[1936] 6 COMP. CAS. 90 (BOM.)
v.
E.D. Sassoon & Co. Ltd
BEAUMONT, C.J.
AND WADIA, J.
SEPTEMBER 18,
1935
Kania, J.—The first question which arises
is as to the power of the company and its directors to borrow the money from
M.T. Ltd. From the memorandum of association of the company it is clear that
there is no limit to the borrowing power of the company as such for its
business. The terms of Clause 3 (f) further authorize the company to mortgage
any property or to secure the re-payment of any money borrowed by it in any
manner as the company should think fit. As to the power of the directors to
borrow money the matter has become complicated because certain articles of
association were drawn up when the company was formed and under which the
directors were given very wide and general powers, but these articles were not
filed with the Registrar, with the result that the articles of association
contained in the schedule to the Indian Companies Act govern the company.
Article 73 is the relevant article to be considered on this point. That article
runs as follows :
"The amount for the time being remaining undischarged of moneys
borrowed or raised by the directors for the purposes of the company (otherwise
than by the issue of share capital) shall not at any time exceed the issued
share capital of the company without the sanction of the company in general
meeting."
The question for consideration is what is the proper
construction of this article. It is contended on behalf of Sassoons that
the words "for the time being" mean "when the claim is
made." It is contended that whatever be the initial
borrowing by the directors that is not a matter to be inquired into by the
Court. I do not think the terms of the article justify such a narrow
construction. The article in terms fixes the limit at any time and although the
validity of the claim may have to be considered in respect of the amount
claimed on the date of liquidation I am unable to consider that the article in
terms refers only to that point of time and no other.
On behalf of the claimants it is contended that the article authorizes
the directors to borrow money and the company as such has unlimited power of
borrowing. Therefore, when the directors borrow money in excess of the amount
of the issued capital the lender is entitled to presume that the necessary
formalities authorizing the directors to borrow money have been gone through,
and the question of going through such formalities is a matter of internal
management of the company. In this connection strong reliance is placed on the
decision of Royal British Bank v. Turquand. In that case the plaintiff claimed
against the defendants, a joint stock company, on a bond signed by two
directors under the seal of the company whereby the company acknowledged
themselves to be bound to the plaintiff, in £ 2,000. The plea set out the condition
which appeared to be for securing to the plaintiff, who was a banker, such sum
as the company should to the amount of £1,000 owe to the plaintiff on the
balance of the account current, from time to time and for indemnifying
plaintiff to that amount from losses incurred by reason of the account between
plaintiff and defendants. The plea further set out clauses of the registered
deed of settlement, by which it appeared that the directors were authorized,
under certain circumstances, to give bills, notes, bonds or mortgages; and one
clause provided that the directors might borrow on bonds such sums as should,
from time to time, by a general resolution of the company, be authorized to be
borrowed. The plea averred that there had been no such resolution authorizing
the making of the bond, and that it was given without the authority of the
share-holders. The replication set out the deed of settlement further, by which
it appeared that the company was formed for the purpose of carrying on mining
operations and forming a railway. On demurrers to the plea and replication the
plaintiff was held entitled to judgment, the oblige having, on the facts
alleged, a right to presume that there had been a resolution at a general
meeting, authorizing the borrowing of the money on bond. The facts set out in
the judgment show that at a general meeting of the company it was resolved that
the directors of the company should be and they were thereby authorized to
borrow on bond such sums for such periods and at such rates of interest as they
might deem expedient, in accordance with the deed of settlement and the Act of
Parliament; and the said resolution had remained unrescinded. In the judgment
Jervis, C. J., observed as follows (p. 331):
"My impression is………….that the resolution set forth in the
replication goes far enough to satisfy the requisites of the deed of
settlement. The deed allows the directors to borrow on bond such sum or sums of
money as shall from time to time, by a resolution passed at a general meeting
of the company, be authorized to be borrowed: and the replication shows a
resolution, passed at a general meeting, authorizing the directors to borrow on
bond such sums for such periods and at such rates of interest as they might
deem expedient, in accordance with the deed of settlement and the Act of
Parliament; but the resolution does not otherwise define the amount to be
borrowed. That seems to me enough. If that be so, the other question does not
arise. But whether it be so or not we need not decide;
for it seems to us that the plea, whether we consider it as a confession and
avoidance or a special non est factum, does not raise any objection to this
advance as against the company. We may now take for granted that the dealings
with these companies are not like dealings with other partnerships, and that
the parties dealing with them are bound to read the statute and the deed of
settlement. But they are not bound to do more. And the party here, on reading
the deed of settlement, would find not a prohibition from borrowing, but a
permission to do so on certain conditions. Finding that the authority might be
made complete, by a resolution, he would have a right to infer the fact of a
resolution authorizing that which on the face of the document appeared to be
legitimately done."
The facts thus show that the directors could borrow on bonds such sums,
as from time to time by a general resolution of the company they may be
authorized, and a resolution having been passed, the lender was not called upon
to make any other inquiry, but would be entitled to rely on what appeared to be
done on the face of the document as legitimately done. The judgment, however,
makes clear the distinction between a case where the
directors are permitted to borrow on certain conditions as contrasted with the
case of a prohibition from borrowing contained in the article. In other words,
if the article authorizing the directors to borrow is so worded as to give them
authority or permission to borrow on certain conditions, and ostensibly those
conditions were fulfilled, the lender would be entitled to act on the footing
that the necessary steps were taken, and the way in which the authority is
given is a matter of the internal management of the company. On the other hand,
as the judgment points out, when there is an express prohibition to borrow
beyond a certain limit contained in the article itself, the lender cannot rely
on the principle of this ease but has to satisfy himself that in accordance
with the terms of the article the prohibition does not stand in the way of the
directors borrowing the money.
This distinction is made clear and accepted by the decision in
"The case of Royal British
Bank v. Turquand was decided with reference to a company registered under 7 and
8 Viet., C. 110, and Jervis, C. J., remarked that the lender, finding that the
authority might have been made complete by a resolution would have had a right
to infer the fact of a resolution authorizing that which on the face of the
document appeared to be legitimately done. In the present case, however, the
bank would have found that, by the articles of association the directors were
expressly restricted from borrowing beyond a certain amount, and they must have
known that if the general powers vested in the directors by Article 50 had been
extended or enlarged by a resolution of a general meeting of the share-holders
under the provisions of Section 31, a copy of that resolution ought, in regular
course, to have been forwarded to the Registrar of Joint Stock Companies, in
pursuance of Section 53 of the Companies Act, and would have been found amongst
his records. Their Lordships are of opinion that the learned Recorder was
correct in holding that this case is different from that of Royal British Bank
v. Turquand:
Article 73 of the articles of
association contained in Table A is similar in terms to the article in
"If it be outside the power of a statutory society to enter into the
relation of debtor and creditor in a particular transaction, the only possible remedy
for the person who has paid the money would, on principle, appear to be one in
rent and not in personam, a claim to follow and recover specifically any money
which could be earmarked as never having ceased to be his property. To hold
that a remedy will lie in personam against a statutory society, which by
hypothesis cannot in the case in question have become a debtor or entered into
a contract for repayment, is to strike at the root of the doctrine of ultra
vires as established in the jurisprudence of this country. That
doctrine belongs to substantive law and is the outcome of statute, and cannot
be made different by any choice of form in procedure.''
The Lord Chancellor, after examining in detail how actions for money had
and received came into existence, held that none of the underlying principles
could be invoked as an authority for the
proposition that an action for money had and received would have lain in a case
of borrowing ultra vires the company. The other Law Lords expressed concurrent
opinions on this point. On behalf of M.T. Ltd., on the other hand, it is
contended that the whole argument of the liquidator was fallacious and was
based on a misconception of the situation. The principles laid
down and the opinions pronounced in Sinclair v. Brougham are all based on the
central fact that the borrowing by the society itself was ultra vires. In my
opinion the contention of the liquidator in this connection is wrong. According
to the general principles of law when an agent borrows money for a principal,
without the authority of the principal, but if the principal takes the benefit
of the money so borrowed or when the money so borrowed has gone into the
coffers of the principal, the law implies a promise to repay. The lender has
not advanced the money as a gift but has given them as a loan, and the
principal having received the benefit of the money, the law implies a promise
to re-pay. This view is supported by the decisions in Reid v. Rigby & Co.
and Bannatyne v. MacIver. There appears to be nothing in law which makes this
principle inapplicable to the case of a joint stock company when the borrowing
power of the company itself is unlimited. The position, in my opinion, would be
that the principal (the company) through its agents (the directors or the
managing agents) had borrowed money which the principal had not authorized the
agents to borrow. However, the money having been borrowed and used for the
benefit of the principal, either in paying its debts or for its legitimate
business, I do not think the company can repudiate its liability to repay on
the ground that the agents had no authority from the company to borrow. In my
opinion, when these facts are established, a claim on the footing of money had
and received would be maintainable. The decision in Sinclair v. Brougham is
clearly based on the fundamental fact that the society was prohibited by
statute from borrowing any money and therefore any borrowing by the company,
i.e,, the principal itself would be ultra vires. The
observations of Lord Haldane, L.C., apply, in my opinion, to that set of facts
alone.
I am further supported in this
view by the decision in Troup's case, where it was held that when the directors
of a company have no power to borrow, a person lending money to the
company cannot enforce payment of it against the company unless it had been
bona fide applied to the purposes of the company. In that case the directors
having no borrowing powers, being pressed for money by their contractor,
obtained for him, on credit, £2,000 at a banker's upon their guarantee. The
contractor afterwards agreed to abandon the plant, etc., to the company, on
receiving £600 and being indemnified against the banker's claim. Subsequently
to this, the secretary of the company, with the sanction of the directors,
borrowed £500 in his own name for the company, which was applied in paying the
bankers and a judgment debt of the company. The company had the benefit of the
plant, etc. It was held that the secretary could recover the amount from the
company with interest. The principle of that case was accepted and followed in
Hoare's Case. There a sum of money had been borrowed from the lender by H, the
secretary of a company, and for which three of its directors had become
sureties. The directors had no borrowing powers, but it was admitted that the
money had been applied for the benefit of the company. Judgment had been signed
against H for the debt, and he applied to prove the amount against the company
which was being wound up. It was held that money borrowed for the company and
bona fide applied for its benefit could be recovered from the company although
the directors had no borrowing powers.
In British and American Telegraph Co. v. Albion Bank, the plaintiffs, a
telegraph company, invited applications for shares, received some in the
ordinary way and allotted some on which deposits were paid. The number allotted
was, however, insufficient to procure a settling day on the stock exchange, and
some of the directors of the company, S the promoter, and C the defendants'
manager, agreed, in order that the defendants might certify to the committee of
the stock exchange the requisite amount of shares to have been subscribed, that
an account should be opened in S's name with the defendants, and another
account in the plaintiff's name; that the plaintiffs should guarantee to the
defendants the payment of any money drawn by S, and charge with such repayment
any balance in their favour; that the defendants should have a bonus of £ 600,
and C, £ 1,000; that S should get persons to apply for shares, which would be
duly allotted, and should draw on his account for, and pay into the plaintiffs'
account the requisite deposits, taking blank transfers for the pretended
allottees. This plan was carried out. Accounts were opened, that in the
plaintiff's name with £ 1,500 really paid in ; that in
5's name with a loan of £ 1,500 from the defendants. Same applications were
obtained by S and shares allotted to them. S thereupon drew on his account, and
with the proceeds paid the requisite deposits into the plaintiffs' account. The
pretended allottees, immediately after the shares were allotted, handed blank
transfers to S. Finally the plaintiffs' account with the defendant stood with a
credit of £ 24,505 and odd, made up of £1,500 really paid in and the pretended
deposits. 5's account stood with a debit of £24,506 and odd made up of the sums
he had drawn and the £1,500 loan. No settling day was ever granted and the
plaintiffs' company afterwards went into liquidation under a winding-up order.
A suit was filed to recover the whole amount to the credit of the plaintiffs.
The defendants paid the bonus of £ 600 into Court, and denied liability as to
the residue. It is apparent on the facts that the directors and parties were
not authorized to do the acts for the company and the same were not therefore
binding on the company. It was, however, held that the plaintiffs were entitled
to the re-payment of £ 1,500 actually paid by them to the defendants but to no
more. This case, in my opinion, is a clear authority for the proposition that
money actually received by the company and used for its business can be
recovered by the claimants. In Halsbury's Laws of England (Edn. 2,) Vol. 5, at
p. 314, this case is relied upon for the following proposition:
"Apart from ratification, the company will be answerable for any
property which has come into its possession through the unauthorized acts of
the directors."
It is argued on behalf of the liquidator that
"for the above reasons their Lordships are of the
opinion that the plaintiffs are not entitled, as against the defendant, to a
charge on the property beyond the amount of one half of £17,100 the paid-up
capital of the company."
The form of the order finally made also makes this clear. It was as
allows
"Their Lordships will, therefore, further advise Her Majesty that it
be ordered that the costs of the suit in the lower Court, both of the
plaintiffs and of the defendant respectively, as taxed by the lower Court, be
paid to the said parties respectively out of the proceeds of the sale of the property
which are now in Court, and that out of the balance of such proceeds there be
paid to the plaintiffs a sum of rupees equivalent, at the rate of exchange
current between Rangoon and England at the time of filing of the suit, to the
principal sum of £8,550, with interest thereon, at the rate of 8 per cent, from
October 5, 1872 to the date of the sale of the property, together with a
proportionate part of the accumulations, if any, of the proceeds of the sale
and that the residue of the proceeds and of the accumulations thereon, if any,
be paid to the defendant appellant."
The O.R. Company, who were parties to the
original suit had not appeared before the Privy Council at all. The question of
directing an inquiry as to what portion was bona fide used for the benefit of
the company is not considered, nor is the question of
a tracting order discussed. I am, therefore, unable to consider this decision
as overriding the general principle of law under which a principal is liable
for what he actually receives, when his own powers of borrowing or receiving
are not limited. In the present case the balance sheets and the accounts put in
show that the amount borrowed by the company from M.T. Ltd. was utilized for
the business of company and the results of the dealings were submitted every
year to the share holders. It is not suggested on behalf of the liquidator that
any business done by his company was ultra vires the company. Therefore the
money received by the company from M.T. Ltd., through the directors and managing
agents was bona fide utilized for the business of the company and the company
has received the benefit thereof. I, therefore, hold that for the reasons
mentioned above M.T. Ltd. are entitled to claim from the company the balance of
the amount advanced by them. It is further urged on behalf of M.T. Ltd., that
in any event the company is liable because, however unauthorized the directors'
borrowings be, the share holders of the company were aware of this and have
ratified the same by their acquiescence. In this connection M.T. Ltd., rely on
the balance-sheets prepared by the directors and passed by the share-holders,
year after year, at their annual general meetings from 1921 onwards. As I have
pointed out, these balance sheets clearly show the amount due by the company to
M.T. Ltd., from year to year, and it is not disputed that those balance-sheets
were duly passed by the share-holders.
In In re The Magdalena Steam Navigation Co. by the deed of settlement of
a joint stock company power was given to a meeting of two-thirds in number and
value of the share-holders, to authorize the directors to borrow money upon
debentures; and at a meeting of shareholding less than two-thirds of the shares
it was resolved that the directors should be authorized to borrow money on
debentures. The directors accordingly borrowed on debentures diverse sums of
money, which were applied in discharging the debts and liabilities of the
company. The debenture debts regularly appeared in the reports of the directors
which were confirmed at the annual general meeting of the share-holders, and
interest was regularly paid, with the consent of share-holders, until the
winding up of the company, a period of 2 years. It was held that though the
debentures were clearly improperly issued, yet as the money had been raised and
applied for the benefit of the company, and the share-holders had acquiesced
for two years, it was too late to dispute their validity. The report shows that
the holders of the debentures themselves were present at the meeting of the
shareholders, which passed the resolution, and were therefore, conscious of the
irregularity of the meeting. It is" urged that this case distinctly
supports the contention of M.T. Ltd., because the balance-sheets showed the
amount from time to time due by the company to M.T. Ltd., and also showed the
amounts from time to time paid by way of interest to M.T. Ltd. in respect of
these borrowings. It is pointed out that at no time before the liquidation any
shareholder had contended that the borrowings were not binding on the company.
On behalf of the liquidator reliance is placed on the decision in Houghton
& Co. v. Nolhard, Lowe and Wills where it was held that although a person
who contracts with an individual director or servant of a company, knowing that
the board of directors had powers to delegate its authority to such an
individual, may under certain circumstances assume that that power of
delegation had been exercised and that he may safely deal with the individual
in question as representing the company, he cannot rely on the supposed
exercise of such power if he did not know of the existence of the power at the
time he made the contract. It was also held that the doctrine of constructive
notice operates adversely to a person who neglects to inquire; it does not
entitle such a person to claim for his own advantage to be treated as having
knowledge of the facts which an inquiry would have disclosed. In my opinion the
contention of M.T. Ltd. in this connection is unsound. In order to establish a
case of ratification it appears to be essential that the party ratifying should
be conscious that an act beyond the authority of the agent had been done, and
further after notice of that fact the party consciously by an overt act agreed
to be bound by it or by acquiescence in the situation arising thereafter
allowed the business to continue. It either event it appears that consciousness
of the act done by the agent without authority must be proved, and, secondly,
it should be proved that, after notice of such unauthorized act, the principal
adopted the transaction.
The question of adopting the transaction by the shareholders passing the
balance-sheets has been considered in some English cases. In Houldsworth v.
Evans the question indirectly came to be considered and Lord Cairns, L. C, in
considering this point held that the share-holders who had agreed to the scheme
had no knowledge that the scheme which they were adopting was the scheme
originally put forward. In other words that case shows that in order to
establish a case of ratification it was essential to prove in the first
instance that the alleged assent was given on proof of consciousness of the act
having been done without authority or after full knowledge of the transaction
which was being assented to. Even in the dissenting judgment of Lord Cranworih,
who held that when the directors bad exceeded their legal powers and the
share-holders took no steps in the matter but allowed the things done to remain
unimpeached for years they must be taken to have retrospectively sanctioned
what had been done, the fact that the share-holders were aware that the
directors had been exceeding their legal powers was emphasized. In In re
Railway and General Light Improvement Co., Matzetti's Case the question again
came to be considered. In that case a certain item of expenditure was included
in a larger item in the balance-sheet and that balance-sheet was passed by the
share-holders at their meeting. The item included was shown to be unauthorized
expenditure. Brett, L. J., in considering the question of ratification observed
as follows:
"But it cannot be said that the company ratified the payment by
passing it unquestioned on the balance-sheet, unless it appeared there in such
a way as to attract the attention of persons of ordinary care. There must have
been direct notice, or notice sufficient to put a person of ordinary care upon
inquiry as to the item. The mere statements on the balance-sheet in this case
would not have put such a person upon inquiry so as to lead him to the facts.
Therefore, I think there is no evidence of ratification."
In In re
"After they learned at the share-holders' meeting of December 14,
1908, that the legality of these payments was questioned, the meeting was
adjourned for the purpose inter alia of inquiries being made into the matter,
and the balance-sheet and accounts were subsequently approved by the
share-holders at the adjourned meeting….."
These observations also show that in order to establish a case of
ratification it is essential to prove knowledge of the fact that the act was
unauthorized in the first instance and that after clear notice either by
acquiescence or an overt act the shareholders of the company adopted the
transaction.
''Their Lordships think that it would be competent for a majority of the
share-holders present (though not a majority of the share-holders of the
company), at an extra-ordinary meeting convened for that object, and of which
object due notice had been given, to ratify an act previously done by the
directors in excess of their authority; and they are not prepared to say that
if a report had been circulated before a half-yearly meeting distinctly giving
notice that the directors had done an act in excess of their authority, and
that the meeting would be asked by confirming the report to ratify the act,
this might not be sufficient notice to bring the ratification within the
competency of the majority of the share-holders present at the half yearly
meeting.
The case of In re The Magdalena Steam Navigation
It is next contended on behalf of the liquidator, that the claim now made
by M.T. Ltd., wholly represents the balance of unauthorized borrowings. This
contention is based on the argument that in considering the account of
borrowings and repayments the rule in Clayton's case does not apply. In this
connection reliance is placed on the decisions in Blackburn and District
Benefit Building Society v. Cunliffe, Brooks & Co. Cunliffe Brooks &
Co. v. Blackburn and District Benefit Building Society,
According to the Lord Chancellor, therefore, in the absence of evidence
to the contrary, when repayments are made by the company, they should be
treated simply as returning to the lender his own money, and which in law,
having regard to the incapacity of the company to borrow had never become the
property of the company. These observations, therefore, instead of supporting
the contention of the liquidator, support the contention of M.T. Ltd. Applying
that principle to the account it should be held that the first five lacs of
rupees, borrowed by the company from M.T. Ltd., were the authorized borrowing
and the excess was unauthorized so far as the directors are concerned.
Thereafter when in the subsequent years or the same year there are repayments,
the same should be treated as repayments of the unauthorized borrowings, i.e.,
return to M.T. Ltd., of their own money. Looking at the account in that way and
having regard to the fact that the balance now claimed is only Es.
4,91,284-0-8, it is evident that, according to the principles laid down by Viscount
Haldane, L.C, the whole of the balance now claimed by M.T. Ltd., represents the
authorized borrowing, the unauthorized borrowing having been repaid during the
interval by the directors. This contention of the liquidator, therefore, if
necessary to be considered, must also fail.
The observations and principles contained in Sinclair v. Brougham, with
regard to making a tracing order, were fully argued. Having regard to my
finding the question does not arise, and, therefore, I do not propose to
examine the cases cited on the point. It was lastly contended on behalf of the
liquidator that no further call on the shareholders should be made. That
contention is based on Sinclair v. Brougham. I do not think that case stands in
the way of M.T. Ltd. The principles there discussed were for finding how the
assets which were the outcome of a wholly ultra vires business were to be
divided between the creditors of the ultra vires business and the share-holders
of the same ultra vires business. In the present case, M.T. Ltd., claim a sum
of money payable from the company in liquidation, and if the claim is allowed,
all the liabilities of the shareholders to satisfy the claim of a person who is
entitled to the payment of a specified sum of money must follow. I shall consider
next the claim of Sassoons. It is contended on behalf of the liquidator that
the agreement of February 28, 1928, is not valid and binding on the company
because it is a suretyship transaction. It is pointed out that in the deed
itself the company is called surety. It is common ground that at the time of
the execution of the deed no money was paid and the company had borrowed no
money from Sassoons.
It is further pointed out that in spite of the deed, and all the recitals
contained therein, M.T. Ltd. continued to be the creditors of the company, and
Sassoons to be the creditors of M.T. Ltd., for the whole amount, as before. In
the books of Sassoons the company is not shown to be their debtor nor in the
books of the company are Sassoons shown to be their creditor. The result is
that the legal relations subsisting between the parties till then were not
altered and the company and Sassoons do not assume the relationship of debtor
and creditor. The right of Sassoons is only under the deed of mortgage and there
are no other relations on which the claim put forward by Sassoons could be
sustained. As regards the clause by which the company and M.T. Ltd. jointly and
severally promised to pay the Sassoons Rs. 4,50,000,
it is contended that this provision cannot override the legal relations
established by the description given to the company in the deed itself. In any
event it is pointed out that, as the liability of the surety is co-extensive,
the two clauses can be reconciled and the deed is only a deed of suretyship. It
is further contended that if the two clauses cannot be reconciled, the first
must prevail on the general principle that in construing a deed the first
clause prevails. The liquidator contends that such a transaction of suretyship
is ultra vires the directors and also the company.
