the share capital of the company is effected, the creditors are entitled to notice because by the reduction they are likely to be adversely affected.

There was some dispute before us whether there was any substance in the claims of the interveners and whether they could be said to be creditors of the company but for the purpose of this judgment we will proceed on the assumption that they are creditors of the company. But even on this assumption, can it be said that the order of this court dated 31st May, 1977, directing the company to purchase the shares of the Gupta group and providing that, consequent upon this purchase, the share capital of the company would pro tanto be reduced, is bad for want of notice to the interveners and other creditors of the company ?

Section 77 prohibits the company from buying its own shares unless the consequent reduction of capital is effected and sanctioned in pursuance of sections 100 to 104 or section 402. This section places an embargo on the company purchasing its own shares so as to become its own member but the embargo is lifted if the company reduces its share capital pro tanto. It is clear that this section envisages that on purchase by a company of its own shares, reduction of its share capital may be effected and sanctioned in either of two different modes : (i) according to the procedure prescribed in sections 100 to 104; or (ii) under section 402, depending upon the circumstances in which reduction becomes necessary. Sections 100 to 104 specifically prescribe the procedure for reduction of share capital where the articles of the company permit and the company adopts a special resolution which can only become effective on the court according sanction to it. On the other hand, reduction of share capital may have to be done pursuant to a direction of the court requiring the company to purchase the shares of a group of members while granting relief under section 402. Both the procedures by which reduction of capital of a company may be effected are distinct and separate and stand apart from each other. It would not, therefore, be correct to say that whenever it becomes necessary to reduce the capital of a company, the reduction can be brought about only by following the procedure prescribed in sections 100 to 104. There is another independent procedure prescribed in section 402 and recognised by section 77, by which reduction of the share capital of a company can be effected. But both these procedures have one feature in common, namely, that there is court's intervention before the company can reduce its share capital, and this is of vital importance from the standpoint of creditors of the company.

Sections 100 to 104 provide a detailed procedure for reduction of share capital. Without being exhaustive section 100 mentions three modes of reduction of share capital, viz., (i) extinction or reduction of the liability on any of the shares in respect of share capital not paid up, (ii) cancellation of any paid up share capital which is lost or is unrepresented by available assets, and (iii) plying off any paid up share capital. Section 101 provides that a company which has adopted a special resolution for reduction of share capital has to move the court by a petition for an order confirming the reduction. A detailed procedure is prescribed which the court should ordinarily follow before confirming the resolution. This procedure has to be followed where the proposed reduction of share capital involves either the diminution of liability in respect of unpaid share capital or payment to any shareholder of any paid up share capital and in any other case if the court so directs. But even in the first mentioned two cases, sub-section (3) confers a discretion on the court to dispense with the procedure if the court, having regard to any special circumstances, thinks proper to do so. The procedure envisages a list of creditors to be settled and a notice to be published which will enable the creditors whose names are included in the list to object to the reduction and a provision has to be made in respect of dissenting creditors.

Sections 397 and 398 enable the minority shareholders to move the court for relief against oppression by majority shareholders. In a petition under sections 397 and 398, section 402 confers power upon the court to grant relief against oppression, inter alia, by providing for the purchase of shares of any of the members of the company by other members thereof or by the company and in the case of purchase of its shares by the company, the consequent reduction of the share capital of the company. Rule 90 of the Companies (Court) Rules, 1959, provides that where an order under sections 397 and 398 involves reduction of capital, the provisions of the Act and the Rules relating to such matter shall apply as the court may direct.

The question is : whether, when on a direction given by the court, while granting relief against oppression to the minority shareholders of the company, to the company to purchase the shares of some of its members which would ipso facto bring about reduction of the share capital because a company cannot be its own member, is it obligatory to serve a notice upon all the creditors of the company ? It was conceded that the procedure prescribed in sections 100 to 104 is not required to be followed where reduction of share capital is necessitated by the direction given by the court in a petition under sections 397 and 398. Section 77 leaves no room for doubt that reduction of a share capital may have to be brought about in two different situations by two different modes. Undoubtedly, where the company has passed a resolution for reduction of its share capital and has submitted it to the court for coffirmation, the procedure prescribed by sections 100 to 104 will have to be followed, if they are attracted. On the other hand, where the court, while disposing of a petition under sections 397 and 398, gives a direction to the company to purchase shares of its own members, a consequent reduction of the share capital is bound to ensue, but before granting such a direction it is not necessary to give notice of the consequent reduction of the shire capital to the creditors of the company. No such requirement is laid down by the Act. Two procedures ultimately bringing about reduction of the share capital are distinct and separate and stand apart from each other and one or the other may be resorted to according to the situation. That is the clearest effect of the disjunctive "or" in section 77.