In this connection reliance is placed on the decision in Crenver etc.,
Mining Co., Ltd. v. Willyams. In that case a company, which was a mining
company, after its incorporation entered into a written contract with G, an
engineer, for the construction of certain work and erection of plants,
machinery, etc., and agreed to pay £8,500 to him. The payments under the
contract to G were to be made every month on a certificate of the engineer of
the company less twenty per cent. Considerable sums of money were advanced by
bankers to G to go on with the erection, and in January 1865, he owed to the
bankers upwards of £14,000 for moneys advanced to him. The company also owed
the bankers £1,272 and was liable for £5,000 on bills discounted by the bankers
and which formed part of the £14,000 due from the contractor. In this state of
things an indenture of mortgage was executed by G of the first part, the
company of the second part and the bankers of the third part, which recited the
contract with G and that he had since erected diverse building and machinery in
pursuance of the contract. It further recited that G had received £19,578 from
the company in part-payment and that a large sum still remained due to him from
the company under the contract; that G was possessed of machinery and that he
was indebted to the bankers for money advanced for the purposes of the
contract; that the company was indebted to the bankers in £l,272 and that G had
applied to the bankers to make him further advances to enable him to carry out
the work which the bankers had agreed to do on having the re-payment of the sum
of £14,289, the balance which was due by G to the bankers, and £1,272 which was
due by the company to the bankers, and any other sum advanced by them to G
secured as mentioned in the deed.
By the indenture, G and the company covenanted to pay to the bankers
£14,239 and £1,272 with all further sums advanced to G with interest and G assigned
to the bankers all moneys due or to become due under the contract and all
engines, etc., and the company assigned to the bankers all tin, copper, etc.,
to be raised out of the mines. In a suit by the bankers to enforce the
mortgage, the trial Court refused to recognise the validity of the mortgage and
dismissed the suit with costs. The matter went in appeal and the decision is
reported in Crewer & Wheal Abraham United Mining Co., Ltd. v. Willyams. The
Court upheld the contention of the company in part and gave a declaration that
the mortgage was invalid so far as it made the property of the company a
security for the debts due by G to the bankers. So far it secured the moneys
due by the company, and so far it was a mortgage by the contractor of his property
to the bankers, it was not interfered with. It is contended by the liquidator
that the position in the present case is the same. It is further urged by the
liquidator that the question of acquiescence and ratification does not come in
because in the balance-sheets of the company it is nowhere mentioned that
Sassoons were given the security. On the other hand the balance-sheets of the
company after 1927 show that M.T. Ltd. were secured
creditors. On this ground it is contended that as the transaction is ultra
vires the company and the directors, the deed is a nullity and no claim could
be created thereunder. In the alternative it is contended that if the
transaction is put forth as a new contract made between the parties on February
28, 1928, it must fail because there was no fresh consideration.
It is therefore necessary to look to the provisions of the deed itself.
After describing M.T. Ltd., as the mortgagors, the company as sureties and
Sassoons as the mortgagees, the deed recites as follows:
" And whereas the surety required money for the purpose of and in
connection with its business and requested the mortgagor to lend and advance to
it the money so required, and whereas the mortgagor requested the mortgagee to
lend and advance to it a sum of Rs. 9,00,000 (nine lacs) in order to enable it
to lend and advance to the surety the amount required by the surety and to use
the remaining portions for its own business, and whereas the mortgagee agreed
to lend and advance to the mortgagor the said sum of Rs. 9,00,000 (nine lacs)
on the mortgagor agreeing to repay the said sum with interest thereon, and to
secure re-payment of the moiety thereof by the mortgagor depositing the
title-deeds relating to………belonging to the mortgagor and to secure re payment of
the other moiety by the surety depositing with the mortgagee by way of
equitable security the title deeds relating to the said
properties………..particularly described in the first and second schedules
hereunder written, and whereas the mortgagee hath already paid ' to the
mortgagor the said sum of Rs. 9,00,000 (nine lacs) as the mortgagor doth hereby
admit and acknowledge out of which the mortgagor hath paid to the surety a sum
of over Rs. 4,50,000 (four lacs and fifty thousand) as the surety doth hereby
admit and acknowledge………And whereas the surety also hath deposited with the
mortgagee the title-deeds of the said lands……………belonging to it and whereas the
mortgagee hath called upon the mortgagor and the surety to execute these
presents evidencing the said deposit of title deeds as such security now this
indenture witnesseth that in consideration of the amount lent and advanced to
it by the mortgagor out of the said sum of Rs. 9,00,000 (nine lacs) lent and
advanced to the mortgagor by the mortgagee (the receipt of which the surety and
the mortgagor do hereby respectively admit and acknowledge) the surety hath
already deposited with the mortgagee the title-deeds mentioned in the schedule
hereunder written relating to lands belonging to the surety to the intent that
the said lands may be equitably charged with the re-payment to the mortgagee of
the sum of Rs. 4,50,000 out of the said sum of Rs. 9,00,000 lent and advanced
to the mortgagor by the mortgagee with interest on the same from July 1, 1926,
at the rate of 6 per cent……..and the mortgagor and the surety do hereby jointly
and severally agree to re-pay to the mortgagee on October 31, 1931, the said
sum of Rs. 4,50,000 with interest thereon at the rate aforesaid and do hereby
undertake that the surety shall execute at its own costs, when called upon a
proper legal mortgage of the said lands...to secure the said sum of Rs.
4,50,000 with interest."
I am unable to accept the first argument urged on behalf of the
liquidator that because in the deed the company is described as a surety they
must be treated as sureties. While taking into consideration that description
used in the deed to arrive at a correct conclusion, it is necessary to look to
the whole deed and consider the nature of the transaction between the parties.
In my opinion the principle that the first statement in the deed should prevail
is not relevant to be considered in this connection, because what the Court is
called upon in this case is not to determine the question of grant of property,
in which case that principle is held to be applicable, but to determine the
true effect of the document. The liquidator does not dispute the correctness of
the recitals in the deed and no evidence is led to challenge the truthfulness
of the statements contained therein. There is, of course, no proof of the
statements being wrong. Looking to the whole deed, the following facts appear
to be established :— (1) that on July 1, 1926, a sum of Rs. 9,00,000 had been
advanced by Sassoons to M.T. Ltd.; (2) that out of that Rs. 4,50,000 were
admitted to be advanced by M.T. Ltd. to the Company; (3) that M.T. Ltd., had
requested Sassoons to lend the said sum of Rs. 9,00,000, to them in order to
enable them to lend and advance to the company the amount required by the
company; (4) that at the time the said sum of Rs. 9,00,000 was advanced, M.T.
Ltd., had agreed to give by way of security its own property and the company's
property; (5) that the company had already deposited with Sassoons the
title-deeds of their property; (6) that Sassoons had called upon M.T. Ltd., and
the company to execute the document evidencing the deposit of the said
title-deeds as security; (7) that in consideration of the amount lent and
advanced M.T. Ltd., had already deposited the title-deeds of their property by
way of equitable mortgage for the repayment to Sassoons of the sum of Rs.
4,50,000 out of the said sum of Rs. 9,00,000; (8) that by the document M.T.
Ltd., and the company did jointly and severally agree to repay to Sassoons on
October 31,1931, the said sum of Rs. 4,50,000 with interest; and (9) that the
company agreed to execute at its own costs, when called upon, a proper legal
mortgage in favour of Sassoons of the said lands and building to secure the
said sum of Rs. 4,50,000, acknowledged to be received by the company out of the
said Rs. 9,00,000.
In order to decide whether the transaction is ultra vires the company or
not, it is necessary to have regard to these facts read along with Cl. 3 (f) of
the memorandum of association of the company. Under that clause the company
could give a promissory note to M.T. Ltd., for the amount borrowed by the
company from M.T. Ltd., It is similarly permissible for M. T. Ltd., to ask the
company to join them in passing a promissory note to borrow money, and for the company
to join accordingly. Therefore, a promissory note signed by M.T. Ltd., and the
company, making them jointly and severally liable thereunder, is not void under
Class 3(f) of the memorandum of association. As the company is empowered to
secure the repayment in such manner as it may deem expedient, it appears to be
equally clear that to secure repayment of the amount covered by the promissory
note the company could have given an equitable mortgage on its property. It is
not disputed that the company, as such, apart from the question of directors'
authority, could have secured the repayment of the money borrowed by it by the
deposit of title deeds with M.T. Ltd., or entered into an agreement of
equitable mortgage in favour of M.T. Ltd. It is further not disputed that if
such mortgage was given, M.T. Ltd. could either assign the equitable mortgage
in favour of the Sassoons or could in their turn enter into another agreement
of equitable mortgage in respect of the same property in favour of the
Sassoons. If so, is the transaction as contained in the deed of February 28,
1928, ultra vires? . In my opinion, having regard to
the terms of the deed of mortgage, it is not a document of suretyship. A
contract of guarantee, which is the same as a contract of suretyship, is
defined in Section 126, Contract Act, as "a contract to perform the
promise, or discharge the liability, of a third person in case of his
default." The person who gives the guarantee is called the
"surety," the person in respect of whose default the guarantee is
given is called the "principal debtor," and the person to whom the
guarantee is given is called the "creditor." Section 128 provides
that the liability of the surety is co-extensive with that of the principal
debtor. In the present case the terms of the deed of mortgage do not provide
that in default of the payment of money by M.T. Ltd., to Sassoons the company
would make good the amount. It is also not a case of admitting or becoming
liable when no money is received, but a case where the liability is admitted
and security given for that portion which has admittedly gone into the
possession and coffers of the company. It is a case where both M.T. Ltd., and
the company jointly promise to pay the Sassoons the sum of Rs. 4,50,000 because at the initial stage M.T. Ltd. borrowed Rs.
9,00,000 from Sassoons and the company admitted that out of that sum a sum of
Rs. 4,50,000 was actually received by them and which they were liable to make
good to M.T. Ltd. when called upon.
The difference between the position of a surety and a joint debtor is
made clear and recognized so far back as 1866 in Buck v. Hurst and Bailey. In
that case the plaintiff lent money to A upon B's promise to become surety for
its repayment, and after the money was advanced A and
B signed and delivered to the plaintiff the following memorandum: "We
jointly and severally owe you £60." It was held that this was evidence for
the jury of "an account stated by A and B jointly." In Guild &
Co. v. Conrad, the defendant orally promised the plaintiff that if he (the
plaintiff) would accept certain bills for a firm in which the defendant's son
was a partner, he (the defendant) would provide the plaintiff with funds to
meet the bills. It was held that this was not a contract of guarantee but a case
where the defendant promised to be liable on the ground of indemnity. In other
words the liability of the defendant did not arise in the event of the firm
failing to pay the bills, but, apart from that consideration, the defendant had
promised to discharge the bills if the plaintiff for the time being
accommodated the party. In the same way in the present case, as in the event of
Sassoons demanding from M.T. Ltd. payment of Rs. 4,50,000
the company could have been called upon to pay the amount forthwith by M.T.
Ltd., the company agreed to indemnity Sassoons for the amount and gave the
security mentioned in the deed of mortgage. In my opinion, therefore, the
transaction contained in the deed of mortgage is not a suretyship transaction
as argued on behalf of the liquidator. If the joint liability is admitted, no
question of reduction of debt of M.T. Ltd. arises. Similarly no question of
making entries in the books of any of the three companies arises. The legal
effect of the deed of mortgage cannot be controlled in any event by the
presence or absence of entries the parties may make or omit to make in their
books.
The case of Crenver etc. Mining Co. Ltd. v. Willyams, is quite distinct. In that case the company had
purported to mortgage its own property for the debt due by the contractor to
the banker. It was not shown that any portion of the money borrowed by the
contractor from the banker was admitted to be paid by the contractor to the
company. Merely because in respect of the work done and materials supplied by
the contractor to the company, the contractor had an independent claim against
the company, the company cannot mortgage to the banker its property for the
payment of the whole debt of the contractor and also further moneys to be
borrowed by the contractor for his contract. Therefore, that decision does not
help the liquidator.
In my opinion it is not open to the liquidator to contend that Sassoons'
money had not gone to pay the creditors of the company because Sassoons paid
the money to M.T. Ltd. and that money was advanced by M.T. Ltd. to the company,
as admitted in the deed of mortgage, and bona fide utilized for the business of
the company as shown by its books and balance sheets. Under the circumstances,
even in the absence of any extension of the directors powers and in the absence
of acquiescence or ratification, having regard to the terms of Article 73 of
the articles of association in Table A read with Clause 3(f) of the memorandum
of association, the directors had power to give security in respect of a sum
not exceeding Rs. 5,00,000. As under the deed of
mortgage Rs. 4,50,000 are shown on the face of the
document to be borrowed by the company and for which Sassoons received a
security, the transaction appears to be within the competence of the directors
and is binding on the company. The borrowing in excess by the directors from
M.T. Ltd. does not touch the validity of the deed of mortgage or the rights of
Sassoons thereunder, because if the security is treated as given for Rs. 4,50,000, out of Rs 9,00,000 it does not follow that the
security is given for the unauthorized portion of the borrowing. This is on the
ground that when a man has the power to do the right thing and does a thing
which is capable of being taken either as the right thing or in excess of his
power to do this right thing, it should be presumed the he had done the right
thing, especially when the rights of third parties would be adversely affected
on the other construction. In my opinion equity demands that it should be held
that the security so given was given in respect of the borrowing which the
directors were empowered to borrow under Article. 73. In respect of the excess,
the claim of the claimants must stand or fall on, its own merits.
The balance-sheets of the company do not show the name of Sassoons as
secured or unsecured creditors. Nor is it shown that at any
stage the attention of all the share-holders, viz., M.T. Ltd., the ten
directors and Mr. F. E. Dinshaw was drawn to the fact that the directors were
doing something which under the articles they were not authorized to do.
Under the circumstances, as I have pointed out before, no question of
ratification by acquiescence arises. On behalf of Sassoons it is contended that
as M.T. Ltd. could have obtained the deed of mortgage from the company and
could in their turn have either assigned it or executed another document of
mortgage in favour of Sassoons, it is only a question of form and not of
substance, and the transaction, under the circumstances, should be held to be binding
on the company. For this contention reliance is placed on the decision in
Seligman v. Prince & Co. In that case P assigned his business to the
company and the company agreed to indemnify him against the debts of his old
business. To satisfy these debts the company issued debentures and gave them to
certain creditors of the old business of P. It was held that the debentures
were issued not for the purpose of paying the debts of third parties but having
regard to the agreement to indemnify P., the debentures were binding on the
company and the debenture-holders were entitled to enforce their rights against
the company. It is contended by the liquidator that no such case of indemnity
is proved here. In my opinion, having regard to the express terms of the
indemnity contained in that case, that decision is not helpful to Sassoons. On
the evidence on record and the recitals in the deed of mortgage, it is
difficult to find support for the contention that an agreement of indemnity, as
contemplated in that case, was entered into.
The contention of the liquidator, that if this is a fresh agreement there
was no fresh consideration and therefore it must fail, is untenable. The
recitals in the document coupled with the admission that the sum of Rs. 45,000
out of the sum of Rs. 9,00,000 borrowed by M.T. Ltd.
from Sassoons was utilized by the company shows the consideration which moved
the company to execute this document in favour of Sassoons. It should be
remembered that under the Contract Act if Sassoons give time to M.T. Ltd. to
pay their debt to Sassoons, that would be sufficient consideration in law to
sustain the promise by the company to pay to Sassoons Rs. 4,50,000 out of the
sum of Rs. 9,00,000 under the circumstances mentioned in the deed. It is next
contended that the resolution of the directors authorizing the execution of the
document is bad, and in this connection reliance is placed on Article 77 of
Table A and Section 91-B, Companies Act. It is pointed out that Mr. A. J.
Raymond was a party to the resolution and was the managing director of Sassoons
and had the full powers of the board of directors. It is further pointed out
that Sassoons is a private limited company and all the directors of M.T. Ltd.
were parties, to this resolution. It is argued that the deed of mortgage is a
tripartite agreement in which all the three companies and directors were
interested and therefore there was no independent person to vote at the meeting
of the directors held on February, 1928. Under these circumstances it is contended
that the whole voting is bad and the resolution is void. It is pointed out that
the interest of a person as a share-holder is sufficient to disqualify him for
the voting under Section 91-B, and that the transaction is of such a nature
that the Court should very minutely scrutinise the voting at the meeting.
The contention that Sassoons is a private limited company or that Mr.
Raymond as the managing director had all the powers is quite irrelevant. As
held in Salomon v. Salomon & Co. under the law, a joint stock company is a
distinct entity; and although all the shares may be practically controlled by
one person, in law a company is a distinct entity and it is not permissible or
relevant to inquire whether the directors belonged to the same family or whether
it is, as compendiously described, a "one man company." The law
having recognized joint stock companies as distinct entities, these inquiries
and suggestions are quite irrelevant to the present contention. In my opinion
the transaction is not at all unusual, because it is conceded that if two
different documents, one from the company to M.T. Ltd. and another from M.T.
Ltd. to Sassoons had been passed, it would have been a perfect business
transaction with no unusual character. A9 pointed out in the correspondence,
the attempt on the part of the three parties was to save costs of the two
documents being prepared, and merely
because the effect and result of the two documents is entered in one document,
I am unable to hold that the transaction became an unusual one. It is not a
case of one person giving security for the debt of another, because it is
admitted by the deed of mortgage that the company gave the security only in
respect of the sum of Rs. 4,50,000 admitted to be
received by it out of the sum which originally came from Sassoons.
It is contended on behalf of
Sassoons and M.T. Ltd. that the liquidator's contention in respect of the
voting at the directors' meeting is untenable because the transaction contained
in the deed of mortgage is not-of the kind suggested by the liquidator. It is a
transaction between M.T. Ltd. and the company on the one side and Sassoons on
the other side, but it is not a contract between the company and M.T. Ltd.
Under the circumstances the directors of Sassoons alone would be disqualified
to vote, but not the directors of M.T. Ltd. As against this, it is argued by
the liquidator that without there being contract between M.T. Ltd., and the
company, how can a contract, as contained in the deed of mortgage, come into
existence? In my opinion this last argument is futile. Because the contract
contained in the deed of mortgage exists between the company and M.T. Ltd. on
the one hand and Sassoons on the other hand, it is not necessary that the
arrangement or contract between M.T. Ltd, and the company must be contained in
the same document. It is further contended against the liquidator that the
interest mentioned in Article 77 and Section 91-B, Companies Act, is some
personal interest which is not in common with the other share holders. For that
purpose reliance is placed on the decision in Seligman v. Prince 6- Co., and
the remarks at p. 629 where it is pointed out that the interest should be one
not in common with the others. Reliance is also placed on behalf of the
claimants on the terms of Section 91-B.
In my opinion there is
considerable force in the contentions urged on behalf of the claimants. I do
not think, however, that it is necessary to go into this part of the argument.
It is common ground that a resolution at a meeting of the board of directors of
the company was passed and the execution of the deed was sanctioned. The
correspondence further shows that Sassoons were informed of the board
meeting having been held. Under the circumstances the contention urged on
behalf of the liquidator is a contention in respect of the internal management
of the affairs of the company and must fail. In In re Hampshire Land Co., where
there was a common officer of the company who was present when the resolution
which was sought to be challenged as irregular was passed, this principle came
to be considered. Vaughan Williams, J., in delivering judgment observed as
follows:
"They (the share-holders) had no authority in the absence of a
properly passed resolution to borrow this money. But in that state of things,
the money having been lent by the society and received by the company, the
question which I have stated (viz., who is to bear the
loss?) arises. It is not disputed that the authority of Royal British Bank v.
Tarquand is such that the society had a right to assume in a case like this
that all these essentials of internal management had been carried out by the
borrowing company, and that it is only in case the law imputes to the society
knowledge of these irregularities that the society is not to rank……as a
creditor for the amount lent."
On the facts of the case, the learned Judge held that the knowledge of
the common officer could not be imputed to the society. Apart from the fact of
Mr. Raymond being a director of Sassoons the point is completely covered by the
remarks of Lord Hatherley in Mahony v. East Holyford Mining Co., as follows:
"On the one hand, it is settled by a series of decisions, of which
Earnest v. Nicholls is one and Royal British Bank v. Tarquand a later one, that
those who deal with joint stock companies are bound to take notice of that
which I may call the external position of the company. Every joint stock
company has its memorandum and articles of association; every joint stock
company, or nearly every one, I imagine (unless it adopts the forms provided by
the statute, and that comes to the same thing) has its partnership deed under
which it acts. Those articles of association and that partnership deed are open
to all who are minded to have any dealings whatsoever with the company, and
those who so deal with them must be affected with notice of all that is
contained in those two documents".
"After that, the company entering, upon its business and dealing
with persons external to it, is supposed on its part to have all those powers
and authorities which, by its articles of association and by its deed, it
appears to possess; and all that the directors do with reference to what I may
call the indoor management of their own concern, is a thing known to them and
known to them only; subject to this observation, that no person dealing with
them has a right to suppose that anything has been or can be done that is not
permitted by the articles of association or by the deed."
It is, therefore, not permissible in a case like this to inquire whether
there was a proper quorum for holding a meeting or whether the meeting of the
directors authorizing the execution of the deed of mortgage was properly
convened. These are matters of the internal management of the company, and
under the principles contained in Royal British Bank v. Tarquand the company is
bound by the resolution, so far as outsiders are concerned. No irregularity in
the internal management would therefore vitiate the transaction so far as an
outsider creditor is concerned. In this transaction there appears to be no such
irregularity as it was the duty of Mr. Raymond to convey to Sassoons and there
is nothing by which Sassoons could be held to be aware of any irregularity. In
my opinion, therefore, this contention of the liquidator must fail. On these
grounds, the deed of February 28, 1928, when executed, was valid, and Sassoons
have a right to recover the amount mentioned therein, according to the terms of
that deed. The result, therefore, will be that their claim as secured creditors
under the deed of February 28, 1928 should be allowed."
F.J. Collman and M.L. Manekshaw, for the Appellant.
K.M. Munshi and M.C. Setdlvad, for the Respondents.
Beaumont, C. J.—This is an appeal from an
order of Kania, J., made in the liquidation of T.R. Pratt (
That document, which is Exhibit J,
was made between M.T.s (thereinafter called the mortgagor of the first part),
Pratts (thereinafter called the surety of the second part) and Sassoons
(thereinafter called the mortgage of the third part). It recites the title to
the properties which were to be mortgaged, and then it recites that Pratts
required money for the purpose of their business and requested M.T.s to lend
them money, and that M.T.s, requested Sassoons to lend them rupees nine lacs,
in order to enable them to lend money to Pratts. Then it recites that Sassoons
had already paid to M.T.s rupees nine lacs, out of which M.T.s had paid to
Pratts rupees four and a half lacs. It is argued that in fact there is no
evidence on the record that that recital is true, namely, that the money
borrowed by M.T.s from Sassoons had to any extent gone to Pratts; but I see no
reason why we should not accept that recital as correct. There is no evidence
that it is untrue, and being an admission made by Pratts under their seal and
by the other parties, I think we can accept it as true. Then the document
recites deposits of the title deeds of the immovable properties both of M.T.s
and Pratts with Sassoons, and then the witnessing part states that Pratts have
already deposited with Sassoons the title deeds of the properties therein
mentioned with intent that the properties may be equitably charged with the
repayment to Sassoons of the sum of rupees four-and-a-half lacs out of the sum
of rupees nine lacs advanced to M.T.s by Sassoons with interest. Then M.T.s and
Pratts jointly and severally covenant with Sassoons to pay the said sum of
rupees four-and-a-half lacs with interest on October 31, 1931.
Now, we had a long and elaborate
argument from Mr. Coltman on behalf of the liquidator of the Pratts to the
effect that assuming that document was validly executed by Pratts, it was not
binding upon them. The argument is that Pratts by that document in effect
became surety for M.T.s and deposited their deed as security for M.T.s debt, and
that under the memorandum of association they had no power to do that.
It is also argued that there was no consideration in the deed in favour of
Pratts. It seems tome that the argument ignores the essential fact that as
between these three companies Pratts were primarily liable to pay at least
rupees four-and-a-half lacs, and Sassoons were entitled to receive
four-and-a-half lacs. It seems to me clear that the transaction could have been
carried out, as originally suggested by two documents. Pratts could have
mortgaged their properties to M.T.s for four-and-a-half lacs, part of the
moneys owing, and M.T.s could have assigned either absolutely by way of sale,
or by way of security, that mortgage to Sassoons and the actual result brought
about by this document could have been brought about in that way by two
documents and no question could have been raised. To hold that an arrangement
which could have been carried out by two documents cannot be carried out by one
document to which all the parties interested are parties, would be to sacrifice
substance to form. I think that the case of Seligman v. Prince & Co. is an
authority for that proposition. I agree with Mr. Coltman that that case is not
on all fours with the present case. It would be on all fours if Pratts had
agreed to indemnity M.T.s against their debt to Sassoons, but it seems to me
that that distinction is not an essential one. The essence of this case is that
as between the three parties to the deed Pratts were primarily liable to pay
and Sassoons were ultimately entitled to receive the money; and that was the
position also in Seligman v. Prince & Co. It is quite true that in the
document there is no consideration expressed in favour of Pratts. The
transaction is, I think, of the nature of a novation, that is to say a
substitution of the liability of Pratts to Sassoons for the liability of Pratts
to M.T.s and M.T.s to Sassoons; but it is not a complete novation, because
there is no release of Pratts' liability to M. T's and the subsequent books of
the companies show that Pratts were treated as debtors of M.T.s after this
document had been executed, and not as debtors of Sassoons.
But it seems to me that you cannot give effect to this document without
holding that there was an implied obligation on M.T.s part not to sue for the
amount of four-and-a-half lacs for which Pratts had given security to Sassoons
as long as this mortgage stood. It seems to me plain that if M.T.s had claimed
the money from Pratts, this mortgage, to which M.T.s were
a party, would have been a defence. I think that there was sufficient
consideration in favour of Pratts, in the implied covenant not to sue on the
part of M.T.s coupled with the fact that time was actually given. I agree,
therefore, with the learned Judge in thinking that if this document was
properly executed on behalf of Pratts, it was a valid contract. It is not in my
opinion, a document of suretyship at all. There is no ground suggested for
that, except the mere definition of Pratts as surety which amounts to very little.
Then the second point argued by Mr. Coltman on behalf of the liquidator of
Pratts as against Sassoons, though logically it comes first, is that this
document was never executed in such a way as to be binding upon Pratts. The
objection arises in this way: Section 91-A Indian Companies Act, provides that
a director who is directly or indirectly concerned or interested in any
contract or arrangement entered into by or on behalf of the company shall
disclose the nature of his interest: and Section 91-B provides that no director
shall, as a director, vote on any contract or arrangement in which he is either
directly or indirectly concerned or interested; and if he does so vote, his
vote shall not be counted.
Section 91-B is not taken from the English Act. The subject-matter of
Section 91-A was for the first time included in the English Companies Act by
the Act of 1929; but there is no statutory provision in England corresponding
to Section 91-B though the subject-matter of that section, namely the right of directors
to enter into contracts on behalf of the company in which they have some
personal interest is frequently dealt, with in the articles of association.
Now, the position with regard to the directors of Pratts is this. There were
always a certain number of directors common to Pratts and M.T.s and from 1922
until 1931, that is to say, during the whole of the material period, the boards
of the two companies were common. There were in all seven directors of the two
companies. One of those directors was Mr. A. J. Raymond, and another Capt. E.
V. Sassoon, both of whom were directors of Sassoons. But Mr. Raymond was more
than a director. He was the Managing Director of Sassoons, and, under a power
in their articles Sassoons had delegated to him all the powers of the
directors. The resolution to that effect is Exhibit 9. Now it is alleged that
in 1928, when this mortgage was arranged and executed, all the directors of
Pratts were concerned or interested in the matter individually, that is to say,
apart from their position as directors of Pratts, because they were directors
of M.T.s and also shareholders in that company. The qualification for directors
of M.T.s was the holding of one hundred shares, so that all the directors of
Pratts were not only directors but also shareholders in M.T.s; and I think that
the argument that they were individually concerned or interested in this
mortgage is sound. The object of Section 91-B was clearly to ensure that a
company shall have the benefit of the judgment of an entirely independent
Board; and I do not think that the Board of Pratts was independent of M.T.s in
the matter of this contract, or that the interests of the two companies were
identical.
It was vital to M.T.s that they should get for Sassoons the security
which Sassoons were asking for, which involved a mortgage of Pratts' property.
No doubt, Pratts were in a difficulty in resisting any claim by M.T.s because
they owed M.T.s money. But an independent Board theoretically might have taken
the view that it would be better that Pratts should be wound up rather than
give security for the debt, although experience shows that directors do not
usually take such a pessimistic view of the prospects of their company. But
there is practical force in the suggestion that an independent Board of Pratts
would not have agreed to a contract in the exact terms of the contract of
February 28, 1928. An independent Board might very well have said that if
Pratts were to give their property in security to Sassoons, at any rate they
must have an out-and-out release from M.T.s of a corresponding part of their
debt, and that Pratts should not be left to rely on an implied covenant not to
sue on the part of M.T.s. It seems to me impossible to say that there was no
conflict of interest in the matter of that mortgage between M.T.s and Pratts,
although to a certain extent their interests were common. In my opinion
therefore, by virtue of Section 91-B, none of the directors of Pratts was
competent to vote for the resolution to execute this mortgage in favour of
Sassoons.
Two further questions then arise: first, is it necessary to show that
Sassoons had notice of the disability arising under Section 91-B? Secondly, if
so, had Sassoons such notice? Now, it is very well settled law in the case of
English joint stock companies that people dealing with such a company are fixed
with notice of any limitations on the power of the company contained in the
statute under which it is incorporated or in the memorandum or articles of
association; but that if it is shown that a particular act was ostensibly
authorized by the statute and the memorandum or articles of association,
persons dealing with the company are not concerned to see that the company has
put itself into a position to exercise its power properly. That is the rule
recognized in Royal British Bank v. Tarquand and a great many other cases. It
is generally expressed by saying that outside parties are not concerned with
the internal management of the company. They are not, for instance, concerned
to see that there was proper quorum of directors present, or that persons who
were apparently directors of the company had in fact been validly appointed.
Those are matters of internal management: and I have no doubt if the disability
of a director to vote upon a contract in which he was personally interested
were imposed by the articles of association, the question whether he was
personally interested in, and entitled to vote upon, a particular contract
would be regarded as a matter of internal management, with which persons
dealing with the company would not be concerned.
It is argued, however, that that position does not apply in
The question then arises whether Sassoons had notice. It is, of course,
clear that they had notice of the terms of the contract to which they were
parties, and, therefore, they had notice that there was a conflict of interest
in relation to that contract between Pratts and M.T.s; and the only real
question, is, whether they had notice that the Board of the two companies were
common, and that, therefore, all the directors of Pratts were personally
concerned or interested in the contract.
Mr. Coltman has relied on Section 87, Companies Act, which requires a
list of directors to be filed with the Registrar, and he says that Sassoons,
therefore, had notice of who the directors of Pratts and M.T.s were; but it has
never been held, as far as I know, in the English cases that people dealing
with companies have notice of the contents of all documents on the file of a
particular company; and this Court in Pudumjee & Co. v. Moos has expressed
an opinion against that view. I therefore do not rely on Section 87. Apart from
this the first point argued in favour of the view that Sassoons had notice of
the common directorship is that they had such notice through Mr. Raymond. Mr.
Munshi on behalf of Sassoons has referred us to a good many cases which
undoubtedly show that where you have a director common to two companies you
cannot impute to both those companies all matters within the private knowledge
of the director, The cases referred to are In re Marseilles Extension Railway
Co., Exparte Credit Fonder and Mobilier of England ;
In re Hampshire Land Co. and Duck v. Tower Galvanizing Co. I may take the
general rule as stated in In re Hampshire Land Co. There the headnote, which I
think accurately represents the decision says:
"Where one person is an officer of two companies his personal
knowledge is not necessarily the knowledge of both the companies. The knowledge
which he has acquired as officer of one company will not be imputed to the
other company unless he has some duty imposed on him to communicate his
knowledge to the company sought to be affected by the notice, and some duty
imposed on him by that company to receive the notice; and if the common officer
has been guilty of fraud, or even irregularity, the Court will not draw the
inference that he has fulfilled these duties."
That case was followed, as to the last portion of it, where the common
director had been guilty of fraud or irregularity, by the House of Lords in
J.C. Houghton & Co. v. Nothard Lowe and Wills and none of the learned Lords
in that case expressed any dissent from the earlier portion of the decision, so
that I think one may take that case as good law. I am unable to say in this
case that Mr. A. J. Raymond had no duty imposed upon him to communicate to
Sassoons matters within his knowledge as a director of Pratts or M.T.s. He was
more than a director of Sassoons, he was, as I have said, the managing director
with all the powers of the directors; and having regard to the relations
between the three companies, I think it is a fair inference that he was placed
on the boards of M.T.s and Pratts largely in order that he might protect their
interests, and I have not the slightest doubt that it was his duty to
communicate to Sassoons any material fact which came to his knowledge as
director of either of those companies. Whether he ever did communicate to
Sassoons, the fact that the boards of directors of the two companies were common,
I do not know. I should think probably he did. But if he omitted to do so, it
was not, I feel sure, because he considered that he owed no duty to Sassoons to
make the communication, but because he did not realize the importance of the
fact.
Moreover, apart from the notice which Sassoons acquired through Mr.
Raymond, I think they also had notice in another way. The attestation clause to
the mortgage deed of February 1928, shows that the common seals of M.T.s and of
Pratts respectively were fixed pursuant to resolutions of the respective boards
of directors passed at meetings held on February 23,1928.
Sassoons were concerned to see that those resolutions were in order, because
they were the foundation of their title, and if they had taken the trouble to look
at the resolutions, they would have seen that they were resolutions passed by
the same persons as directors of Pratts and also as directors of M.T.s. So that
Sassoons knew in that way that all the directors of Pratts who voted in favour
of the execution of the document of February 28, 1928, were also directors, and
therefore share-holders of M.T.s, and in that way had an interest conflicting
with that of the company, and that their votes therefore could not be counted
under Section 91-B. It seems to me, in the circumstances of this case,
impossible to hold otherwise than that Sassoons had notice that the votes of
the directors of Pratts in favour of the execution of this document, under
which they claim, ought not to have been counted by reason of the provisions of
Section 91-B. If that is so, the resolution of the directors of Pratts of
February 23, 1928 is void, and the execution of the mortgage in favour of
Sassoons must also be void: see In re Greymouth Point Elizabeth Railway and
Coal Co., Ltd.
It was further argued by Mr. Munshi that even if the document was void,
it had been ratified by all the shareholders of Pratts. So far as the holders
of ordinary shares were concerned, there may have been a
ratification, because all the ordinary shares were held either by M.T.s
or by their directors, but the preference shares were held by outside parties,
one of whom was Mr. F.E. Dinshaw, who alone is suggested to have had notice. It
is said that Mr. F.E. Dinshaw was informed that Pratts had mortgaged their property
to Sassoons and that he knew that the boards of Pratts and M.T.s were common ; but not only was he not told that there was any
question as to the validity of the mortgage, but he was not told, as far as I
can see, the fact that the mortgage was not made directly to secure a debt due
by Pratts to Sassoons, but to secure a debt due by M.T.s to Sassoons. That is
to say, he was not told anything to suggest that there was any conflict of
interest between Pratts and M.T.s, Or any reason why
the execution of the mortgage should be impeached under Section 91-B. That
being so, I am clearly of pinion that the view of the learned Judge was right
as to this, and there is no force in the contention that the document has been
ratified by the share-holders. In the result, therefore, the claim of Sassoons
fails. As they had no debt apart from the mortgage-deed, they have no equity to
retain the documents of title of Pratts which were deposited with them. These
will have to be returned to the liquidator.
Then the question arises as to the claim of M.T.s. As I have Said, the power of the directors to borrow was limited by
Article 73 under which the amount borrowed by the directors for the time being
remaining undischarged must not exceed rupees five lacs, the capital of the
company. I have also mentioned that at the time of the liquidation the amount
due to M.T.s was less than five lacs. Therefore, prima facie, there seems to be
no reason for challenging the claim of M.T.s on the ground that the incurring
of the debt was ultra vires. But it appears from the accounts put in by M.T.s
that in previous years the borrowing did go beyond five iacs and reached, in
the year 1922, thirteen lacs, and it was gradually reduced, but remained over
five lacs down to the year 1928. It was argued by Mr. Coltman that by the
application of some of the many equities discussed in Sinclair v. Brougham we
ought to hold that the amounts repaid were the authorized borrowing and not the
unauthorized borrowing, and we ought, therefore, to come to the conclusion that
the whole amount due at the date of the liquidation was the unauthorized
borrowing. Why we should apply any equity in favour of his clients who borrowed
the money they do not wish to re-pay, I do not know. It is quite clear that the
rule in Clayton's case has no application where the question is between moneys
borrowed inira vires, and moneys borrowed ultra vires in respect of which the
relationship of debtor and creditor never arises. It is clear also that Pratts
had the benefit of all these moneys, and as soon as the amount due came to
below five lacs, the borrowing was authorized under Article 73.1 entirely agree
with the learned Judge that, insofar as it is necessary to rely on any
presumption, the presumption would be that the moneys repaid represented in the
first place moneys borrowed ultra vires, which never became the property of the
company, but remained the property of the lenders. I am not sure that in this
case it is necessary to rely on any presumption, because at the material date,
namely the commencement of the liquidation, Article 73 had no application,
because the debt was under the limit. I agree also with the argument of Mr.
Setalvad on behalf of M.T.s that in a case where the borrowing is ultra vires
the directors, and not ultra vires the company, the money could be recovered in
an action for money had and received. As pointed out by the Lord Chancellor in
Sinclair v. Brougham where the borrowing was ultra vires the company, no action
for money had and received lies in such a case, because the action is based on
the fiction of a promise to pay, and you cannot have a fictional promise to pay
where the promisor is not competent to give an actual promise. But that
reasoning does not apply where the borrowing is only ultra vires the directors,
so that the company can ratify the borrowing and give a. valid promise to pay.
It has further been argued by Mr. Coltman in this Court, though the point
does not appear to have been taken in the Court below, nor is it directly taken
in the memorandum of appeal, that a part of the moneys due at the date of the
liquidation to M.T.s represents interest on moneys borrowed ultra vires. There
is, I think, some force in the contention that Pratts could not be charged with
interest on moneys which for the time being had not been properly borrowed, nor
I think could such interest be recovered in an action for moneys had and
received. If that point were to prevail, I think that the liquidato of Pratts
would be entitled to an account of the moneys due to M.T.s with a declaration
that nothing was to be allowed in respect of interest on moneys borrowed which
were for the time being in excess of five lacs. But, in my opinion, we ought
not to direct such an account in this case. The point, as I have said, was not
taken in the Court below, nor has it been directly taken in the memorandum of
appeal; and in the lower Court Counsel for Sassoons tendered an account of
pratts in that ledgers of M.T.s, and
Counsel for Pratts admitted the correctness of the account and no point was
raised that any particular issue in the account was wrong. No doubt it was said
that the whole amount due on the account was not properly payable because it
all represented moneys borrowed ultra vires. But no question was raised that a
part of the moneys due at the date of liquidation to M.T.s represented interest
on moneys borrowed ultra vires. I think, in view of the admission in the Court
below as to the correctness of the account, and the fact that this question as
to interest was not argued in the Court below nor taken in the memorandum of
appeal, we ought not to direct an account now.
In the result, I agree with all
the conclusions of the learned Judge in the Court below except the conclusion
that Sassoons were not fixed with notice of the disability of the directors of
Pratts to vote on the resolution for the execution of the contract in suit. That being so, the appeal against Sassoons will be allowed, and the
appeal against M.T.s dismissed. Declared that M.T. s are
entitled to a certificate under Rule 702, as unsecured creditors for the amount
of their claim. The appeal against M.T. s is dismissed with costs, and the
liquidator of Pratts will have liberty to pay the costs out of the assets. The
appeal is allowed against Sassoons ; but having regard
to the fact that they have succeeded on certain issues in the lower Court and
in this Court, they ought not to pay the whole of the costs in both the Courts.
Instead of apportioning costs, we propose not to vary the order of the lower
Court that the costs of respondent No. 1 should come out of the assets, but we
direct respondent No. 1 to pay the whole costs of the appeal against respondent
No. 1 to the appellant.
B.J. Wadia, J.—I have come to the same conclusion. The
question for decision so far as the claim of the Sassoons is concerned, centers
round the transaction contained in the deed on mortgage, dated February 28,
1928, made between M.T.s. the Pratts and the Sassoons. The claim of the
Sassoons is based on this deed, and on the deed of 1931 between the same
parties which was, however, only by way of confirmation. The claim was rejected
by the liquidator, but the grounds far rejection have not been clearly stated
in his affidavit made in these proceedings on July 13, 1933. His
Counsel, however, contended before us that the transaction was not binding on
the company and the liquidator on the grounds, (1) that the recitals in the
deed were not accurate and did not correctly represent the actual state of the
dealings and business between the parties: (2) that the transaction was really
a transaction of suretyship under which Pratts stood surety for payment of a
debt due to the Sassoons, not by themselves, but by M.T. s, and the giving of
such guarantee was ultra vires the company; (3) that the covenant under which
the Pratts and M.T.s jointly and severally promised to repay four and a half
lacs to the Sassoons and the security for the repayment of the same were
without consideration; that the deeds were executed in pursuance of resolutions
which were not valid and binding, and that therefore the deeds were void and of
no effect.
With regard to the recitals in the deed of 1928 it was argued that the
figures of nine lacs and four and a half lacs were entirely imaginary, that
there was no evidence of a direct specific loan of four and-a-half lacs from
the Sassoons to the Pratts, that there was no connection between the account
subsisting between Pratts and M.T.s on the one hand and the account between
M.T.s and the Sassoons on the other, and that therefore no relationship of
creditor and debtor had been established to justify the covenant to repay the
four and a half lacs and the security for repayment of the sum. It is common
ground that there is no account of the Sassoons in the books of Pratts showing the
Sassoons as creditors, nor any account of Pratts in the books of the Sassoons
showing Pratts as debtors. But the relationship of creditor and debtor in
respect of the four and a half lacs is created by the deed itself, which has
been formally signed and executed by all the three companies. In that document M.T.s have acknowledged receipt of nine lacs from
the Sassoons, and Pratts acknowledged receipt of four and a half lacs out of
the nine lacs advanced by Sassoons to M. Ts. The recitals may not be
literally correct in the sense that there is nothing on the record of the
companies corresponding with what is stated in them, but they are not false in
substance. To hold otherwise would be, in my opinion, to sacrifice substance to
form. There is also a plain recital that Pratts required four and a half lacs
for the purpose of their business, that these four and a half lacs were
advanced for such purpose, and there is no evidence before us that the money
which were within the authorized limit were not used and applied bona fide for
the purposes of the company. When moneys borrowed or acknowledged to be due are
within the authorized limit, there is no obligation upon the lending company to
inquire how the moneys are about to be used nor how in fact they have been
used. In my opinion, therefore, all the parties would be bound by this
transaction, if it was otherwise valid.
I agree with the learned Judge in the Court below that this is not a
suretyship transaction. The fact of Pratts having been described as "surety"
is not conclusive as to the nature of the transaction, any more than the stamp
on the document is conclusive as to what the document really is. Our attention
was drawn to certain correspondence that passed before the deed was executed.
But all previous correspondence was in the nature of negotiations. The
negotiations became merged in the deed which after execution was the sole
repository of the terms of the transaction. Under this deed the Pratts have not
guaranteed the payment of the moneys due by M. Ts. to the Sassoons. They have
acknowledged their own liability to the Sassoons for four-and a-half lacs, and
secured repayment of that sum by deposit of title-deeds of their property. It
cannot, therefore, be said that Pratts have made their own property security
for somebody-else's debt when they have themselves acknowledged that they are
debtors to the extent of four-and-a-half lacs, and the ruling in Crewer &
Wheal Abram United Mining Co., Ltd, v. Willyams, on which Counsel for the
liquidator relies, therefore, does not apply. It was also argued that there was
no novatio as to the four-and-a half lacs, because M.T.s have
not released Pratts of their liability for that amount, nor have the Sassoons
released M.T.s. It is true that there is no express covenant in the deed that
M.T.s will not sue Pratts for four-and-a-half lacs, but such a covenant is
implied in the deed, for as a result of the deed M.T.s could not have sued
Pratts for four-and-a half lacs, at least not for three years.
The Sassoons gave time to M.T.s to pay their debt, and an implied
forbearnce to sue M.T.s is sufficient consideration in law to sustain the
promise by Pratts to pay four-and-a-half lacs, to Sassoons which is a part of
the nine lacs advanced by the; Sassoons to M.T.s. There is a
tripartite arrangement in the nature of a novatio, and it cannot be said that
an arrangement of this kind is ultra vires the company. This brings me to the
resolution of February 23, 1928. The alleged invalidity of the resolution seems
to be the only ground which has been forcibly urged by the liquidator in his
affidavit. But it is a question which really goes to the root of the whole
matter. Counsel for the liquidator relied on Section 91 B and the proviso to
Article 77 of Table A, Companies Act. Sections 91-A,
91-B, 91-C and 19-D have all been added by Act 11 of 1914. Section 14 of the
English Companies Act, which was added in the Act of 1929, corresponds in
effect to Section 91-A of our Act. There is no section in the English Act
corresponding to Section 91-B. Section 91-B provides that where a director is
concerned or interested directly or indirectly in a contract or arrangement
with the company; he cannot vote on that contractor arrangement; and the
proviso to Article 77 in Table A says in effect the same thing, except that the
words in the section are "contract or arrangement" and the words in
the article are 'contract or work.'
It is clear that the interest of the director in the transaction must be
personal, and either pecuniary or material. It may be direct or indirect, but
it must be adverse to the company of which he is a director. The principle on
which it is based has' been well recognized, and it is so direct and inflexible
that even the fairness or unfairness of the transaction is immaterial. For
instance, directors have been held to be incopmetent to vote on giving a
debenture security to two of themselves in consideration! of
a large sum of money owing to them : In re Greymouth Point Elizabeth Railway
and Coal Co., Ltd. They cannot vote on an issue of debenture to secure an
overdraft account with the bank which was guaranteed by themselves personally : Victors, Ltd. v. Linggard. A director cannot
vote on an allotment of shares to himself: In Re Hormusji A. Wadia. The reason
in all these cases is that the company is entitled to the unbiased judgment of
its directors on matters affecting the interests of the company. As pointed out
by the Vice-Chancellor in Benson v. Heathorn, the company has a right to the
entire services of its directors, a right to the voice of every director, and a
right to his advice in giving his opinion on matters which are brought before
the Board for consideration. Section 91-B, Companies Act, enforces a statutory
prohibition which is somewhat stringent and it was pointed out in argument in
Guntur Cotton Jute and Paper Mills Co., Ltd. v. Venkatachalapati at p. 128 that
the case to which it should be applied must fall strictly within its purview.