The scheme of sections 397 and 402 appears to constitute a code by itself for granting relief to oppressed minority shareholders and for granting appropriate relief, a power of widest amplitude, inter alia, lifting the ban on a company purchasing its shares under court's direction, is conferred on the court. When the court exercises this power by directing a purchase of its shares by the company, it would necessarily involve reduction of the capital of the company. Is such power of the court subject to a resolution to be adopted by the members of the company which, when passed with statutory majority, has to be submitted to court for confirmation ? No canon of construction would permit such an interpretation in which the statutory power of the court for its exercise depends upon the vote of the members of the company. This would inevitably be the situation if reduction of share capital can only be brought about by resorting to the procedure prescribed in sections 100 to 104. Additionally, it would cause inordinate delay and the very purpose of granting relief against oppression would stand self-defeated. Viewed from a slightly different angle, it would be impossible to carry out the directions given under section 402 for reduction of share capital if the procedure under sections 100 to 104 is required to be followed. Under sections 100 to 104 the company has to first adopt a special resolution for reduction of share capital if its articles so permit. After such a resolution is adopted which, of necessity, must be passed by majority, and it being a special resolution, by a statutory majority, it will have to be submitted for confirmation to the court. Now, when minority shareholders complain of oppression by majority and seek relief against oppression from the court under sections 397 and 398 and the court, in a petition of this nature, considers it fair and just to direct the company to purchase the shares of the minority shareholders to relieve oppression, if the procedure prescribed by sections 100 to 104 is required to be followed, the resolution will have to be first adopted by the members of the company; but that would be well nigh impossible because the very majority against whom relief is sought would be able to veto it at the threshold and the power conferred on the court would be frustrated. That could never have been the intention of the legislature. Therefore, it is not conceivable that when a direction for purchase of shares is given by the court under section 402 and consequent reduction in share capital is to be effected, the procedure prescribed for reduction of share capital in sections 100 to 104 should be required to be followed in order to make the direction effective.

A very serious apprehension was voiced by Mr. De that if the court directs the company to purchase the shares of some of its members while granting relief against oppression, the company would part with its funds which would jeopardise the security of the creditors of the company and that if such a direction for reduction of share capital can be given by the court behind the back of the creditors, the creditors would be adversely affected and, therefore, it was contended that, even though, while giving direction under section 402 directing the company to purchase the shares of its members, it is not obligatory upon the court to give notice to the creditors, such notice ought to be given in the interests of the creditors. This apprehension is, in our opinion, unfounded. Even when the court is moved to confirm the resolution for reduction of share capital under sections 100 to 104, the court may in its discretion dispense with the procedure prescribed in that group of sections [vide section 101(3)]. Undoubtedly, the court would use the discretion only upon proof of special circumstances as contemplated by section 101(3), but when such discretion is used, the creditors would have no opportunity to object to the reduction. The opportunity to object would thus depend upon the court exercising its discretion one way or the other. It may be noticed that until the company submits its resolution for reduction of share capital to the court, the creditors have no say in the matter and, therefore, the court is empowered to ascertain the wishes of the creditors by following the procedure prescribed in sections 101 to 104. The object behind prescribing this procedure requiring, save in special circumstances as contemplated in section 101(3), the court to give notice to the creditors is that the members of the company may not unilaterally act to the detriment of the creditors behind their back. If such a procedure were not prescribed, the court might, unaware of all the facts, be persuaded by the members to confirm the resolution and that might cause serious prejudice to the creditors. But such a situation would not be likely to arise in a petition under sections 397 and 398. In such a petition the court would be better in a position to have all the relevant facts and circumstances before it and it would be the court which would decide whether to direct purchase of shares of the members by the company. Before giving such a direction the court would certainly keep in view all the relevant facts and circumstances, including the interest of the creditors. Even if the petition is being disposed of on a compromise between the parties, yet the court, before sanctioning the compromise, would certainly satisfy itself that the direction proposed to be given by it pursuant to the consent terms, would not adversely affect or jeopardise the interest of the creditors. Therefore, it cannot be said that merely because section 402 does not envisage consent of the creditors before the court gives direction for reduction of share capital consequent upon purchase of shares of some of the members by the company, there is no safeguard for the creditors.