The liquidator contends that the resolution of February 23, 1928, is
invalid because the directors of Pratts were not competent to vote on a
resolution for executing the deed, having regard to their common interest in
M.T.s and that the Sassoons had notice, actual or constructive, of the facts
going to invalidate the resolution. The five directors of
Pratts, who were present at the meeting of February 23, and voted on the
resolution of 5 p.m., passed exactly the same resolution as directors of M.T.s
in the same building at 5-15 p. m. Moreover, the directors of Pratts
were interested in M.T.s. either as share-holders or as directors of M.T.s. One
of the directors of Pratts was Mr. A. J. Raymond, who was also the managing
director of the Sassoons. Under resolution of the Sassoons of February 3,1921, he was empowered to exercise the full powers of the
entire Board of Directors of the Sassoons, and according to the evidence given
in these proceedings by the head accountant of the Sassoons, he was in charge
of the business of the Sassoons as managing director from its inception. There
was no doubt a common Board between M.T.s and Pratts, also a common secretary
and a common management. It was argued on behalf of the liquidator that there
was no independent person present to vote on the resolution giving the security
of Pratt's property to the Sassoons, and that all the directors, were,
therefore, disqualified to vote. There was no quorum competent to transact
business, and therefore, the resolution was invalid, and the deed executed in
pursuance thereof was a nullity.
On the other hand Counsel for the Sassoons argued that the question of
the disqualification of the directors of Pratts, the question whether the
meeting was properly called, the question whether there was a proper and
competent quorum qualified to vote on the resolution, are all matters of
internal or in door management of the company, and do not affect the validity
of the contract or transaction so far as outsiders are concerned, under the
ruling in Royal British Bank v. Tarquand and a company is bound by its own
resolution. A person dealing with limited liability companies is deemed to have
notice of its memorandum and articles of association, but he is not bound to
inquire into the internal management, and will not be affected by any
irregularity of which he has had no notice. He has a right to assume that
nothing has been done or permitted to be done which is not permitted by the
memorandum and articles of association or by the statute incorporating the
company itself. But actual or constructive notice of any irregularity prevents
a third person contracting with the company from obtaining the protection of
the rule in Royal British Bank v. Tarquand namely, that all matters of internal
or in-door management must be deemed by outsiders to have been duly and
properly complied with. Such notice, as I have said, may be actual or
constructive. If the outside party is put on inquiry by reason of the
circumstances under which the transaction was put through, or by the nature of
the transaction itself, or by any other surrounding circumstances, and
disregards the facts which put him on inquiry as to the irregularity, he cannot
get the benefit of the rule.
The question, therefore, in this case is whether the Sassoons had notice
of the irregularity, that is, notice of the disqualification of the directors
of Pratts to vote on the resolution, under the terms of Section 91-Bof the Act.
Mr. A.J. Raymond was a common director of all the three companies but it was
said that he was present at the meeting of February 23, 1928, in his capacity
as director of Pratts only, and that he was not bound to communicate his
knowledge of any irregularity derived in that capacity to the Sassoons. It has
been laid down in numerous cases that the knowledge of the common officer of
two companies is not necessarily the knowledge of both the companies, and
Counsel contended that it did not follow that the Sassoons therefore had notice
of every fact that happened to be known to Mr. A.J. Raymond : In re Hampshire
Land Co. In re Marseilles Extension Railway Co. Ex parte
Credit Foncier and Mobilier of England. But in J.C. Houghton & Co.
v. Nothard Lowe and Wills, Viscount Dunedin points out at p. 14 that it may be
assumed that the knowledge of directors is in ordinary circumstances the
knowledge of the company, and Viscount Sumner points out in the same case at p.
19 that what a director knows or ought in the course of his duty to know may be
the knowledge or the company, for it may be deemed to have been duly used so as
to lead to the action, which a fully informed corporation would proceed to take
on the strength of it. The position of Mr. A. J. Raymond when he sat as a
director of Pratts on February 23, 1928, is of importance in this connection.
The Sassoons were vitally concerned in the equitable mortgage which Pratts were
to give to them. There was previous correspondence between the companies about
it. Mr. Raymond was not merely a common director, but he was also present there
as manager of the business of the Sassoons, and this certainly was a business
transaction, not of Mr. A. J. Raymond, personally, but of the Sassoons. He knew
or must be presumed to have known that there was a common board of Pratts and
M.T.s., though he may not have appreciated the legal significance of that fact
nor thought it his duty to communicate to the Sassoons. There were other
circumstances surrounding the transaction which were sufficient to suggest
further inquiry.
The two resolutions passed on the same day are mentioned under the seals
of M.T.s and Pratts which were affixed to the deed itself. The learned Judge in
the Court below has stated that if this transaction could have been put through
by two documents, it might as well have been put through by one, and there was
nothing unusual in its nature as a business transaction. The form may not be
unusual, but the question is not one merely of form. A transaction which may be
effected by two documents may well be effected by one, but the doubt as to the
validity of the transaction as embodied either in one document or two documents
will still remain under the circumstances which I have referred to before. In
my opinion it was Mr. Raymond's duty as manager of Sassoons for all business
purposes to act not merely for the purposes of receiving information but also
for the purpose of communicating it. It is really difficult to believe that
there was a situation on February 23, when it could be said that Mr. Raymond
had notice only as a director of Pratts and had no notice as managing director
of the Sassoons and as manager of their business. The Sassoons also were bound
to inquire into the title to their mortgage, and the title to the mortgage was
based upon the validity of the resolution. There was no independent board, and
no meeting of the shareholders was called to ratify the transaction. Therefore,
under all the circumstances, the Court can impute knowledge of the irregularity
to Sassoons. Counsel for the liquidator also relied on Section 87, Companies
Act, under which the list of directors filed with the Registrar is open to
inspection, but it was pointed out in Pudumjee & Co. v. Moos that
notwithstanding Section 87 the appointment of directors was still a matter of
the internal management of the company, and an outsider could not be expected
also to search the register for the list of directors.
I do not agree with counsel for the Sassoons that the transaction was
ratified by all the shareholders of Pratts by acquiescence. There can be a ratification either with full knowledge of the transaction
or with the intention to adopt the transaction under any circumstances. It
cannot be said that Mr. F.E. Dinshaw, and two others who were joint holders of
preference shares on behalf of the Gwalior State had full knowledge of all the
circumstances attending the transaction or were put upon inquiry. It was argued
that if he had not the knowledge, he had the means of knowledge. But a person
can only be put on inquiry if there are facts communicated to him which may
lead to a further inquiry. He was not put on inquiry merely as a shareholder.
Reference was made to two letters of February 28, and March 3, 1928, written to
him by H.M. Mehta & Co., the managing agents, on behalf of Pratts. There
was no reply to either of them; but from that it cannot be inferred that he
manifested an intention to adopt the transaction. In my opinion the letters are
not sufficient evidence on which any Court can base a finding of standing by or
acquiescence on the part of Mr. F. E. Dinshaw.
The claim of the Sassoons is based on the deeds. The deeds not being
valid and binding for the reasons above stated, they cannot have any claim
either as secured or unsecured creditors, for the debts as well as the security
are created by the deed of 1928. This brings me to the claim of M.T.s which is
really an alternative claim. It is stated in para. 7 of the affidavit of Mr.
J.M. Taleyarkhan, dated July 7, 1933, that in the event of the claim of Messrs.
E.D. Sassoon & Co., Ltd., being admitted, M.T.s will not claim the amount
over again. Article 73 of Table A has already been referred to and I need not
recite it again. It fixes the directors' limit of borrowing at five lacs. It
was, however, argued that borrowings by Pratts were far in excess of the limit
of five lacs, but in my opinion there is no ground for assuming that the claim
now made, which is below the limit, represents the balance of unauthorized
borrowings. It was further argued that the Pratts should not, in any event, be
charged with interest on that portion of the claim, which may represent
interest on their unauthorized borrowings. That contention, however, was never
put forward in the Court below. It has not been mentioned in the judgment. It
is not taken in the memorandum of appeal. Even in the affidavit of the
liquidator himself of July 13, all that is stated is as follows
:
"The petitioners contend, and I am advised with reason, that as the
payments made by the company from time to time to M. T., Ltd., in liquidation
of the account would discharge the borrowings from M.T.s Ltd., in order of
time, the ultimate balance left unpaid represents that final borrowings, and
therefore the balance shown as now due in the account of M.T. Ltd., represents
the last borrowings by the management of M. T., Ltd., in excess of the powers
of the board of directors to borrow, and therefore represent unauthorized and
ultra vires borrowings by which the company is not bound."
The claim of M.T.s was disputed on principle, and not in respect of the
quantum, in the course of the hearing, and no one contended in the Court below
that an account should be taken of what was due to M.T.s in respect of their
claim. The account of the Sassoons in the ledgers of M.T.s and the account of
Pratts in the ledgers of M.T.s were put in, and their correctness was admitted.
Counsel for the liquidator argued that all that was meant by the admission was
that the accounts were not to be formally proved. If that was so, the note
taken by the learned Judge would not have been in that form. The accounts would
only have been put in by consent without proof. I therefore hold that the
liquidator is not now entitled to have any account taken of the sum due to
M.T.s in respect of their claim. The claim is within the authorized limit. The
moneys were borrowed and used according to the balance sheets of Pratts for
their business. There was, therefore, an implied promise by the Pratts to repay
all that had gone into their coffers. In my opinion no account should now be
ordered, and the account of the claim should be taken as correct. It has been
held that an account for money had and received cannot lie in the case of an
ultra vires borrowing: Sinclair v. Brougham. But the amount claimed by M.T.s is
within the limit, and Pratts are bound to repay the sum. For these reasons I
agree with the conclusion that the claim of the Sassoons should be rejected,
and the claim of M.T.s allowed. In the result the appeal would be allowed so
far as the claim of the Sassoons is concerned, and dismissed so far as the
claim of M.T.s is concerned. I agree with the order for costs made by the Chief
Justice.
[1932] 2 COMP. CAS. 588 (
CHANCERY DIVISION
Eve, J.
February 1, 2, 16, 1932
Manning, K.C. and Harold Christie, for the applicant.
A. de W. Mulligan, for the liquidator.
Eve, J.,—after stating the facts as above set forth, read the following judgment: It is not contended, nor in the face of a number of authorities to the contrary effect could it be, that an arrangement of this nature for rewarding long and faithful service on the part of persons employed by the company is not within the power of an ordinary trading company such as this company was, and indeed in the company's memorandum of association is contained—clause 3, paragraph W—an express power to provide for the welfare of persons in the employment of the company, or formerly in its employment, and the widows and children of such persons and others dependant upon them, by granting money or pensions providing schools, reading room or places of recreation, subscribing to sick or benefit clubs or societies or otherwise as the company may think fit. But whether they may be made under an express or implied power, all such grants involve an expenditure of the company's money, and that money can only be spent for purposes reasonably incidental to the carrying on of the company's business, and the validity of such grants is to be tested, as is shown in all the authorities, by the answers to three pertinent questions: (1) Is the transaction reasonably incidental to the carrying on of the company's business? (2) Is it a bona fide transaction? and (3) Is it done for the benefit and to promote the prosperity of the company ? Authority for each of the foregoing propositions is to be found in the following cases—Hampson v. Price's Patent Candle Co., Hutton v. West Cork Railway, and Henderson v. Bank of Australasia.
In the present case the Court is left entirely without any material for determining whether the transaction was characterised by any of these several attributes, assuming, as I am quite prepared to do, that there are no grounds for impugning the bona fides of the board or the applicant; no one of them has given evidence to suggest that the course adopted was taken for the benefit of or to promote the prosperity of the company, or that the execution of the deed of covenant and the assumption of so burdensome a liability was reasonably incidental to the carrying on of the company's business. All that I have in the way of evidence are affidavits proving the death of Southerden and probate of his will, verifying the memorandum and articles and the minute book of the company, the three deeds executed on June 29, 1928, and the certificate of the applicant's birth. Neither of the two directors who authorised the sealing of the deeds has made any affidavits, and the only material paragraphs in the applicant's affidavit are paragraphs 2 and 3, where she says: "(2) My late husband was for many years prior to his death managing director of the company. (3) After the decease of my said husband considerable negotiations took place between me and the directors of the company and S.L. Behrens, Ltd., with a view to providing me with a pension, and eventually it was agreed that the company and S.L. Behrens, Ltd., and myself should enter into a deed of covenant under which the company and S.L. Behrens, Ltd. were to jointly and severally pay me an annuity of £500."
The conclusion to which, in my opinion, such evidence as is available irresistibly points is that the predominant, if not the only, considerations operating in the minds of the directors were a desire to provide for the applicant, and that the question what, if any, benefit would accrue to the company never presented itself to their minds. If there were nothing more in the case than what I have just indicated, I should feel myself bound in the circumstances to support the liquidator's rejection of this lady's proof. But there is another and perhaps more insurmountable difficulty with which she is faced, and it is this, that this annuity is a gift or reward given out of the company's assets by the directors to one of their own body, and this is something they cannot do unless authorised by the instrument which regulates the company, or by the shareholders at a properly convened meeting, that is, a meeting convened by a notice disclosing the intention to make the proposal. The authority for this proposition is the case of Newton & Co., In re. The paragraph I read earlier in this judgment from the company's memorandum does not assist the plaintiff, for "a director is not a servant" of the company—per Bowen, L.J. (52 L.J. Ch., at p. 698; 23 Ch. D., at p. 672), nor is any managing or other director a person in the employment of the company—Normandy v. Ind, Coope & Co. The alternative of getting authority from the shareholders at a meeting duly convened for the purpose was, never thought of, or, if thought of, was dismissed as superfluous, inasmuch as the shares were in the hands of so few, and, so far as was known, nobody was likely to object. It was the same in Newman's Case, but Lord Lindley, in giving judgment on behalf of Lord Halsbury, A.L. Smith, L.J., and himself disposed of this point in the following terms (64 L.J. Ch., at p. 413; [1895] 1 Ch., at p. 686): "Even if the shareholders in general meeting could have sanctioned the making of these presents, no general meeting to consider the subject was ever held. It may be true, and probably is true, that a meeting, if held, would have done anything which Mr. George Newman desired; but this is pure speculation, and the liquidator, as representing the company it its corporate capacity, is entitled to insist upon and to have the benefit of the fact that even if a general meeting could have sanctioned what was done, such sanction was never obtained. Individual assents given separately may preclude those who give them from complaining of what they have sanctioned; but for the purpose of binding a company in its corporate capacity individual assents given separately are not equivalent to the assent of a meeting. The company is entitled to the protection afforded by a duly convened meeting, and by a resolution properly considered and carried and duly recorded." All of which is peculiarly appropriate to the present case.
In my opinion, the rejection of this proof by the liquidator was quite right, and I must therefore dismiss this summons with costs.
Walters Deed of
Guarantee, In re
MAUGHAM, J.
JANUARY 11,
1933
Archer, K.C, and C.W. Turner, for the company and
the trustee for the preference shareholders.
Swords, K. C. and Heckscher, for the Defendant.
JUDGMENT
Maugham, J., after stating the facts, said: The question arises whether
Clause 7 of the deed of guarantee is binding on the company. The instant that
any sum is paid by the defendant to the trustee for the preference
shareholders, Clause 7-according to its terms, authorizes the defendant to
commence an, action for repayment of the sum, as if he were a creditor of the
company entitled to rank in the same position as any other creditor. The
capital of the company might thereby be reduced otherwise than by expenditure
on the objects defined by the memorandum. In my opinion, such a provision must
be inconsistent with the principles in Trevor v. Whitworth, in which it was
held that a claim against a company in liquidation by a former shareholder for
the balance of the price of shares which he had sold to the company, and which
the company had purported to buy under its articles, failed, because the
company had no power under the Companies Acts to buy its own shares, or to make
without the sanction of the Court any payments in reduction of capital, not
being expenditure upon and reasonably incidental to the objects of the company.
Clause 7 is not in my opinion, dealing with any question of subrogation. It
purports to place the defendant in the position of a creditor who is entitled
to rights against the company quite different from the right which a preference
shareholder has to payment of dividends out of profits, according to the
company's articles of association and distinct from the right of a preference
shareholder in a winding-up. In my opinion, therefore.
Clause 7 is wholly ultra vires and void. On the other hand, preference
shareholders are not entitled to be paid twice over any part of dividends which
the defendant has provided for distribution among them. I therefore declare
that Clause 7 is wholly ultra vires and void, and that this declaration is
without prejudice to any claim of the defendant to be subrogated to the rights
of preference shareholders of the company as to payments which may be made in
regard to preference dividends for the period of three years from May 30, 1928,
or in respect of any rights of preference shareholders in a winding-up.
[1934] 4
COMP. CAS. 481 (BOM.)
HIGH COURT OF
v.
Sholapur
Spg. & Wvg. Co. Ltd.
BEAUMONT, C.J.
AND RANGNEKAR, J.
MARCH 22, 1934
V.F. Taraporewala and M.C. Setalvad, for the Appellant.
Chimanlal Setalvad, M.L.
Manekshaw, K.M. Munshi and D.D. Sabnis, for the Respondents.
Beaumont, C. J.—In this case the plaintiff sues on
behalf of himself and the other shareholders of the Sholapur Spinning and
Weaving Co., Ltd. and he asks first, for a declaration that certain resolutions
passed by the directors, which resolutions were for the dismissal of the
company's agents, are in contravention of the memorandum and articles of
association of the company and are not binding on the members of the defendant
company, and secondly, for an injunction to restrain the defendants from acting
upon the resolutions. Defendant No. 1 is the Sholapur Spinning and Weaving Co.,
Ltd. and the other defendants are the directors. It is a well-settled principle
in company law that the Court does not generally interfere with the internal
management of the affairs of a company, and, if the majority of the shareholders
consider that a particular contract of employment should be terminated, the
Court would not as a rule consider the matter at the instance of a minority of
shareholders. To get over that difficulty, it is contended by the plaintiff
that the dismissal of these agents is an act ultra vires the company, and, no
doubt the case of acts ultra vires the company does constitute an exception to
the general rule that the Court will not interfere in the management of a
company. But it is, on the face of it, startling to find it suggested that the
dismissal of persons in the employment of the company, or under contractual
relations with the company, is an act ultra vires the company. To get over that
difficulty the plaintiff alleges that the rights of the agents arise under the
memorandum of association of the company, and, therefore, cannot, be altered.
But at that point another difficulty arises, i. e., that
the memorandum of association, as it has been held many times, does not
constitute a contract between the company and a third party who may be named
therein. So that, ultimately the argument assumes some such form as this, that
it is a vital part of the constitution of the company, that the company should
employ the agents that the company should do its business through the services
of the agents, that that obligation arises apart from any contract with the
agents, and that it is an obligation imposed upon the company as part of its
charter which cannot be altered, having regard to the terms of Section 10,
Companies Act. In my opinion, the argument is quite untenable and the
plaintiff's action is wholly misconceived. With whatever skill the real object
of the plaintiff is concealed, it is quite plain that the order which he asks
for would have the effect of restraining the
company from dismissing the agents, and it is, well settled that the Court will
not make an order the effect of which is to enforce specifically any contract
of personal service. But I think the case may be based on another ground, because
I am not perpared to accept the argument of the plaintiff that the material
clause in the memorandum is really a vital part of the constitution of the
company or a condition of the memorandum within the meaning of Section 10,
Companies Act. The clause in question which is Clause 6, is not incorporated
amongst the objects of the company, but is an independent clause, and it is in
these terms :
"That the firm of the Morarjee Goculdass & Co., of
Bombay, merchants, or whatever member or members that firm may for the time
consist of, shall be the agents of the company, so long as the said firm shall
carry on business in Bombay or until they shall resign, and they shall receive
a commission of ¼ anna per lb., on all the yarns and other material
manufactured and sold by the company; should however the company during any one
year be unable to declare a dividend of 4 per cent, owing to their own profits
being less than that amount, the agents shall only be paid one-third of the
above commission."
The clause does not purport in terms to impose any
obligation of service upon the agents. It merely provides what remuneration the
agents shall receive. Now, properly construed it seems to me that what that
clause really does is to provide that the company shall enter into a contract
of agency, on the terms indicated, with the firm of Morarjee Goculdas &
Co., that it confers a power upon the company and might more properly have been
included amongst the objects of the company. Mr. Taraporewala for the plaintiff
objects to. that view of the matter, and says that there is no question of any
contract between the company and the agents, but directly the company after its
incorporation, employs the agents, which it can only do with the agents'
consent contractual relations must arise, and the clause must in effect impose
on the company an obligation to enter into a contract with a third party. It
has been held many times that a company cannot be bound by a contract entered
into on its behalf before the company was formed, and, in my opinion, it is not competent to
bring a company into existence bound to enter into a contract with a third
party, the terms of which have been arranged before the company was formed. It
is for the company to consider after its formation whether it will enter into
the contract or not.
There is a further objection to
the plaintiff's case in that, in my opinion, Clause 6 of the memorandum of
association, even if construed as the appellant desires, merely imposes on the
company an obligation as to management and is not a vital part of the
constitution of the company. In support of the view that a clause of this
nature is a condition of the constitution of the company, Mr. Taraporewala
relies on the case of Venkatramana v. Coimbalore Mercantile Bank. That was an application
to the Court on a petition under Section 12, Companies Act, asking the Court to
confirm a special resolution for the alteration of a memorandum of association
by striking out a clause somewhat in the terms of Clause 6 in the present
memorandum. The Court refused to strike out the clause, but in giving judgment
Sir Walter Schwabe, the Chief Justice, did no doubt say that a clause of this
nature is a condition of the memorandum but he based his view expressly on the
ground that the clause in the memorandum constituted a vital contract between
the company and the person to be emplo3red as agent, and, I think, it cannot
have been present to the mind of the learned Chief Justice, first, that a
company cannot be bound by a contract made before it comes into existence, and,
secondly that the memorandum of association does not operate as a contract
between the company and persons who are not members of the company. I think
therefore that the views of the learned Chief Justice as to the nature of a
clause of this character cannot be supported. It is, to my mind, almost
impossible to conceive of a case in which the Court would, at the instance of a
minority of shareholders compel a company to enter into, or carry out, a
business contract which the majority of the shareholders and the directors
considered to be detrimental to the interests of the company, the terms of
which contract had actually been arranged before the company was brought into
existence.
There is an alternative ground
which, I think, is equally fatal to the plaintiff's case, and that is, that
even assuming that Clause 6 of the memorandum has the effect for which the
appellant contends, the present members of the
firm of Morarjee Goculdas & Co., do not come within the terms of that
clause. The clause provides, as I have said, that the "firm of Morarjee
Gsculdas & Co." or "whatever member or members that firm may for
the time consist of" shall be the agents etc. Strictly speaking, as soon
as new members are introduced into the firm, a new firm is constituted. The
plaintiff relies on the words, "whatever member or members that firm may
for the time consist of," but the facts are that at the date of the
incorporation of the company the firm consisted of two individuals, one of whom
died in 1880, and the other of whom died in 1908, and none of the present
members of the agency firm were ever partners with either of those two
individuals. Whatever meaning may be given to the words, "whatever member
or members that firm may for the time consist of," it seems to me quite
impossible to say that the present members of the firm of Morarjee Goculdas
& Co., who were never members of the firm at a time when either of the
persons who constituted the firm at the date of the incorporation of the
company were alive, can be said to be members of the firm named in the
memorandum. The argument of the appellant really seeks to endow this firm with
the attributes of a corporation having perpetual succession so far as concerns
its relations with the company. It is further suggested by Sir Chimanlal
Setalvad that if the clause has the extended meaning contended for by the
appellant, it would be void in law, but it is not necessary, in my opinion, to
consider that argument.
There is another point taken against the appellant, namely,
that, again giving to Clause 6 the effect for which he contends, at the most it
only outlines the nature of the contract into which the company was to enter
with the agents. It is contended, I think rightly,
that the company, when entering into an actual Contract with the agents, would
be entitled to incorporate proper provisions including power to terminate the
agency for sufficient reason. For all these reasons, I think the learned Judge
was quite right in dismissing the action with costs, and that the appeal must
be dismissed with costs,
Rangnekar, J.—I agree. In my opinion there is
more than one fatal answer to the claim of the plaintiff in the suit. Apart
from the fact that the clause in question is one-sided in that it does not
impose any obligation on the firm of Morarjee Goculdas, it is nothing more in
my opinion than a preliminary contract such as promoters make before
incorporation of the company, and means nothing more than that the company
should enter into a contract of agency with the firm of Morarjee Goculdas. In
fact that seems to be the plaintiff's case, and that is clear from para. 6 of the plaint. Then, one answer to the plaintiff's claim
would be that a company cannot before its incorporation enter into a contract,
for it is non-existent and another that, except by any Act of the legislature,
it is not possible to bring a company into existence under the Indian Companies
Act bound by a contract previously made, for such a contract cannot be ratified
after incorporation. In order to get over this difficulty, the plaintiff
contends that this is not a contract of employment but it is really a vital
conditon on which the company was constituted. Now the authorities show that a
memorandum of association may contain conditions essential as well as
conditions non-essential, and the question is, whether this is an essential
condition. Undoubtedly it is not mentioned in the objects where perhaps,
properly speaking, it might have been mentioned, and it stands by itself. What
are conditions essential is indicated by the frame of the Indian Companies Act,
and the scheme contained therein and it would be very unreasonable to hold that
a condition of this nature which is after all, what ever way you look at it,
nothing more than a detail of management for the purpose of carrying on the
business of the company, can be considered to be a vital condition and cannot
be altered, when the Act provides that conditions which are vital to the very
existence of the company, such as for instance, the name of the company, the
objects of the company, and so on, can be altered undoubtedly in a limited way
in accordance with the provisions of the Indian Companies Act. The learned
counsel for the appellant says that the rights of the agents are created by the
memorandum of association, but the answer to that is that the memorandum of
association does not constitute a contract between the company and a third
party, though named therein.
Then there is another point, and
it is that the condition, on the face of it, is unreasonable, and it is no use
saying that the shareholders subscribed on the faith of it. There is no
obligation imposed on the agents either to act as agent or go on acting as
agent. Supposing, for instance, the agents refuse to work as agents, I do not think
it can be contended that the company, or the shareholders or majority of
the shareholders interested in the continuance of the company, have no power to
appoint other agents in their place. Similarly if the agents are found guilty
of fraud, or are not properly managing the business, it cannot be contended
that the company cannot appoint other agents in their place. Then it is said
that it is open to the shareholders to dissolve the company. But supposing, for
instance, that the majority of the shareholders are of opinion that the company
is in a flourishing condition, and that there was no necessity to have it wound
up, what then? Can it be contended that the substratum of the company is gone
or it is just and equitable that the company should be wound up because A.B.C,
who were agents refuse to Act and refuse to resign ?
In my opinion the clause in question does not constitute a vital condition.
Then assuming however it is a
vital condition, I have no doubt that the plaintiff must fail on a true and
proper construction of the clause in question. It was conceded that unless that
clause was construed to mean that the agents of the company should be "the
firm of Morarjee Goculdas & Co., its successors or assigns," the
plaintiff must fail. There is nothing in that clause which would justify such a
construction. In my opinion the clause really means this, that Morarjee
Goculdas & Co., or those who, as the facts show, were then about to carry
on business in the name of Morarjee Goculdas & Co., were to be appointed
agents of the company. But the utmost length to which one can go is that under
this clause the agents were to be the then firm of Morarjee Goculdas or his
surviving partners. The original surviving partner having died in 1908, the
firm came to an end and although for reasons in which it is not necessary to
enter, the heirs of Morarjee Goculdas were admitted into partnership and the
company went on employing them and utilised their services, it is difficult to
see how in 1930 the present members of the firm, who admittedly have no
connection with Morarjee Goculdas, or any of
his surviving partners could be said to be members of the firm within the
meaning of Clause 6 of the memorandum. Assuming however, that the construction
which the plaintiff seeks to put upon the clause is correct, even then, I think
the Court would be justified in refusing an injunction.
Section 15
Printing
& signature of memorandum
[1987] 62 COMP.
CAS. 220 (MAD)
HIGH COURT OF
v.
Registrar of Companies
MOHAN, J.
JULY 23,1986
B. Ramamurthy for the Petitioner.
R.
Shanmugham for the Respondent.
Mohan, J.—By
consent of both parties, the writ petition itself has been taken up to day for
final disposal.
The writ petition is for a
mandamus to direct the respondents to receive computer-printed memorandum and
articles of association as printed matter for the purpose of section 15 of the
Companies Act, 1956, and to issue certificate of incorporation after following
necessary formalities.
The short facts are as follows :
The petitioner is a firm of
chartered accountants which undertakes preparing of memorandum and articles of
association for several companies. It also represents the promoters of new
companies for presenting the memorandum and articles before the Registrar of
Companies for obtaining the certificate of incorporation. Under section 15 of
the Companies Act, 1956, the memorandum and articles of association shall be
printed, be divided into paragraphs numbered consecutively and be signed by
each subscriber. Under section 33 of the Companies Act, the memorandum and
articles of association should be presented for registration to the Registrar
of that State in which the registered office of the company is situate. A declaration by a chartered accountant who is
engaged in the formation of the company shall be filed with the Registrar and
the Registrar may accept such declaration as sufficient evidence of such
compliance. As per the same section, if the Registrar is satisfied that all the
requirements aforesaid have been complied with by the company and that it is
authorised to be registered under the Act, he shall retain and register the
memorandum and articles, if any. It is submitted in the affidavit that even
though section 15 provides that the memorandum shall be printed, due to
technological development and methods of printing developed recently, by a Circular No. 3/81 (F. No. 8/31/15/80 CLV), dated
December 15, 1981, the Government of India and the Department of Company Law
Board declared that offset printing is one of the latest developed printing
systems, that the said printing system was declared as good as normal printing
and that it was declared that there was no objection for accepting offset
printing by the Registrar of Companies.
The petitioner would
contend that, if the offset printing is a development in printing, the printing
by computer is also a well developed technology in printing and, therefore,
could be accepted. There is no justification for the Registrar to reject
computer printing. Such printing is more legible and clearer and it can be done
easily and quickly. By avoiding composing, proof reading, etc., if a matter is
printed in a computer and kept in the memory of the computer, it can be used at
a later stage. Thus,
there are so many advantages in printing by computer. In fact, the Government
of India and particularly the Prime Minister of India advocate introduction of
computers in all fields as modern technology.
As
a firm of chartered accountants, the petitioner submitted the memorandum and
articles of association of six companies and all of them were printed in a
computer by a reputed firm, namely, Data Base System P. Ltd.,
In
the counter-affidavit filed on behalf of the first respondent, it is stated
that sections 15 and 30 of the Companies Act strictly provide that the
memorandum and articles of association of companies presented for registration
shall be printed. The Department of Company Affairs,
vide Circular No. 3/81 (F. No. 8/31/15/80-CLV), dated December 15, 1981, has
clarified that offset printing is one of the methods of printing developed
recently and as good as normal printing and hence the memorandum and articles
of association printed by offset printing can be accepted by the Registrar of
Companies for the purpose of registration of companies. In terms of sections 15
and 30 of the Companies Act, read with the circular dated December 15, 1981, of
the Department of Company Affairs, apart from the conventional printing, the
only other mode of printing recognised for submission of memorandum and
articles of association for incorporation of new companies is "offset
printing". The petitioner himself admits that the memorandum and articles
of association in question were not printed by "offset printing" and
hence not prepared in accordance with the Circular dated December 15, 1981, of
the Department of Company Affairs relied upon by the petitioner. The so called
computer printing as claimed by the petitioner is more akin to that of typing
susceptible to erasing, defacing, etc., and hence not recognised as
"printing" to meet the requirements of sections 15 and 30 of the
Companies Act. The petitioner submitted the memorandum and articles of association for registration of only five companies on the
dates noted against each :
|
1.
1.
Mantralaya Finance and Leasing P. Ltd. |
26-5-86 |
|
2.
2.
Maruti Finance and Leasing P. Ltd. |
26-5-86 |
|
3.
3.
Nagammai Hire Purchase and Finance P. Ltd. |
28-5-86 |
|
4.
4.
Allzewek Sales P. Ltd. |
5-6-86 |
|
5.
5.
Target Investments P. Ltd. |
11-6-86 |
No memorandum and articles
of association have been filed with the first respondent for the registration
of a company under the name and style "Ayyappa Security Bureau P.
Ltd". It is not correct to say that mere presentation of documents by the
promoters at the receipt counter of the first respondent office amounts to the
first respondent accepting the documents unless and until the documents are properly
scrutinised after the receipt in the office and found correct. When the
documents were scrutinised, it was found that the memorandum and articles of
association of the above-noted five companies were not in conformity with the
provisions of sections 15 and 30 of the Companies Act, read with the Department
of Company Affairs clarifications dated December 15, 1981, referred to above.
Therefore, these were returned to the parties for rectifying the defects as
provided under regulation 17 of the Companies Regulations, 1956. The documents
in question being defective were lawfully and properly returned by the first
respondent in exercise of the powers and functions provided to him under
regulation 17 of the Companies Regulations, 1956. It is further submitted that
the petitioner himself has admitted that the memorandum and articles of
association in question were not printed as per the recognised methods and the
so called computer printing has not been recognised for the purpose of sections
15 and 30 of the Companies Act, read with the Department of Company Affairs
clarification dated December 15, 1981, as it is more akin to typing and
susceptible to erasing, defacing and tampering. It is further submitted that
present clarity and legibility of the memorandum and articles of association
cannot be the sole criterion. The documents being of permanent nature, their
reference value in the long run is the key factor. It is uncertain that the so
called computer printing will stand the test of time in the printed matter not
fading away with efflux of time. Further, if on the ground of present
legibility, the so called computer-printed documents are accepted, it will open
the flood gates for recognising typewritten or cyclostyled materials
undermining the very object with which the statute has prescribed printed
documents. Lastly, it is added that every year thousands of companies are
registered all over the country, including the State of
Mr. B. Ramamurthy, learned
counsel for the petitioner, would contend that, having regard to the meaning of
the word "print", it means engraving or any other method of
multiplying copies as stated in Stroud's Judicial Dictionary and the printing
is a mark made by pressure to create an impression. Certainly the word
"print" must have an enlarged meaning and cannot be confined to mere
technicality, especially with the advancement of technology. Having regard to
the fact that offset press has come to be accepted as printing, by the same
line of reasoning, the computer-printing also must be regarded as printing,
within the meaning of section 15 of the Act. The memorandum and articles of
association of a company is its charter defining the objects of its existence
and operation. If it is a matter of preservation, certainly this document could
also be preserved and it has every prominence that is expected of the
memorandum.
Mr. R. Shanmugham, learned
counsel appearing for the first respondent, would reiterate the contentions
raised in the counter-affidavit, that having regard to the doubtful nature of
computer-printing, it is more akin to that of typing susceptible to erasing and
defacing and the Registrar has rightly refused to recognise this as printing.
If, therefore, a document does not fulfill the legal requirement, it could be
returned. Then again, in the long run, the document, by efflux of time, is
likely to fade away and so certainly it cannot be accepted.
In order to appreciate the
respective arguments, I would firstly state as to what exactly the memorandum
and articles of association represent. Section 12 of the Companies Act, 1956,
hereinafter referred to as "the Act", states that any seven or more
persons, or where the company to be formed will be a private company, any two
or more persons, associated for any lawful purpose may, by subscribing their names to a
memorandum of association and otherwise complying with the requirements of this
Act in respect of registration, form an incorporated company, with or without
limited liability. As to what the requirements are with respect to the
memorandum have been detailed under section 13 of the Act. It is well-settled
in law that the memorandum of association of a company is its charter defining
the objects of its existence and operation, as was laid down in Cotman v.
Brougham [1918] AC 514 (HL). The purpose of such association is to enable the
shareholders, creditors and those dealing with the company to
know what is its permitted range of enterprise. In setting out the
objects of a company, its memorandum usually, sets out the several powers which
the company will be entitled to. exercise in carrying
out its objects. In the same case, it is laid down that the practice has become
so common and widespread that the Registrar usually does not refuse to register
a memorandum containing, besides its objects, the several powers which a
company may exercise in effecting its objects. The result is "to bury
beneath a mass of words the real object or objects of the company with the
intent that every conceivable form of activity shall be found included
somewhere within its terms".
With
this, I pass on to section 15 of the Act. That says :
"The
memorandum shall—
(a) be
printed".
(rest of the section is omitted as unnecessary)
Now,
I will consider what exactly is the meaning of
"print". The word
"print" in Webster's Dictionary (Seventh New Collegiate Dictionary) means :
"1 (a) A
mark made by pressure—impression;
(b) Something
impressed with a print or formed in a mould".
2.A device or instrument for impression
or forming a print.
Words
and Phrases, permanent edition, volume 33, states that "printing" is
a process of multiplying the copies of a composition by sheets. As denned in
Bouvier's Law Dictionary, printing "is the art of impressing letters, the art
of making books or papers by impressing legal characters"
"Printing" means the impress of letters or characters upon paper, or
up on other substance, and implies a mechanical act "Print" is a word
of wide signification, but, in its ordinary sense, means to impress letters,
figures and characters by types and ink of various forms and colors on paper of
various kinds or on some such yielding surface.
Webster
defines "to print" …..(2) to take an
impression of : to copy or take off the impress of; to stamp. (3) Hence,
specifically to strike off an impression of or
impressions of form types, stereo-types, or engraved plates, or the like, by
means of a press; or to print books, handbills, newspapers, and the like. (4)
To mark off by pressure, to form an impression upon, to cover with figures by a
press or something analogous to it; as to print calico, etc. Print, noun : A mark made by impression; a line, character, figure
or indentation made by the pressure of one body or thing upon another. (5) A
printed cloth, a fabric, figures by stamping. [Arthur v. Moller (97
Encyclopaedia Britannica,
concerning "printing" states as follows :
"Printing"
traditionally has been defined as a technique for applying under pressure a
certain quantity of colouring agent onto a specified surface to form a body of
text or an illustration".
"The invention of printing at the dawn of the age
of the great discoveries was in part a response and in part a stimulus to the
movement that, by transforming the economic, social and ideological relations
of civilization, would usher in the modern world".
Judged
by the above, if there is to be transformation of economic, social and
ideological relations of civilisation and if similar transformation has to be
ushered in the modern world, one has to necessarily recognise computer printing. It should be remembered that the memorandum and
articles of association is not a work of art nor is it an art required to be
done in a particular way. It requires to be printed. With the advancement of
printing technology, certainly computer-printing fulfils every requirement of
printing.
Then again, I am not
impressed with the argument that if the memorandum and articles of association
are printed by computer, their reference value in the long run would be
uncertain and it may hot stand the test of time and it is likely to fade away
with the efflux of time. This is only hazarding a guess unsupported by any
technical data without any actual material on which the first respondent could
come to such an opinion. The argument is that if this kind of printing is
accepted, it will open the floodgates, for recognising typewritten or
cyclostyled materials undermining the very object with which the statute has
prescribed printed document, cannot be held to be tenable. There is an ocean of
difference between printing and typewriting or cyclostyling. They cannot be
compared with a case of computer-printing. The stand taken in the
counter-affidavit that the writ petitioner is agitating only from a selfish
angle to save a few hundred-rupees in printing cost, unmindful of the
far-reaching adverse consequences resulting from watering down the statutory
requirement, in my considered view, is an argument which has to be rejected. As
I said above, the great benefits that are to be received in computer-printing
cannot be lightly ignored as though the petitioner desires to save a few
hundred rupees. Law is never static, but it is dynamic. Looked at from that
point of view, the word "printing" cannot be so technically
construed, as the Registrar would have it, to enable him to contend that this
will water down the statutory requirement. If, as quoted above from Bouvier's
Law Dictionary, printing is the art of impressing letters and it is a process
of multiplying the copies of a composition by sheets, certainly
computer-printing clearly falls within the definition. Obstacles should not be
thrown on the road to scientific progress by these orthodox representations,
unmindful of the great changes taking place with scientific technological
advancement. In this connection, I am tempted to quote Viscount Simon.
"Qui
haeret in liter a haeret in cortice ' He who clings to the letter clings to the dry barren shell and misses the truth and
substance of the matter' " [1952] AC 166, 183.
For all these reasons, I
hold that the stand of the Registrar cannot be accepted and this is not a case
in which it could be said that, by virtue of regulation 17 of the Companies
Regulations, 1956, he could hold the document to be defective. Accordingly, the
writ petition will stand allowed and a direction will issue to the Registrar to
accept this memorandum brought about by computer-printing. There will be no
order as to costs.
Section 17
Alteration
of memorandum of association
Alteration
of objects clause
[1959] 29 COMP. CAS. 85 (
HIGH COURT OF
Rampuria Cotton Mills Ltd., In re.
BOSE,
J.
JANUARY
29, 1958
BOSE, J. - This is an application under section 107 of
the Indian Companies Act, 1956, for an order that the variation of the rights
of the holders of the ordinary shares in a company known as Rampuria Cotton
Mills Ltd. in terms of a purported resolution dated 18th May, 1957, be
cancelled and the company, its directors, servants and agents be restrained by
an injunction from giving effect to the said variation, or to the said
resolution dated 18th may, 1957.
The company to
which this application relates is a public limited company which was
incorporated under the name and style of Rampuria Cotton Mills Ltd., under the
provisions of the Indian Companies Act in 1941. The authorised capital of the
company is Rs. 40,00,000 divided into 3,50,000
ordinary shares of Rs. 10 each and 5,00,000 deferred shares of Re. 1 each. The
issued share capital of the company at all material times has been 2,00,000 ordinary of Rs. 10 each and 5,00,000 deferred shares
of Re. 1 each. The subscribe and paid up capital of the company is as follows :
(a) 20,300 ordinary shares
or Rs. 10 fully paid up in cash, 1,74,475 ordinary shares of Rs. 10 each issued
as fully paid up otherwise than in cash aggregating in all 1,94,775 ordinary
shares.
(b) 5,00,000 deferred shares of Re. 1 each
issued as fully paid up otherwise than in cash.
The present
directors of the company are six in number and their names are set out in
paragraph 6 of the petition, the last two being ex officio directors appointed
by the managing agents. Under the articles of association of the company, a firm known as the firm of Hazarimull Hiralal were
constituted as the first managing agents of the company and it was provided
that the said firm and their successors in business would continue to be the
managing agents of the company. This firm was composed of three branches of the
Rampuria family consisting of three brothers, each of whom had one-third share
therein. The brothers were Bahadurmull, Hazarimull Hiralal and Bhanwarlal
Rampuria. This Bhanwarlal died on the 18th November, 1947, leaving him
surviving the petitioner Sushila Rampuria, who was his sole widow, and Kamal
Singh and Surendra Kumar, two sons who were minors at the time. This Sushila
Rampuria, Kamal Singh Rampuria and Surendra Kumar along with one Sampetlal
Rampuria are the petitioners in this application and they claim to be holders
of not less than 10 per cent. of the issued ordinary
share capital of the said company. It appears that disputes and differences
arose between the partners of the said firm and the parties agreed to refer the
disputes to arbitration by an agreement dated 28th of March, 1950. The said
reference was however set aside by S. R. DAS GUPTA, J. on 9th January, 1951.
But prior to that, on 3rd January, 1951, one Sekharchand Rampuria filed a suit
in this court for dissolution of the partnership and other reliefs, being Suit
No. 198 of 1951. By an order dated the 23rd February, 1953, A. K. SARKAR J.
directed the matters in the suit to be referred to the arbitration of one Shri
Mangturam Jaipuria.
The order of
reference, inter alia, provided that 5,00,000 deferred shares and 44,475
ordinary shares in the Rampuria Cotton Mills Ltd. of the face value of Rs.
9,43,750 held in the name of Hazarimull Hiralal together with the managing
agency held by Hazarimull Hiralal should be auctioned by the arbitrator and
sold to the highest bidder. Pursuant to such provision the arbitrator on 21st
June, 1953, put up for auction between the parties the said shares and at the
said auction the rights of the said shares were purchased by Jaichandlal
Rampuria, Ratanlal Rampuria and Manakchand Rampuria and the petitioners in this
application ceased to have any interest in the said shares and the said rights.
On 10th
September, 1953, the arbitrator made his award. There were two applications
made for setting aside the award but ultimately on or about 13th September,
1956, the parties mutually settled and adjusted the disputes in the said Suit
No. 198 of 1951.
In paragraph
18 of the petition it is alleged that on or about 18th of April, 1957, a notice
was issued under the signature of Nathmull Rampuria as a director of the
company convening and a meeting on the 18th May, 1957, for the purpose of
considering and if thought fit, passing with or without modifications the
under-mentioned resolutions :
(A) As special
resolution :
Clause (2)
Resolved that clause (5) of the memorandum of association of the company be
amended by substituting the figure '6' in the fifth line of second paragraph of
the said clause in the place of the figure '10'.
An explanatory
statement was also appended to this special resolution No. 2 which runs as follows :
"The
limit of dividends to be declared on ordinary shares before any dividends can
be paid to the deferred shareholders is very high. If fact, the company has paid
dividends on deferred shareholders only on three occasions. The
disproportionate voting rights enjoyed by the deferred shareholders are no
longer possible but restrictions on dividends shall remain. In order to remove
this abnormality and put the deferred shares on as far as possible equal
footing with the ordinary shares, the limit of 10 per cent. is
being reduced to 6 per cent."
In paragraphs
19 and 20 of the petition it is stated that pursuant to the said notice a
meeting was held on the 18th of May, 1957, at No. 147,
In paragraphs
21 and 22 of the petition it is alleged that notwithstanding the objection of
the petitioners the directors of the company who controlled the majority of the
ordinary shares and controlled all the deferred shares passed the said
resolution on the strength of the majority of the voting rights which they
commanded. The petitioners thereupon demanded a poll and the result of the poll
was 1,95,975 votes in favour of the resolution and
37,100 votes against the resolution.
In paragraph
23 of the petition it is alleged that the said meeting held on the 18th May,
1957, was not a properly constituted meeting. In the said paragraph article 65
of the articles of association is set out as follows :
"Whenever
the capital by reason of the issue of preference shares or otherwise is divided
into different classes of shares, all or any of the rights and privileges
attached to each class may be modified, commuted, affected, abrogated, or dealt
with by agreement between the company and any person purporting to contract on
behalf of that class, provided such agreement is ratified in writing by the
holders of at least three-fourths in nominal value of the issued shares of the
class or is confirmed by an extraordinary resolution passed at a separate
general meeting of the holders of shares of that class and all the provisions
hereinafter contained as to general meetings shall, mutatis mutandis, apply to
every such meeting, so that the quorum thereof shall be members holding or
representing by proxy one-fifth of the nominal amount of the issued shares of
the class. This clause is not to derogate from any power the company would have
had if this clause were omitted."