But quite apart from that, it is clear on the facts of this case that the apprehension of Mr. De is not well founded. The order of the court dated 31st May, 1977, clearly provides that the chartered accountants and auditors will determine the value of the shares as of the date of filing of the petition under sections 397 and 398 on the basis of the existing as also contingent and anticipated debts, liabilities, claims, demands and receipts of the company (underlining is ours) and, for the purpose of determining the value, they will be at liberty to examine the accounts of the company for the last five years. Therefore, while ascertaining the break-up value of the shares on the date of filing of the petition under sections 397 and 398, the chartered accountants and auditors will have to take into account the assets of the company as also the existing, contingent and anticipated debts, liabilities, claims, demands, etc. This would indisputably include the claims made by the interveners in the two suits filed by them to the extent to which they appear genuine and well-founded. They need not, therefore, have the slightest apprehension that their interests are not safeguarded by the direction given by the court. It must also be made distinctly clear that the order of the court does not fix any minimum price at which the shares shall be purchased by the company. The order makes it clear that if the value of the shares is more than Rs. 65 per share, the company will have to pay the balance and if it is less than Rs. 65 per share, the Gupta group who have to sell the shares, will have to refund the difference between the price of the shares calculated at the rate of Rs. 65 per share and the rate determined by the chartered accountants and auditors within four weeks from the date of such determination. This pragmatic and flexible approach clearly safeguards the interests of the creditors including the interveners. There could have been a legitimate apprehension if some minimum price were fixed at which the company was bound to purchase the shares. Then, it could have been plausibly argued that if such minimum price were higher than the Teal value of the shares, the company would have to part with some of its funds jeopardising the security of the creditors. Such not being the position, there is no scope for apprehension on behalf of the interveners that the reduction of share capital to be effected under the court's direction without reference or notice to creditors would adversely affect their interests.

We may also point out that a right to notice by reason of any rule of natural justice, which a party has to establish, must depend for its existence upon proof of an interest which is bound to be injured by not hearing the party claiming to be entitled to a notice and to be heard before an order is passed. If the duty to give notice and to hear a party is not mandatory, the actual order passed on a matter must be shown to have injuriously affected the interest of the party which was given no notice of the matter. The facts discussed above by us show that no interest of the interveners, on whose behalf we have heard Mr. De at length, has been injured by not hearing them before the order was passed. They have not shown us how the order could be different if they had been heard by issuing notices to them under the inherent powers of the court under rule 9 of the Companies (Court) Rules, 1959, even though there was no statutory duty to hear them. Hence, we hold that the order passed by this court on 31st May, 1977, is not vitiated on such a ground.

It was also urged that the court was in error in making the order without notice to the Central Government. Section 400 provides that the court shall give notice of every application made to it under section 397 or 398 to the Central Government and shall take into consideration the representation, if any, made to it by that Government before passing a final order under that section. It was urged that before this court made the final order dated 31st May, 1977, the record does not show that any notice was given to the Central Government and, therefore, also the order is vitiated. We see no merit in this contention. Undoubtedly, when a petition is made to the court under sections 397 and 398 it is obligatory upon the court to give notice of the petition to the Central Government and it would be open to the Central Government to make a representation and if any such representation is made, the court would have to take it into consideration before passing the final order in the proceeding. But section 400 does not envisage a fresh notice to be issued at the appellate stage. The present petition under sections 397 and 398 was made to the Calcutta High Court and it was not disputed that before the learned single judge finally disposed of the petition, inter alia, directing purchase of shares of the Gupta group by the company, notice was issued to the Central Government as envisaged by section 400. The Central Government apparently did not appear and make any representation. The matter came before this court initially against the interim order made by the appellate Bench of the Calcutta High Court in the appeal against the order of the learned single judge but subsequently special leave was obtained for appealing against the order of the learned single judge also and it was after this special leave was granted that this court made the final order. Therefore, there was no question of issuing fresh notice to the Central Government under section 400 and the contention must be negatived.

Accordingly, we find no merits in the civil miscellaneous petition and it must be rejected.

Before parting with this case we would like to point out that, unfortunately, though Suits Nos. 729 of 1974 and 933 of 1976 have been filed by the interveners in the High Court at Bombay as far back as 1974, the written statements in these suits have not been filed though more than 3 years have elapsed. The decision in the suits may have a bearing on the value of shares to be determined under the directions of this court dated 31st May, 1977. We. therefore, direct that Suits Nos. 729 of 1974 and 933 of 1976 may be expedited and they may be heard and disposed of without delay, at any rate, within a period of six months.