It may be
pointed out at this stage that this article 65 contemplates that variation or
modification of the rights of a class of shareholders can be effected only by
means of an agreement between the company and any person purporting to contract
on behalf of that class subject to the proviso that such agreement is ratified
in writing by the holders of at least three-fourths in nominal value of the
issued shares of that class or such agreement is confirmed by an extraordinary
resolution passed at a separate general meeting of the holders of shares of
that class. So it is only through the instrumentality of an agreement of the
nature contemplated in the article that any variation of a class right is
permissible.
In paragraph
24 of the petition it is stated as follows :
"Your
petitioners state that in terms of the said provisions of the articles of
association the said proposed resolution which modified and/or affected the
rights of the holders of ordinary shares could only be considered at a separate
meeting of the holders of the shares of that class and could not be considered
at any meeting which was not a meeting exclusively of the holders of that class
of shares. As will appear from the notice the said meeting was a meeting of all
the shareholders of the said company. Your petitioners
state that any resolution passed at any such meeting modifying or affecting the
rights of the holders of the ordinary shares was wholly illegal, null and void
and wholly inoperative and ineffective."
In paragraph
25 of the petition it is stated as follows :
"Your
petitioners are holders of not less in the aggregate than 10 per cent. of the
issued ordinary shares of the company and did not consent to or vote in favour
of the resolution varying the rights enjoyed by the holders of ordinary
shares."
In paragraph
26 of the petition it is, inter alia, stated as follows :
"Your
petitioners state that the said resolution was moved mala fide and is
oppressive on your petitioners who are minority shareholders.
The said
purported resolution is not at all passed in the interest of the holders of
ordinary shares and no benefit accuse to them.
Your
petitioners state that the said purported resolution is in any event unjust and
unfair and has not been passed bona fide in the interest of or for the benefit
of the holders of ordinary shares."
In paragraph
27 of the petition it is, inter alia, stated as follows :
"The
explanatory note attached to the said notice dated 18th April, 1957, is wholly
misleading and incorrect in material particulars."
In paragraph
31 there is a further reference to the said resolution and it is pointed out
that the effect of the resolution was to unfairly reduce the benefits which had
been given to the holders of ordinary shares and to wrongfully bestow
additional rights to the deferred shareholders in the surplus profits of the
company.
In the prayer
portion of the petition, prayer (a) is as follows :
"That
the variation of the rights of holders of ordinary shares and of your
petitioners as holders of ordinary shares of Rampuria Cotton Mills Limited in
terms of the purported resolution dated 18th May, 1957, be cancelled."
In prayer (b)
an injunction is asked for restraining the directors' resolution dated 18th
May, 1957, resolving upon the variation of the rights of the holders of
ordinary shares.
It is thus
clear from an analysis of the various paragraphs in the petition and the
prayers of the petition that the entire case of the petitioners is based on the
footing that the variation of the rights of the shareholders by reducing their
right to dividend from 10 per cent. to 6 per cent. was effected by the sanction of the resolution being No. A(2) of the special resolution which was passed at the
meeting of the 18th May, 1957, and as this resolution was not passed at a
separate meeting of the ordinary shareholders of the company and as the effect
of the resolution was to unfairly prejudice the rights of the holders of the
ordinary shares as a class, the variation which was effected by the said
resolution should be cancelled.
In the
affidavit-in-opposition affirmed by Kanwarlal Rampuria it is pointed out that
the variation was effected by means of an agreement which is annexure 'E' to
the said affidavit and which was entered into between the company and Kanwarlal
Rampuria and which was consented to and ratified by a large number of ordinary
shareholders whose names appear as signatories to the said agreement. It has
also been pointed out with reference to the correspondence which are annexed to
this affidavit-in-opposition and the minutes of the meeting which was held on
the 18th May, 1957, that the attention of the shareholders present at the
meeting was drawn to the agreement dated 12th April, 1957, which was ratified
later on, on different dates by the different signatories to the agreement and
prior to the date of the meeting in which the resolution was passed altering clause
5 of the memorandum which dealt with this right of dividend of the ordinary
shareholders, and the petitioners had also inspection of this agreement at the
attorney's office upon appointment made for the purpose. In the affidavit in
reply the factum and validity of the agreement has been challenged. But such
questions which involve the taking of evidence would have to be agitated in a
separate suit if the petitioners are really serious about this challenge.
Mr. R.
Choudhury, one of the learned counsel appearing for the company, has raised a
preliminary objection to the maintainability of this application and he has
submitted that the petitioners are not entitled to claim any relief on the
basis of the case as set out in the petition and the prayers as framed. His
main argument is that as no relief has been claimed challenging the variation
as effected by the agreement and the only prayer in the petition asking for
relief is on the basis that the variation was carried out by means of a
resolution passed at the extraordinary meeting of shareholders on the 18th May,
1957, the petitioners should not be granted any relief on this application. It
appears to me that this contention of Mr. Choudhury should be given effect to.
As I have already indicated when analyzing the various allegations in the
petition, there is no mention of any agreement being entered into between the
company and any shareholder for carrying out this variation although this was
the only mode prescribed by article 65 of the company's articles for effecting
a modification or variation of the rights of shareholders of any particular
class. The petitioners must be presumed to know that the only mode of variation
of such class rights as contemplated in article 65 was by an agreement which
could either be ratified by the other shareholders of that class or which in
the alternative would be confirmed by a resolution at a separate meeting of the
holders of shares of that class.
The validity
of the resolution dated 18th May, 1957, has been challenged on the ground that
as there was no separate class meeting of the ordinary shareholders of the
company, there was no effective variation made by such resolution.
Mr. Sen
appearing on behalf of the petitioners has answered this preliminary objection by
submitting that no variation of any right of a class of shareholders can be
effective nor is it complete until a special resolution by altering clause 5 of
the memorandum is passed at a properly constituted meeting of the company, and
the resolution dated 18th May, 1957, was the last and final step which it was
necessary to take in order to completely effectuate the variation.
Mr. Sen has
also raised a further point that as clause 5 of the memorandum which is sought
to be modified by the resolution dated 18th May, 1957, is a condition contained
in the memorandum, no alteration of this clause could be made even by a special
resolution passed at a meeting of the shareholders as was sought to be done at
the extraordinary meeting held on the 18th May, 1957.
In support of
his argument Mr. Sen has drawn the attention of the court to Form No. 528 given
in Palmer's Precedents, 17th Edition, at page 1075 and the learned counsel has
argued that no fault can be found with the petition which is before this court
inasmuch as the same has been drawn exactly in the form which is set out in
Palmer's book at page 1075.
It may be
pointed out, however, that the drafting of this Form No. 598 is based on the
special nature of the article which authorises the modification of the rights
of shareholders of the class concerned in that case. In paragraph 5 of the Form
of the petition reference is made to article 9 of the company's articles which
is set out at page 408 of Palmer's book as follows :
"If at
any time the share capital is divided into different classes of shares, the
rights attached to any class (unless otherwise provided by the terms of issue
of shares of that class) may, whether or not the company is being wound up, be
varied with the consent in writing of the holders of three-fourths of the
issued shares of that class with the sanction of an extraordinary resolution
passed at a separate general meeting of the holders of the shares of that
class".
It appears
that in the case of Form No. 598 the resolution passed at an extraordinary
general meeting of the company sanctioning the variation was confirmed by a
resolution passed at a separate meeting of the classes of shareholders who were
present at the meeting and accordingly in prayer (1) of Form No. 598 it was
stated that the variation of the rights of the two classes of shares purported
to be effected by the said resolution might be cancelled and disallowed.
Reference has
also been made to Form 61 in Lord Atkin's Encyclopaedia of Forms and
Precedents, Vol. 6, at page 165. It may be pointed out that the prayers of the
petition set out at page 167 do not mention anything about any resolution as
having purported to affect the variation. Prayer 1 in the said form is as follows :
"That
the variation of the rights (of the preference shareholders or as the case may
be) may be cancelled and disallowed."
In this form
also, in paragraph 8 of the petition it is stated that a general meeting of the
company was at first held and on the same day immediately thereafter a separate
general meeting of the particular class was held at the same place. So the case
contemplated in the petition is a case where variation is effected by a
resolution passed at a separate meeting of the class of shareholders whose
rights are sought to be varied.
In the case
before me, as I have pointed out already, the variation is effected by means of
an agreement entered into between the company and a shareholder and such
agreement is ratified by other shareholders of the same class. There was no
separate meeting of the shareholders held at any time for confirming the
agreement and, therefore, it cannot be said that the variation in this case was
carried out by passing a resolution confirming the agreement by which the
modification of the right was made. As to when a variation of a right of a
class of shareholders as contemplated by section 106 read with section 107 of
the Indian Companies Act, 1956, can be said to have been effectually made,
indications are furnished by the terms of those very sections. Before section
106 of the Act begins there is a heading given to that section as
"variation of shareholders' rights" and in the marginal note of that
section the words "alteration of rights of holders of special classes of
shares" find place. Similarly, the marginal note of section 107 is to the
effect - "Rights of dissentient shareholders." A perusal of section
106 makes it clear that it is legitimate for a company to reserve to itself by
a clause in the memorandum of articles of association the power or authority to
vary the rights attached to any class of shares in the company in which the
share capital is divided into different classes of shares, but this must be
subject to the condition that (a) the specified proportion of the holders of
the class of shares not being less than 3/4ths of the issued shares of that
class must consent to such variation or (b) such variation must be sanctioned
by a resolution passed at a separate meeting of the holders of those shares and
supported by the votes of holders of any specified proportion not being less
than 3/4ths of these shares. In sub-section (2) of section 106 it is provided
that any clause in the memorandum or articles of a company which was in force
at the commencement of this Act which specifies the proportion which is less
than 3/4ths shall be read as specifying the proportion of 3/4ths in place of
the less proportion specified. It is, therefore, clear from this section that
there is a statutory sanction accorded to the provision in a memorandum or
articles of a company authorising variation of the rights of shareholders of a
particular class, but this sanction prescribes that the specified proportion
for giving consent to or for sanctioning a resolution confirming the variation
shall in no case be less than three-fourths. Section 107 of the Companies Act
provides that if variation in the manner authorised by the articles and in the
manner contemplated in section 106 takes place, then holders of not less than
10 per cent. in the aggregate of the issued shares of
that class who did not consent to or vote in favour of the resolution for the
variation, may apply to the court to have the variation cancelled. The opening
words of section 107 "if in pursuance of any provision such as is referred
to in section 106 the rights attached to any class of shares are at any time
varied" indicate that if a variation is effected by reason of the combined
operation of section 106 of the Act and the particular clause in the memorandum
or the articles of association of the company which authorised the variation,
the variation can be said to be complete and effectually made. No other step
need be taken to cloth the variation with the character of a full-fledged
variation. It is quite clear from the reading of section 106 and section 107 of
the Act that variation of a right of a class of shareholders can be effected by
two different ways, i.e., by consent given of the specified proportion and by
sanctioning it by a resolution passed at a separate meeting of the holders of
the shares of that class, not being less than 3/4ths of the issued shares of
that class. That a variation becomes complete by the very fact of consent of
the requisite proportion being given to such variation is further made clear by
sub-section (2) of section 107 of the Act which provides the period of
limitation within which an application for cancellation of the variation can be
made by the aggrieved shareholders.
The said
sub-section (2) is as follows :
"An
application under this section shall be made within twenty-one days after the
date on which the consent was given or the resolution was passed, as the case
may be, .............."
This provision
for calculation of the period of limitation of 21 days from the date of consent
indicates that the consent itself completes the variation.
Mr. R.
Chaudhuri has very rightly pointed out that the resolution which was passed at
the extraordinary general meeting held on the 18th of May, 1957, altering
clause 5 of the memorandum was a special resolution which it was necessary for the
company to pass for the purpose of effecting alteration of the clause in the
memorandum by reason of the provision of section 16 of the Companies Act, 1956,
read with section 31 of the said Act. This special resolution which was passed
on the 18th May had not the object of completing the variation but its sole
object was to bring about alteration in clause 5 of the memorandum. If the
argument on behalf of the petitioners to the effect that a variation is not
complete and effectual until a special resolution is passed, is accepted, the
persons responsible for the variation may, by postponing the passing of the
special resolution for an indefinite period, and by causing the period of
limitation of 21 days to expire, make it impossible in every case, for the
aggrieved shareholders to avail of the remedy of an application contemplated in
sub-section (2) of section 107 and thus render this provision practically
nugatory.
A good deal of
argument has been advanced by both parties on the question as to whether this
clause 5 in the memorandum could be at all altered by passing a special
resolution for the purpose. Mr. Chaudhuri has argued that clause 5 cannot be
regarded as "a condition in the memorandum as in contemplated in section
16(1) of the Companies Act, 1956, because it is clear from sub-section (2) of
section 16 that only those provisions which were required by section 13 of the
Act or any other specific provision in the Act to be stated in the memorandum
of the company, shall be deemed to be conditions contained in the memorandum,
and the other provisions which are to be found in the memorandum but which are
not required to be inserted in the memorandum by reason of section 13 of the
Act or any other section of the Act can be altered in the same manner as the
articles of the company." This is made clear by sub-section (3) of section
16; and sub-section (4) of section 16 provides that all references to the
articles of a company shall be construed as references to the other provisions
referred to in sub-section (3) of section 16. Now, a reference to section 13 of
the Act of 1956 makes it clear that there is no provision in section 13 which
requires the right to a dividend to be inserted in the memorandum of
association of the company, nor is there any other provision in the Act which
enjoins that a right to dividend in respect of any class of shares is one which
should be inserted in the memorandum.
Therefore, it
is clear that the clause in the nature of clause 5 with which we are concerned
in this application cannot be regarded as a condition within the meaning of
section 16(1) of the Act. I hold that clause 5 of the memorandum is not a
condition and it can be altered by a special resolution. But assuming that it
is a condition and not alterable at all, then in that case the resolution of
the 18th May, 1957, was an altogether ineffective resolution, and it cannot be
said to have effected any variation at all. So there was no variation in term
of the resolution dated 18th May, 1957, which can be cancelled, as asked for in
prayer (a) of the petition.
Mr. Sen drew
the attention of the court to Alexander v. Thomas [1933] 3 comp. LJ. 81 for the
purpose of showing that if a memorandum prescribed the classes of shares into
which the capital is to be divided and the rights to be attached to such shares
respectively, the company has no power to alter that
provision by a special resolution.
Mr. Chaudhuri,
on the other hand, has referred to the decision of the Judicial Committee
reported in Ram Kissen Dhanuka v. Satya Charan Law, for the purpose of
supporting his argument that as a matter of 0construction of the articles and
memorandum read with sections 106 and 107 of the Act, it should be held that
the clause in the memorandum in the present case could be altered by a special
resolution. It is, however, not necessary to express any decisive opinion on
this point as, in my view, passing of a special resolution is not an essential
ingredient for the purpose of making the variation of a right of a class of
shareholders complete. The variation becomes complete as soon as the
requirements of section 106 read with section 107 of the Indian Companies Act
have been fulfilled. It may be that to avoid complication and for giving
practical effect to the variation it is necessary or advisable to alter the
particular clause in the memorandum or articles which deals with the right
sought to be varied, by passing a special resolution for the purpose, but the
variation is complete when the requisite consent or sanction of the resolution is
given to the variation, as provided in section 106 read with section 107 of Act
of 1956.
I may,
however, point out that in connection with the argument whether clause 5 in the
memorandum can at all be altered by a special resolution, attention of the court
has been drawn to Halsbury, Vol. VI, 3rd Edition, page 223, paragraphs 459 and
522 and Mr. Chaudhuri had drawn the attention of the court to Palmer's Company
Precedents at page 409, 17th Edition, Vol. 1, Part 1, and to page 492, last
paragraph, of Gower's Company Law and section 23(2) of the English Act but it
is not necessary to prolong this judgment by a detailed discussion of the
passages to which reference has been made.
I gave
opportunity to the petitioners to amend their petition if they were so advised.
The learned counsel took time to consider the matter and ultimately decided not
to make any application for amendment.
In my view,
this objection to the maintainability of the application should be upheld and,
accordingly, this application is dismissed with costs. Certified
for counsel. The operation of the order is stayed for one month.
Application
dismissed.
[1957] 27 COMP. CAS. 377 (BOM.)
HIGH COURT OF
v.
GAJENDRAGADKAR AND GOKHALE, JJ.
A.F.O. D. No. 134 of 1951 and F.A. No. 549 of 1951
NOVEMBER 25, 1955
GOKHALE, J. - First Appeal No. 134 of 1951 is filed
against the decree passed by the Third Joint Civil Judge (Senior Division) at
Ahmedabad in Civil Suit No. 163 of 1949 declaring that defendant No. 1 company
was not authorised and entitled to give or pay any extra remuneration to its
secretary, treasurer and agent for managing its affairs and on its behalf the
affairs of the Bhalakia Mills Co. Ltd., and the resolution passed on 20th July,
1949, by the defendant No. 1 company in that connection was ultra vires and
illegal, and restraining the defendant No. 1 company by a permanent injunction
from acting up to and from paying in terms of the aforesaid resolution extra
remuneration to defendant 5.
The
circumstances which gave rise to the suit may be shortly stated as follows : In 1927, one Chandulal Karsandas Mashruwala,
Chhotalal Bhalakia and some others thought of erecting a textile mill at
Ahmedabad, and with that object in view they floated Chandulal and Co. Ltd.,
the present defendant 1 which was to be appointed to manage the textile mill.
The share capital of the defendant No. 1 company was Rs. 640 divided into 128
ordinary shares of Rs. 5 each representing 0- 0-1 1/2 pie of rupee.
72 of these
shares were allotted to the said Chandulal and his nominees who had agree to
manage the affairs of the defendant No. 1 company and on it’s behalf to act as
secretaries, treasurers and agents of the textile mill and 56 shares were
allotted to subscribers of the capital of the Bhalakia Mills Co. Ltd., and each
of those persons who agreed to subscribe 171 ordinary shares, each of Rs. 100
in the capital of the Bhalakia Mills Co. was allotted one ordinary share of the
defendant No. 1 company.
Chandulal and
Co. Ltd. was formed on 4th January, 1928, and Bhalakia Mills Co. Ltd., was also
registered on the same date. For the sake of brevity, the Bhalakia Mills Co.
Ltd. will hereafter be referred to as “the Mills Co.” and Chandulal & Co.
Ltd. will hereafter be referred to as “Defendant No. 1 Co.”
The management
of defendant No. 1 company and on its behalf of the
Mills Co., was vested in the first instance in Seth Chandulal Mashruwala, who
however resigned on 6th June, 1931. He was succeeded as the managing agent of
the two companies by Seth Jethalal Purushottamdas Bhalakia in 1932, and the
following was substituted for the original clause (15) in paragraph III of the
objects of the defendant No. 1 company in its memorandum of association.
“(15) To
appoint Seth Jethalal Purushottamdas Bhalakia as the managing agent of the
company to manage solely and exclusively the affairs of this company as well as
of the Bhalakia Mills Co. Ltd., Seth Jethalal Purushottamdas Bhalakia or his
nominee and in case of his death without any nomination such other person as
his heirs, executors, administrators, assigns or legal representatives shall
nominate, shall have the sole right to manage this company as well as the
Bhalakia Mills Co. Ltd.
The said
Jethalal Purushottamdas Bhalakia or his nominee or any other person nominated
in the manner abovenamed will be the only person authorised on behalf of this
company to work as and to sign as and for the secretaries, treasures and agents
of the Bhalakia Mills Co. Ltd.
And no other
member of this company has any right to interfere in the management of this
company or the Bhalakia Mills Co. Ltd., and every member, present of future, is
deemed to have joined the company on this basis. This appointment is confirmed
on the terms and conditions and the remuneration set out in the agreement as
per revised Schedule A between the Bhalakia Mills Co. Ltd., and this company
and the board of directors are hereby authorised to execute the said agreement
as well as further agreement as per draft approved by the board of directors of
this company in favour of Seth Jethalal Purushottamdas Bhalakia, with such
modifications, if any, as the board and Seth Jethalal Purushottamdas Bhalakia
may agree upon.”
The articles
of agreement into between defendant No. 1 company and
the said Jethalal in connection with the managing agency were executed on 24th
February, 1932, and are a Exhibit 126. Article 1 of this agreement stated,
inter alia, that the sole and exclusive right to manage the affairs of the
defendant No. 1 company was to vest “in Seth Jethalal Purushottandas Bhalakia
and/or in such other person or persons as he nominates and in case of his death
without nominating his successors in the person nominated from amongst
themselves by his heirs, executors, administrators, assigns or legal
representatives, etc.”
The said
Jethalal worked as managing agent of defendant No. 1 company
till his death, which took place on 12th November, 1937. Thereafter, he was
succeeded by Seth Narottam Jethalal, defendant 5 in the suit, by virtue of his
nomination under the terms of the above, article, and the directors of
defendant No. 1 company recognised that nomination and passed a resolution at a
meeting held on 15th November, 1937, stating that the said Seth Narottamdas
Jethalal was to work in place of the deceased Seth Jethalal Purushottamdas with
all the rights as secretary, treasurer and agent which vested in the deceased
Jethalal and as per agreement made between defendant No. 1 company and the said
deceased Jethalal.
That
resolution is at Exhibit 97. The working of the two companies continued under
this arrangement and on 21st June, 1949, the defendant No. 1 company issued a
notice calling the 22nd annual ordinary general meeting of the shareholders of
the defendant No. 1 company on Monday, 18th July, 1949, at 10 a.m. at the
registered office of the company located in the Mills Co.
The fifth item
of business on the agenda in the notice was regarding payment of special additional
remuneration to company’s agent Seth Narottamdas Jethalal. It appears that some
of the shareholder including Jiwanlal Purushottamdas, plaintiff 6 in the
present suit, objected to the inclusion of this item and therefore a notice was
given by the said Jiwanlal to the chairman of the board of directors of
defendant No. 1 company on 8th July, 1949, stating that the subject referred to
in item No. (5) in the notice could not be discussed
at the said meeting.
To this notice
defendant No. 1 company gave a reply on 11th July, 1949 asserting that the
inclusion of item No. (5) in the agenda was quite
proper and legal. Therefore, Natwarlal Chunilal, plaintiff 1 for self and other
shareholder, except defendant 2 to 5, of defendant No. 1 company, filed the present
suit on 16th July, 1949, to get a declaration that defendant No. 1 company was
not authorised or entitled to give or pay any remuneration to its secretary,
treasurer and agent, defendant 5 and for a permanent injunction restraining the
defendant No. 1 company from paying or giving any remuneration to the said
managing agents and also for a permanent injunction restraining the defendant
No. 1 company from passing or discussing any such resolution as was mentioned,
in the notice calling the meeting.
It appears
that the plaintiffs had succeeded in getting a temporary injunction against the
defendant No. 1 company, but the same cannot to be dissolved on 20th July,
1949, and the meeting of the company came to be held on the said day and the
resolution for extra remuneration contemplated in item (5) of the agenda was
passed by the company by 86 to 11 votes.
The plaintiffs
accordingly applied for an amendment of the plaint, which was allowed on 26th
September, 1949, by which the plaintiffs prayed for a declaration that the
resolution for giving extra remuneration, passed by defendant No. 1 company,
was ultra vires, fraudulent and illegal, for a permanent injunction restraining
the company from acting up to and paying in the terms of the said resolution
extra remuneration to defendant 5.
It is the case
of the plaintiffs that the managing agent was to be given a commission of 9
annas in the rupee in the profits of the Mills Co. and that was done by
allotment of 72 shares of defendant No. 1 company and that it was of the
assessee of the incorporation of the defendant NO. 1 company
that the managing agents were not to be given any remuneration for the said
management beyond this.
According to
the plaintiffs, the action of the board of directors of the defendant No. 1
company, in proposing the resolution to give any remuneration to the managing
agents, was ultra vires, illegal and against the objects and constitution of
the company.
According to
the plaintiffs, the managing agents of the defendant No. 1 company were not
entitled to claim, and the company was debarred from paying, any remuneration
because the managing agents had agreed, in consideration of the commission of 9
annas, to manage the affairs of the defendant No. 1 company. It was also urged
that the notice calling the meeting so far as item (5) of the business on the
agenda of the meeting was concerned, was vague, illegal and invalid.
The defendant
resisted the suit on several grounds. They stated that the court had no
jurisdiction to entertain the suit because the resolution of defendant No. 1 company and making payment in pursuance thereof to any of
the company’s employees, including its agent, was a question of internal
autonomy of the management of the company.
They contested
the pleas that it was the essence of the incorporation of defendant No. 1 company and of the appointment of its managing agents that
no remuneration was to be paid or was made payable to the persons managing the
affairs of the said company.
They also
denied that the notice convening the meeting, so far as item (5) was concerned,
was vague or in any way illegal and stated that the notice was clear and
specific and that the question of the amount to be fixed and the reasons for
the payment of the said amount were to be discussed in the said meeting and
depended on the wishes and directions of the shareholders of the company
assembled at the said meeting.
They stated
that the members of the company assembled at its adjourned meeting held on 20th
July, 1949, had passed by an overwhelming majority a resolution sanctioning
payment of extra remuneration to its agent, defendant, 5, as per and in the
manner set out in the said resolution. The defendants urged that the plaintiffs
were not entitled to get the reliefs asked for by them and prayed for dismissal
of the suit with costs.
(5) On these pleadings the
learned trial Judge framed several issues and held that defendant No. 1 company
was not authorised to give or pay remuneration to its agents for managing the
affairs of the company, that the notice dated 21st June, 1949, so far as item
No. (5) was concerned, was illegal and invalid and the
resolution to give extra-remuneration to defendant No. 5 passedas per item No.
(5) of the notice was ultra vires and illegal. The
trial court, therefore, decided the suit in plaintiff’s favour and passed a
decree in terms already stated above. The defendants have now come in appeal.
(6) The first question that
will have to be decided in this appeal is whether defendant No. 1 company was authorised to give or pay any extra remuneration
to its managing agents for managing the affairs of the company, beyond what was
provided for in the agreement dated 24th February, 1932, between defendant No.
1 company and Seth Jethalal Purushottamdas. For this purpose some documents
will have to be referred to. Exhibit 90 is the memorandum of association of
defendant No. 1 company with the articles of
association and Schedule A annexed.
As already
stated above, in the resignation of Seth Chandulal Mashruwala as the managing
agent, Seth Jethalal Purushottamdas came to be appointed in his place and the
original clause (15) in paragraph III of the objects of the defendant No. 1
company was substituted by a new paragraph. The board of directors of defendant
No. 1 company were authorised therein to execute an agreement in connection
with the terms and conditions of appointment an the
remuneration of the said Jethalal. That agreement is Exhibit 126 and Article 2
of the same is in these terms :
“The
remuneration payable by this company to the managing agent is included in the
management commission mentioned in the agreement dated 24th February, 1932,
between the Bhalakia Mills Co. Ltd., and the company, viz., nine annas share in
a rupee of sixteen annas out of the total net amount of commission receivable
by this company from the Bhalakia Mills Company Ltd. and the shares of this
company representing the said none annas commission have already been allotted
to Seth Chandulal Karansandas and Seth Jethalal Purushottamdas Bhalakia
liabilities to be discharged any further in respect of the said nine annas
share commission.”
Exhibit 136 is
the memorandum of association of the Bhalakia Mills Co. Ltd., with the articles
of association and Schedule A annexed. The schedules
annexed to Exhibits 90 and 136 are identical, and the relevant portion of
clause 2(e) of the said schedule shows that out of the total net amount of the
commission payable to the agents’ firm a share of nine annas in a rupee of
sixteen annas was to be called the management commission, while the remaining
seven annas commission was to be called the promoters’ commission.
In
consideration of the work of management, 72 shares of defendant No. 1 company representing the nine annas commission were allotted
to Chandulal Karsandas Mashruwala and Seth Jethala Purushottamdas, and on the
resignation of Chandulal Karsandas Mashruwala the shares standing in his name
were transferred to Seth Jethalal.
The remaining
seven annas commission was payable to all the members of the agents’ firm
including Chandulal Karsandas Mashruwala and Seth Jethalal Purushottamdas and
their heirs, executors, assigns and legal representatives, etc., from time in
consideration of the help given by them in promoting and floating the Bhalakia
Mills Co. Ltd., subscribing to and getting subscribed a large number of shares
by finding person who will subscribe to its shares and by rendering financial
help.
It is,
therefore, urged on behalf of the plaintiffs that the defendant No. 1 company
was not authorised to pay any extra remuneration to the managing agent beyond
the nine annas share in the profits of the Bhalakia Mills Company, Ltd., for
which 72 shares were allotted to them.
The trial
court took the view that there was no provision either on Exhibit 90 or Exhibit
126 expressly authorising an increase in the nine annas commission which was
fixed as the remuneration of the managing agent of defendant No. 1 company. It was also of the view that the promoters’
commission was not to suffer a reduction in any way.
The
plaintiff’s contention was that the promoters’ commission represented by the
seven annas share was not to suffer any reduction under any circumstances and
the action of the defendants No. 1 company in giving
extra remuneration to its managing agent would tend to bring about such a
reduction.
The lower
court was of the view that the appointment of Seth Jethalal as the managing
agent of the defendant No. 1 company and the terms and conditions of his
appointment and his remuneration constituted a condition in the memorandum of
association of defendant No. 1 company and the action of the company in passing
a resolution giving extra remuneration to the managing agent would alter that
condition, and since that the alteration was not made by means of a special
resolution it was ultra vires of the company. But, in our opinion, that view is
not correct.
Under section
10 of the Indian Companies Act, a company cannot alter the conditions contained
in its memorandum, except in the cases and in the mode and to the extent for
which express provision is made in the Act. But the proviso says that any
provision in the memorandum relating to the appointment of the managing agent
and the remuneration payable to him could not be regarded as a condition, and
the defendant No. 1 company was therefore fully authorised to propose and pass
a resolution for the payment of extra remuneration to the managing agent.
In support of
his argument he relied on the ruling in Ramkumar Potdar v. Sholapur Spinning
& Weaving Co., which negatived a similar argument that the rights of the
managing agents which arise under the memorandum of association of the company
could not be altered.
In the case
the suit of the plaintiff was for a declaration that certain resolutions passed
by the directors for the dismissal of the company’s agents were in
contravention of the memorandum and articles of association of the company and
were not binding on the members of the company. The plaintiff’s argument in
that case also was that the rights of the agents arose under the memorandum of
association of the company and therefore could not be altered. But the argument
was held to be quite untenable.
It was held
that the material clause in the memorandum relating to agents was not a vital part
of the construction of the company or a condition of the memorandum within the
meaning of section 10 of the Indian Companies Act. Mr. Munshi on behalf of the
respondents sought to distinguish this case on the ground that whereas the
clause in the memorandum, on which the plaintiffs in that case relied, was not
incorporated amongst the objects of the company, in the present case the
appointment of Jethalal Purushottamdas as managing agent and the terms and
conditions of his appointment and his remuneration were included in the objects
of the company. Mr. Munshi, therefore, urged that the defendant No. 1 company
was not competent to pass a resolution paying extra remuneration to the
managing agent, without passing a special resolution as was contemplated under
section 12 of the Indian Companies Act.
In our
opinion, this argument cannot be accepted. The mere fact that the appointment
of the managing agent and the terms and conditions of his appointment and his
remuneration were mentioned in the objects of the defendant No. 1 company would
not make the provisions relating to the appointment and the remuneration a
condition contained in the memorandum of association, as contemplated in
section 10 of the Act.
The provision
relating to the appointment of a managing agent is merely a detail concerning
the management of the company and a company will be entitled to regulate that
detail in such manner as it likes without going to the court for its sanction
and without recourse to a special resolution as contemplated in section 12 of
the Indian Companies Act.
It could not
make a difference in the position even if the clause in the memorandum of
association relating to the appointment of the managing agent was inserted
among the objects of the company : see Ramachandra Lalbhai v. Chinubhai
Lalbhai, and the remarks of CHAGLA J. (as he then was), at page 81.
Mr. Munshi
also relied in support of the trial court’s view on the case of Ashbury v.
Watson, which held that certain resolution which altered the conditions in the
memorandum of association in contravention the conditions in the memorandum of
association in contravention of section 12 of the English Companies Act, 1862,
were not valid. In that case a provision with regard to the priority of shares
was held to be a condition in the memorandum of association and an essential
part of the constitution of the company upon which it was established because
the distribution of the profits was one of the most essential parts of the
constitution of the company.
Mr. Munshi says
that in the present case also the distribution of the profits of the Bhalakia
Mills Co. Ltd., was an essential part of the defendant
No. 1 company and therefore any action which tended to make a change in this
respect would be an alteration of one of the conditions in the memorandum of
association. We cannot accept that contention.
As the
judgment of FRY L.J. at page 384 shows, provisions in the memorandum of
association with regard to details as to the management of the company would
not be conditions within the meaning of the Companies Act and that is also the
effect of the proviso to section 10 of the Indian Companies Act. In our
opinion, therefore, the view of the trial court that defendant No. 1 company was not authorised to pay extra remuneration to the
managing agent and could not pass a resolution in respect thereof cannot be
accepted.
Then it urged
that in view of the provisions of sub-section (2) of section 87C of the Indian
Companies Act the defendant No. 1 company was not competent to pay any extra
remuneration to the managing agent, unless it was sanctioned by a special
resolution of the company and that the same not having been done the present
resolution passed on 20th July, 1949, was illegal. Sub-section (1) of section
87C says that :
“where any
company appoints a managing agent after the commencement of the Indian
Companies (Amendment) Act, 1936, the remuneration of the managing agent shall
be a sum based on a fixed percentage of the net annual profits of the company,
with provision for a minimum payment in the case of absence of or inadequacy of
profits, together with an office allowance to be defined in the agreement of
management.”
Now, section
87C was inserted in the Indian Companies Act by the Amendment Act 22 of 1936,
which came into operation on 15th January, 1937, and it is urged that since
defendant No. 5, Seth Narottamdas, was appointed as managing agent on 15th
November, 1937, the provisions of section 87C would apply to his appointment
and no extra remuneration could be paid to him, unless it was sanctioned by a
special resolution of the company. Exhibit 97 is the resolution passed at the
meeting of the board of directors of defendant No. 1 company
on 15th November, 1937. It recorded that in place of the deceased, Seth
Jethalal Purushottamdas, Seth Narottamdas Jethalal (defendant No. 5) was to
work with all the rights as secretary, treasurer and agent of the deceased,
Seth Jethalal Purushottamdas, as his legal representative in virtue of his own
right and in virtue of his nomination, as contemplated by the agreement made
between the Bhalakia Mills Co. Ltd., and the defendant No. 1 company. It
cannot, therefore, be said that defendant No. 1 company
had appointed defendant No. 5 as its managing agent after the commencement of
the Indian Companies (Amendment) Act, 1936, that is to say after 15th January,
1937. Defendant No. 5 replaced the deceased, Seth Jethalal, as a managing agent
of a defendant No. 1 company by virtue of the provisions in the memorandum and
articles of association of defendant No. 1 company and as per agreement made
between defendant No. 1 company and Seth Jethalal.
If that be so,
in our opinion, the provisions of section 87C of the Indian Companies Act have
no application and would not required defendant No. 1 company
to pass a special resolution for payment of extra remuneration to its managing
agent.
It was also
urged that the noticed dated 21st June, 1949, of the general meeting, sent to
the plaintiff was not valid in so far as item No. (5) was
concerned, and that therefore the resolution regarding payment of extra
remuneration was illegal.
Mr. Munshi
relied in support of his contention regarding the validity of the notice on
Narayanlal v. Manekji Petit Manufacturing Co. which held that the resolutions
passed by the company as the notice convening the meeting and the circular
accompanying it did not give a sufficiently full and frank disclosure the facts
upon which the shareholders were asked to vote.
Mr. Munshi
makes a similar grievance of the notice in the present case (Exhibit 91A) and
says that item (5) on the agenda of business did not contain a frank and full
disclosure of all that was going to be presented at the meeting regarding the
subject of additional remuneration to the company’s agent. We do not think that
there is any substance in this argument.
As soon as the
notice was received, the present plaintiffs seem to have immediately moved in
the matter and plaintiff 6, Jiwanlal Purushottamdas, gave a notice to the
chairman of the board of directors objecting to the inclusion of item (5) on
the agenda of the meeting. To that notice, as already stated, defendant No. 1 company gave a reply that the inclusion of the item was
quite proper and legal and before the meeting could be held the present suit
came to be filed on 16th July, 1949, by plaintiff 1 for self and other
shareholders who agreed with him.
In our
opinion, therefore, the finding of the trial court that the notice conveying
the annual general meeting, so far as item (5) was concerned, was illegal is
not correct.
No other
points were urged on behalf of the respondents in support of the decree of the
trial court. We may point out that after the present appeal was filed by the
original defendants, defendant No. 5, Seth Narottamdas, died and his heirs and
legal representatives have been duly brought on record. It is not urged that
the appeal would in any way be affected on account of the death of the original
defendant No. 5.
We, therefore,
allow First Appeal No. 134 of 1951, set aside the decree of the trial court and
dismiss the plaintiffs’ suit with costs throughout, costs to be paid by
respondent 6 (original plaintiff 6). The cross objections also fail and are
dismissed with costs.
First Appeal
No. 549 of 1951 was allowed to stand over on the request of Mr. A.S. Pradhan,
who pleaded want of instructions from his clients and therefore wanted an
adjournment. When the appeal was again fixed for hearing Mr. Karlekar on behalf
of the respondents urged a preliminary objection that the appeal had become
incompetent on account of the death of respondents 5 (original defendant No. 5)
and though his heirs and legal representatives were brought on record, the
plaintiffs could have no cause of action against them and could not prosecute
the appeal.
In the suit
out of which the appeal has arisen, the plaintiffs challenged the validity of
the appointment of Seth Narottamdas Jethalal as the managing agent of Chandulal
and Co. Ltd., (defendant No. 1) and prayed for a declaration that defendant No.
5 was not validly and legally appointed managing agent of defendant No. 1
company and for an injunction restraining defendant No. 5 from acting as such.
The trial
court held that the plaintiffs were not entitled to such a declaration and
injunction and dismissed the plaintiffs’ suit with costs. As the original
defendant No. 5, Seth Narottam Jethalal, is now dead, it is obvious that the
plaintiffs’ right to sue does not survive against either defendant No. 1 company or the heirs and legal representatives of defendant
No. 5. This position has been conceded by Mr. Munshi.
First Appeal
No. 549 of 1951 must, therefore, fail and must be dismissed. There will be no
order as to costs of the appeal in the circumstances of the case.
Appeal
dismissed.
[1935] 5
COMP. CAS. 161 (ALL.)
HIGH COURT OF
British India
Corporation Ltd.
v.
Shanti Narain
IQBAL AHMAD
AND HARRIS, JJ.
DECEMBER 21, 1934
K.N. Katju for the Applicant.
G.S. Pathak for the Opposite
Party.
Iqbal Ahmad, J.—This is an application in revision
against an order of the District Judge of Cawnpore rejecting an application
filed by the applicant, the British India Corporation Limited, Cawnpore
(hereinafter called the Company), praying that sanction be accorded to the
proposed consolidation of the deferred and ordinary shares of the Company and
that "the minute suggested be approved." The application purported to
be an application under Section 54(1) of the Indian Companies Act, VII of 1913.
The section runs as follows:—
(1) A company limited by shares may, by special resolution
confirmed by an order of the Court, modify the conditions contained in its
memorandum so as to reorganize its share capital, whether by the consolidation
of shares of different classes or by the division of its shares into shares of
different classes:
Provided that no preference or
special privilege attached to or belonging to any class of shares shall be
interfered with except by resolution passed by a majority in number of share
holders of that class holding three-fourths of the share capital of that class
and confirmed at a meeting of shareholders of that class in the same manner as
a special resolution of the company is required to be confirmed, and every
resolution so passed shall bind all the shareholders of the class.
The admitted facts, so far as
they are material for the decision of the application in revision before us,
are as follows :—
The company was incorporated in
the year 1920 as a company limited by shares with an authorised capital of Rs.
10,00,00,000 (ten crores of rupees) divided into 3,00,000 (three lakhs) 8 per
cent, cumulative preference shares of Rs, 100 each, 60,00,000 (sixty lakhs)
ordinary shares of Rs. 10 each, and 10,00,000 (ten lakhs) deferred shares of
Rs. 10 each. The company allotted 81,000 preference shares, 41,40,000 of its ordinary shares and 5,50,000 of its deferred
shares. The shares allotted were fully subscribed.
The respective rights and
privileges of different classes of shareholders were specified in Paragraphs 6
and 7 of the memorandum of association. The usual preference was given to
preference shareholder but we are not concerned with the same in the present
case. It was provided inter alia by the said paragraphs that after the
preference shareholders were paid their profits the balance of the profits was
to be distributed amongst the ordinary and deferred shareholders in the
following manner :—
The ordinary shareholders' were
to receive 10 per cent dividend on their shares and if nothing was left out of
the profits the deferred shareholders were to get nothing. But if some balance
was left after paying the dividend on preference shares and 10 per cent,
dividend to ordinary share holderes, the deferred shareholders were to get
dividend up to a limit of 10 per cent. If some amount out of the profits was
even then left then half of the amount so left was to be divided between
ordinary shareholders and the other half between deferred shareholders. In the
case of winding up of the company the assets available for distribution after
payment of the capital paid up on the preference shares with any arrears of
dividend thereon was to be distributed amongst the ordinary and deferred
shareholders in the following manner :—
(1) To pay off the capital paid up on
the ordinary shares.
(2) To pay off the capital paid up on
the deferred shares.
(3) The balance (if any) to be distributed as to one- half amongst the holders of ordinary shares and as to the other half amongst the holders of deferred shares.
These rights and privileges of
the various classes of share holders were, however, subject to the provisions
of Paragraph 8 of the memorandum and much of the argument addressed to us as
regards the merits of the application before us has centered round this
paragraph. It is as follows:—
The right for the time being
attached to said several classes of shares may be modified or dealt with in a
manner mentioned in Clause 7 of the accompanying Articles of Association but
not otherwise and that clause and also Clause 138 of the said Articles of Association
shall be deemed to be incorporated herein and have effect accordingly.
Article 7 of the Articles of
Association prescribed the method and procedure by which the special rights
attaching to any class of shares may be "varied, abrogated or
affected." Article 138 is immaterial for the decision of the application
in revision before us.
The capital of the company was
reduced from time to time and the ultimate reduction in capital was made on
November 21, 1932, by an order of the District Judge of Cawnpore, dated
November 21, 1932, in accordance with which the following minute was recorded
by the District Judge :—
The capital of the British India
Corporation, Ltd. hence forth is Rs. 3,65,00,000 (three crores sixty-five
lakhs) divided into 3,00,000 cumulative preference shares of Rs. 100 each,
60,00,000 ordinary shares of Re. 1 each and 10,000,000 deferred shares of 8
annas each. At the time of the registration of this minute 81,000 cumulative
preference shares, 41,40,000 ordinary shares and
5,50,000 deferred shares had been issued. The sum of Rs. 100 has been and is to
be deemed to have been paid up on each of the said 81,ooo
preference shares. The sum of Re. 100 has been and is to be deemed to have been
paid up on each of the said 41,40,000 ordinary shares.
The sum of 8 annas has been and is to be deemed to have been paid up on each of
the said 5,50,000 deferred shares. The remaining 2,19,000 preference shares, 18,60,000 ordinary shares and
4,50,000 deferred shares are unissued.
It would be apparent from the
above quotation that from November 21, 1932, the nominal value of each ordinary
share was Re. 1 and the nominal value of each
deferred share was 8 annas and that all the issued ordinary and deferred shares
were to be deemed to be fully paid up.
In or about the year 1933 it was considered desirable to do
away with the distinction between ordinary and deferred shares and to put the
rights and privileges attaching to these classes of shares on an identical
footing. With this object in view extra-ordinary General meetings of (a) the
deferred shareholders, (b) the ordinary shareholders, and (c) of the
[preference] shareholders of the company were held on 2nd August, 1933, and
extra-ordinary resolutions were passed by all the meetings approving the
consolidation of the deferred share capital in such a manner that every two of
the existing deferred shares of the nominal value of 8 annas should constitute
one new share of the nominal value of Re. 1. In order to deal with the case of
people whose deferred shares of the old class might amount to an odd number, a
special class of holders of fractional share certificates was created, and
these entitled to dividends but not to any other rights. The resolution further
provided that in lieu of the existing rights conditionally attached to the
deferred share capital by Paragraphs 6 and 7 of the memorandum, each one newly
consolidated deferred share of the nominal value of Re. 1 shall be placed on
the same footing in all respects as each ordinary share of the nominal value of
Re. 1. The extraordinary resolution passed by the extraordinary general meeting
of the shareholders of the company on 2nd August, 1933, was passed as a special
resolution by the shareholders at a meeting held on 18th August, 1933.
In order to obliterate the distinction even in name between
the two classes of shares the following extraordinary resolution was passed by
the deferred shareholders of the company on nth October, 1933 :—
"That this meeting of deferred shareholders of
the corporation in view of the fact that the Ordinary and Deferred shares
respectively now carry the same rights in all respects as regards dividend, on
winding up and voting, considers it expedient that the capital of the
Corporation be re-organized by the consolidation of the Ordinary and Deferred
shares, and that the Directors of the Corporation be, and they are, hereby
declared at liberty to take such action as may be necessary to effect such
consolidation and to obtain any necessary sanction of the court thereto."
Identically worded extraordinary resolutions were passed on
the date, viz., on nth October, 1933, at extraordinary general meetings of the
ordinary shareholders and of the [preference] shareholders of the company. It
was also resolved by the extraordinary general meeting of the shareholders that
suitable alterations specified in the resolution be made in the memorandum and
Articles of Association so as to give effect to the resolution quoted above.
The extraordinary resolutions passed by the shareholders of the company were
passed as special resolutions at a general meeting of the shareholders on 27th
October, 1933.
Having passed the resolutions referred to above the company
decided to register the following minute :—
"The capital of the British India Corporation, Ltd.,
Cawnpore, hence-forward is Rs. 3,65,00,000 divided into 3,00,000 cumulative
preference shares of Rs. 100 each and 65,00,000 ordinary shares of Re 1
each"
and filed an
application before the District Judge praying that the minute suggested be approved
and that sanction be accorded to the consolidation of the deferred and ordinary
shares under Section 54 of the Companies Act, and in support of the application
filed an affidavit detailing the facts and the resolutions noted above.
Shanti Narain, the opposite party before us, filed an
objection to the application of the company. He stated in his objection that
the company originally wanted to put up a scheme of amendment of the memorandum
and Articles of Association and the consolidation of the ordinary and deferred
shares at an extraordinary general meeting called for March 25, 1933, but in
that meeting the Chairman of the meeting pointed out that the proposed
amendment was in the opinion of the legal advisers of the company governed by
the provisions of Section 54 of the Act and, as the requisite majority of the
shareholders provided for by the Proviso to Section 54 was not available, the
resolution could not be considered by the meeting. Accordingly the
extraordinary general meetings of the ordinary and deferred share holders
convened for 25th March, 1933, were dissolved. The objector further maintained that
the Directors having failed to carry out the proposed scheme of the
reorganization of the share capital by consolidating the ordinary and deferred
shareholders and the amendment of the memorandum and Articles of Association in
the meeting of 25th March 1933, made a deliberate attempt to circumvent the
provisions of Section 54 of the Indian Companies Act. In this connection he
pointed out that, as the Directors could not by the consolidation of ordinary
and deferred shares modify the conditions contained in the memorandum so as to
re-organize the share capital of the company, they resorted to the device of
attaining the object in view by splitting up the proposed scheme into two
parts, viz., firstly, to consolidate the deferred shares into shares of Re. 1
each and to put the same on a par in all respects with ordinary shares, and,
secondly, by special resolution to consolidate the ordinary and deferred shares
and amend the memorandum and Articles of Association. The objector maintained
that what the company could not do by a single step it could not accomplish in
two steps. In short, the chief objection of the objector was that the division
of the original scheme of reconstruction and reorganization of the share
capital and of amending the memorandum and Articles of Association into two
parts by the management was for the purpose of evading the mandatory provisions
of Section 54 and thereby affecting adversely the rights and privileges
attached to the holders of the deferred shares.
The learned Judge held that the
scheme referred to above was a fair and equitable scheme and "
should be sanctioned on the merits." He, however, held that the two
sets of resolutions passed on August 2 and on October 11 cannot be split up and
that both the resolutions must be read and taken into consideration together.
In this view of the matter he held that it was not open to the applicant
company to ask for the confirmation of the resolution of October 11 and not for
the resolution of August 2. In other words, he held that the two resolutions
must be read together and the scheme treated as a single scheme and sanction
should be accorded or refused to the scheme as a whole. His conclusion was that
he was not competent to grant the application of the company under Section 54
of the Act as the effect of the two resolutions passed on the two dates
mentioned above was to reorganize the share capital of the company by
consolidation of the shares of different classes, and the reorganization had
the effect of interfering with the preference or special privileges attaching
to ordinary shares and the majority of the shareholders contemplated by the
Proviso to Section 54 was not present at the meetings on which those
resolutions were passed. In the alternative he held that
'if the object that the company
has in view can be obtained without modifying the conditions contained in its
memorandum of association, then no sanction of the Court is necessary,’
and, as such, no sanction ought to
be accorded. In the result he dismissed the application of the Company.
The company has come up in
revision to this Court.
A preliminary objection has been
raised to the hearing of this application by the learned counsel for the
opposite party on the ground that the order of the Court below cannot be
revised by this Court. He has formulated his objections on the following three
alternative grounds:
(1) That this Court has no jurisdiction to revise orders passed
by a District Court under the Indian Companies Act;
(2) that a District Court exercising jurisdiction in company
matters is not a court subordinate to the High Court within the meaning of
Section 115, Civil Procedure Code, and
(3) that the Court below had
jurisdiction to hear and decide the application before it and it did not
exercise its jurisdiction illegally or with material irregularity.
So far as the third objection is
concerned it is really not in the nature of a preliminary objection. It is on
the other hand an objection touching the merits of the revision application
before us. A preliminary objection is one that challenges the competence of a
Court to hear and decide a particular cause before it and the third objection
noted above, far from doing so, necessitates the consideration by this Court of
the question whether or not the Court below exercised its jurisdiction
illegally or with material irregularity. This is tantamount to the
consideration of the revision application on its merits. It is one thing to say
that the Court has no jurisdiction to entertain an
application in revision against a particular order passed by a particular
Court, and it is quite another thing to say that though this Court can
entertain the application in revision it ought to reject the same as in passing
the order sought to be revised the Court below did not assume jurisdiction that
it did not possess, or failed to exercise a jurisdiction that it did possess,
or acted in the exercise of its jurisdiction with material irregularity. All
that is necessary to bring into play the revisional jurisdiction of this Court
under Section 115, Civil Procedure Code is that
(i) there be a case decided, (ii)
the decision be of a Court subordinate to this Court, and (iii) the decision be
not appealable.
If these conditions are satisfied this Court has
undoubtedly the revisional jurisdiction conferred on it by Section 115, C.P.C,
and is vested with the discretion to exercise that jurisdiction provided the
case falls within Clause (a) or (b) or (c) of Section 115, Civil Procedure
Code. But the moment this Court proceeds to consider whether a particular case
does or does not fall within eithes of those clauses it necessarily considers
the revision application on its merits. We, therefore, propose to consider the
third objection of the learned counsel while dealing with the merits of the
application before us.
In support of the first two objections noted above the
learned counsel has argued that the Indian Companies Act is a self-contained
Act containing detailed provisions as to the procedure to be adoated by a Court
while exercising jurisdiction under that Act, and as revisional jurisdiction is
not conferred by that Act on this Court, the present application in revision can
not be entertained. In support of this contention reference has been made to
Sections 202 and 246 of the Act. Section 202 provides about appeals from
certain orders made in the matter of the winding-up of the company and Section
246 vests the power in this Court to make rules consistent with the Act and
with the Code of Civil Procedure, 1908, concerning the mode of proceedings to
be had for the winding-up of a company in the High Court and in the Courts
subordinate thereto, and for giving effect to the provisions contained in the
Act as to the reduction of the capital and the sub-divisions of the shares of
the company. It is contended that as provisions for appeals from certain specified orders passed under the
Act are made in the Act and there is no provision in the Act conferring
revisional jurisdiction on this Court, this Court has no power to revise the
order passed by the Court below in the present case. It is further argued that
the District Court of Cawnpore is not a Court subordinate to this Court within
the meaning of Section 115, Civil Procedure Code, and, as such, the present
application in revision cannot be entertained.
In our judgment there is no force
in these contentions. The words "the Court" are denned by the
Companies Act as meaning the Court having jurisdiction under the Act and it is
provided by Section 3 that the court having jurisdiction under the Act shall be
the High Court having jurisdiction in the place at which the registered office
of the company is situate. The High Court is., therefore, normally the Court
having jurisdiction under the Act, but there is a proviso to Section 3 to the
effect that the Local Government may, by notification in the local official
gazette, and subject to such restrictions and conditions as it thinks fit,
empower any District Court to exercise all or any of the jurisdiction by the
Act conferred upon the High Court and
'in that
case such District Court shall, as regards the jurisdiction so conferred, be
the Court in respect of all companies having their registered offices in the
district'.
The registered office of the
applicant company is in the District of Cawnpore, and the Local Government, in
exercise of the powers vested in it by the Proviso to Section 3 of the Act,
has, by a notification dated 24th September, 1914, empowered the District Court
of Cawnpore to exercise all the jurisdiction conferred
by the Act upon this Court. The learned counsel is therefore right in
contending that the District Judge of Cawnpore has exclusive original
jurisdiction to decide all matters arising under the Companies Act with
reference to the companies, the registered offices of which are within the
district of Cawnpore. It follows that this Court cannot exercise jurisdiction
under the Companies Act with reference to the companies mentioned above. But
the exclusive original jurisdiction conferred on the District Court of Cawnpore
can in no way oust the revisional jurisdiction that is conferred on this Court
by Section 115, Civil Procedure Code, unless that jurisdiction is either
expressly or impliedly ousted by the Companies Act or the District Court of
Cawnpore, while exercising jurisdiction under that Act, is not subordinate to
this Court within the meaning of Section 115.
There is nothing in the Companies
Act either expressly or impliedly ousting the revisional jurisdiction of this
Court. In the absence of such a provision the limits of the revisional
jurisdiction of this Court must be ascertained by reference to Section 115,
Civil Procedure Code. The view that we take finds some support from the
decision of their Lordships of the Privy Council in Balakrishna Udayar v.
Vasudeva Ayyar. In that case it was held by their Lordships that the High Court
has jurisdiction under Section, 115, Civil Procedure Code, 1908, to revise an order
of the District Judge made under Section 10 of the Religious Endowments Act, XX
of 1863. It is conceded that by that Act exclusive original jurisdiction in the
matters dealt with by the Act is conferred on the District Judge and there is
no provision in that Act either conferring upon or ousting the revisional
jurisdiction of the High Court. It is true that the point whether or not the
absence of any express provision in the Religious Endowments Act conferring
revisional jurisdiction on the High Court could be impliedly taken to oust the
revisional judrisdiction of the High Court was not argued before their
Lordships. But the fact remains that their Lordships approved of the exercise
of the revisional jurisdiction by the High Court in a case that was by the
special enactment referred to above within the exclusive jnrisdiction of the
District Judge and whose orders under the Act were not appealable. Similarly,
in the Full Bench decision of this Court in Makan Lal v. Secretary of State for
The learned counsel for the opposite party has in support
of his argument relied on the decisions of this Court in Parbhu Narain Singh,
Kashi Naresh v. Harbans Lal and Jamna Prasad v. Karan Singh. In these cases it
was held that no revision lay to this Court against an appellate decree of the
District Judge in suits filed in the revenue Court under the Agra Tenancy Act,
II of 1901. In the Tenancy Act of 1901, apart from the provisions as regards
appeals from decisions under that Act, specific provision was made as regards
revisions by Section 185 of that Act. By that section the Board of Revenue was
empowered to exercise revisional jurisdiction in cases decided by subordinate
revenue Courts except those cases in which the decree of the revenue Court was
appealable under Section 177 of the Act to the District Judge. The omission of
the legislature, while making provision about revisions, to vest this Court
with revisional jurisdiction was significant. Apart from this the provision of
Section 167 of the Act itself was impliedly taken to bar the revisional
jurisdiction of this Court. It was provided by Section 167 of that Act that
'all suits and applications of the nature specified in the
Fourth Schedule of the Act shall be heard and determined by the revenue Court,
and except in the way of appeal, as hereinafter provided, no Court other than a
revenue Court shall take cognissance of any dispute or matter in respect of
which any suit or application might be brought or made.'
It was observed by one of the learned Judges in Prabhu
Narain Singh, Kashi Naresh v. Harbans Lal, that it would be doing violence to
the words of the last clause of Section 167 of the Act if this Court were to
entertain applications in revision against the appellate decree of the District
Judge in suits filed in the revenue Court. These decisions are of no help to
the opposite party for the simple reason that in the Companies Act no provision
is made as regards revisions and there is nothing like Sections 167 and 185 of
the Tenancy Act either expressly or impliedly ousting the jurisdiction
conferred on this Court by Section 115, Civil Procedure Code.
This brings us to the consideration of the question whether
the District Court of Cawnpore, exercising jurisdiction under the Companies Act
to the exclusion of the High Court, is a Court subordinate to this Court within
the meaning of Section 115, Civil Procedure Code. It is argued on behalf of the
opposite party that as the very jurisdiction that is conferred on this Court by
the Companies Act has, by the notification referred to above, been taken away
from this Court and vested in the District Court, that Court can in no sense be
regarded as a Court subordinate to this Court while exercising the exclusive
jurisdiction so conferrred on it. In short it is suggested that the District
Court of Cawnpore exercising jurisdiction in company matters stands in the
shoes of the High Court and it, therefore, can in no way be described as
subordinate to the High Court.
The answer to this contention is furnished by Section 3 of
the Code of Civil Procedure which provides that
'for the purposes of this Code,
the District Court is subordinate to the High Court……….'
It is true that by reason of the notification by the Local
Government the District Court of Cawnpore is empowered to exercise original jurisdiction
in company matters to the exclusion of this Court, but the jurisdiction so
exercised by that Court is in the capacity of a District Court and not of a
High Court, and, as such, that Court is in view of the provisions of Section 3
of the Code subordinate to this High Court within the meaning of Section 115,
Civil Procedure Code.
It is conceded that the order sought to be revised in the
present case fulfils the other requirements of the First Paragraph of Section
115, viz., that a case has been decided by the District Court and that the
order is not appealable. That being so, for the reasons given
above, we overrule the preliminary objection and hold that we have jurisdiction
to entertain this application.
On the merits we have come to the conclusion that the order
of the District Court of Cawnpore cannot be sustained and that in rejecting the
application filed by the applicant company that Court exercised its
jurisdiction with material irregularity.
We have already observed that the Court below came to the
conclusion that what the company proposed to do was "fair and
equitable" and that the scheme "should be sanctioned on the
merits." It was pointed out by the learned counsel for the opposite party
that, in the event of the company making very large profits, the removal of the
distinction between the rights and privileges of the ordinary and deferred
shareholders and consolidation of those classes of shares would be to the
disadvantage of the deferred shareholders. This assertion may well be true, but
the figures supplied to us by the learned counsel for the applicant company
show that even in years when the profit of the company exceeded Rs 32,00,000 no dividend could be paid to the deferred
shareholders. The company has been doing business for the last 14 years. In 9
out of those 14 years no dividend could be paid to the deferred shareholders.
It also appears by reference to the chart supplied to us by the counsel for the
applicant that the profits have been declining from the year 1928 and even in the
last year the profits amounted to only Rs. 12,96,000
which was sufficient only to pay dividend to the preference shareholders.
Having regard to all the circumstances it may safely be said that there is
little prospect of any dividend being paid to the deferred shareholders for
some years to come, and, as such, the extraordinary resolutions passed by the
company on 2nd August and nth October, 1933, are manifestly not to their
disadvantage. Similarly, in the event of large profits being made in the future
the ordinary shareholders also stand to gain by the scheme carried out by the
resolutions noted above. In considering the scheme we cannot overlook the fact
that the resolutions in question were passed by the various classes of
shareholders unanimously in extraordinary general meetings, which were convened
after due notice, and were attended by a large number of shareholders of
different classes either in person or by proxy. We must, therefore, approach
the consideration of the case on the assumption that the scheme is fair and
equitable and for the benefit of the two classes of shareholders concerned.
The question, however, remains whether the Court below was
right in holding that the resolutions of August 2 and October 11 should be read
together. If those resolutions are to be read together and considered as a
whole, there can be no doubt that they have the effect of modifying the
conditions contained in the memorandum of the Company so as to reorganize its
share capital by consolidation of shares of different classes, and they have
further the effect of interfering with the special privilege attached to either
ordinary or deferred shares. It follows that if the Court below is right in
holding that the resolution of October 11 cannot be considered apart from the
resolution of August 2, the case falls within the purview of Section 54, and,
as those resolutions were not passed by such majority in number of shareholders
as is required by the Proviso, the Court could not confirm the resolutions
under Section 54. We are however of the opinion that the Court below was wrong
in holding that the two resolutions must be read and considered together.
Paragraph 8 of the memorandum of association clearly
provided that the rights for the time being attached to several classes of
shares may be modified or dealt with in the manner provided by Clause 7 of the
Articles, and, that that article shall be deemed to be incorporated in the
memorandum and have effect accordingly. By the resolution of August 2 the
company consolidated the deferred shares and gave to the shares so consolidated
the same rights and privileges as those attached to the ordinary shares. The
consolidation was done in the manner provided by Clause 49 of the Articles,
and, it is not suggested that there was any illegality in the procedure adopted
by the company for such consolidation of deferred shares. It is also not
disputed that the rights attaching to the deferred shares were modified and
dealt with in accordance with Clause 7 of the Article. It is clear then, that
what the company did on August 2 was in strict conformity with the provisions
of the memorandum and articles.
But it is argued that notwithstanding the provisions
contained in the memorandum as to the modification of the rights and privileges
attached to various classes of shares, the rights and privileges could not be
altered except in accordance with the provisions of the Act. It is urged that
the provisions of Paragraph 8 of the memorandum being in conflict with the
provisions of Sections 10 and 54 of the Act, the resolution of August 2 was
invalid and of no effect. Section 10 of the Act provides that a company shall
not alter the conditions in its memorandum except in the cases and in the mode
and to the extent for which express provision is made in the Act. itself. The contention is that inasmuch as the resolution of
August 2 had the effect of altering the terms of the memorandum as regards the
rights and privileges attaching to ordinary and deferred shares, the alteration
could only be done in accordance with the provisions of the Act. This argument
proceeds on the assumption that what was done by the company on August 2
amounted to an alteration in the memorandum of association, but in our judgment
this assumption is not well-founded.
Section 6 of the Act prescribes the matters that must be
stated in the memorandum of a company limited by shares, and, so far as those
matters are concerned, no alteration in the memorandum can be made even if
power in that behalf is expressly reserved by the memorandum itself: vide In re
Welsback
Incandescent Gas Light Company Limited, per Stirling,
L, J. The provisions as regards the rights and privileges attaching to
particular class of shares are not required by statute to be inserted in the
memorandum of a company, but if they are stated in the memorandum without the
reservation of the power to modify Or alter those rights and privileges, they
cannot, in view of the provisions of Section 10 of the Act, be altered except
in the mode and to the extent for which express provision is made in the Act. (See Ashbury v. Watson.)
In the case before us, however, we find that the rights and
privileges of the ordinary and deferred shareholders were conditionally stated in
the memorandum, and could, in accordance with Paragraph 8 of the memorandum
read with Clause 7 of the Articles be varied, abrogated, or affected. The
exercise of the power vested by Paragraph b did not amount to an alteration of
those rights and privileges, as those rights and privileges were subject to
this important condition that they could at any time be altered in accordance
with Paragraph 8 of the memorandum and Clause 7 of the Articles. In other
words, in the case before us, the rights and privileges attaching to different
classes of shares defined by the memorandum were not rights and privileges for
all time, but only for such time as they remained unaltered by any special
resolution as provided by Clause 7 of the Articles. Indeed in Clause 8 they are
stated to be the rights " for the time
being." In other words, they were not unconditional rights of the
shareholders, but rights subject to variation from time to time by special
procedure laid down in the memorandum and articles.
The question of the validity and effect of clauses in the
memorandum and articles similar to the clauses in the present case was considered in In re
Welsbach Incandescent Gas Light Company Limited.
In that case it was held by the English Court of Appeal
that the rights and privileges of the various shareholders could validly be
changed by resolution as provided in the memorandum and articles and that such
resolution did not require the sanction of the Court. The case of Ashbury v.
Watson cited above was distinguished upon the ground that in that case the
privileges and rights attached to different classes of shares were
unconditional, whereas in the Welsbach Case they were given conditionally and
were subject to modification or alteration. To vary the conditional rights and privileges
given to various classes of shares by the memorandum does not amount to an
alteration of the conditions contained in the memorandum, because one of the
conditions in the memorandum is that the rights and privileges are subject to
variation. To hold otherwise would be to ignore the condition in the memorandum
providing for variation in the rights for the time being attaching to
particular classes of shares. In order to ascertain the rights attaching to
particular classes of shares, the memorandum must be read and given effect to
as a whole, unless any particular provision of the same violates an express
provision of the statute, in which case, that particular provision will be
treated as invalid.
The learned counsel for the opposite party tried to distinguish
the case of Welsbach on the ground that at the time it was decided there was no
provision in the English Companies Act analogus to the provisions of Section 54
of the Indian Companies Act. It is true that provisions similar to Section 54
of the Indian Act were for the first time incorporated in the English Companies
Act in the year 1908, but this fact in no way shakes the authority of Welsbach
Case. The question that was directly and specifically in issue in that case was
whether or not the variation in the rights and privileges of different classes
of shareholders amounted to a modification or alteration of the memorandum when
power to modify those rights and privileges was given by the memorandum itself,
and the same is the question before us. We may note in passing that in
Reliance has been placed on behalf of the opposite party on
the decision of the Bombay High Court in In re E.D. Sassoon United Mills, Ltd.
That case is, in our judgment, clearly distinguishable as the facts in that
case were very different from the facts in the case before us. In the Bombay
case a procedure was provided in the articles of association for modifying or
altering the preferential rights and privileges of certain classes of shares,
but the preferential rights in the perference shares of the initial capital
were, by the terms of the memorandum of association, made unalterable, and an
attempt was made by means of the procedure prescribed by the artices to take
away the privileges of the preference shares in the initial capital, and this
the company clearly could not do. Further an attempt was made to vary the
privileges attached to the ordinary shares, but the procedure laid down in the
articles for such variation was not followed. Consequently the variation of the
rights and privileges attached to these shares could only be effected in
accordance with the provisions of the Act permitting such variations. In the
case before us the procedure prescribed in the articles and memorandum or
association for modification or variation of the rights and privileges
attaching to various classes of shares has been strictly complied with.
The learned counsel for the opposite party has further
argued, that the resolution of August 2 incorporated a compromise or
arrangement between the company and its members within the meaning of Section
153 of the Companies Act and, therefore, could only have been passed in
accordance with the provisions of Clause (1) of Section 153, and that to have
binding effect it needed the sanction of the Court, which admittedly was not obtained. We are of the
opinion that there is no force in this contention. By the resolution of August
2 the company modified the rights and privileges attaching to deferred shares,
not by means of a compromise or arrangement arrived at between the company and its
members, but in exercise of the powers vested in the company by Paragraph 8 of
the memorandum which incorporated Clause 7 of the articles. We cannot
differentiate the conditions contained in the memorandum before us from a case
in which the memorandum provides that the rights of various classes of
shareholders to participate in the annual profits of the company are such as
shall be determined from time to time by the company. In such a case the mere
fact that year after year the company, by appropriate means, varies the rights
of different classes of shares cannot be tantamount to a compromise or
arrangement between the company and its members or to a variation of the
conditions in the memorandum of association.
As we have stated previously in
this judgment the English Court of Appeal in the case of In re Welsbach
Incandescent Gas Light Company, Limited held that a resolution similar in form
to the August resolution in the present case was a valid one. Further, it is to
be noticed that in that case it was not suggested that such a resolution
required the sanction of the Court as a compromise or arrangement. When the
case of In re Welsbach Incandescent Gas Light Co., Ltd. was decided the English
Companies Act contained provisions analogus to Section 153 of the Indian
Companies Act (see Section 2, Joint Stock Companies Act, 1870 as amended by
Section 24 of the Companies Act, 1900).
Further, the case of In re
Australian Estates and Mortgage Co., Ltd makes it clear that after the passing
of the English Companies Act of 1908, a resolution similar to the August
resolution in the present case did not require the sanction of the Court,
though Section 120 of the English Companies Act, 1908 was identical with
Section 153 of the Indian Act.
Before we leave this point we must
notice the decision in In re J.A. Nordberg which was relied upon by the learned
counsel for the opposite party. In that case it was held that a scheme of
arrangement which modifies the memorandum of association of a company in any
way other than those specified in Section 45 of the Companies Act, 1908, (which
corresponds to Section 54 of the Indian Companies Act) does not require a
special resolution passed by the majority mentioned in that section, but may be
validly effected under Section 120 of the Act (viz., Section 153 of the Indian
Act). That case is distinguishable on the broad ground that the scheme proposed
in that case modified the terms of the memorandum of association of the
company, whereas in the case before us, in our opinion the August resolution
did not in any way modify the terms of the memorandum. On the contrary the
resolution was in strict conformity with the terms of the memorandum. In short,
the scheme proposed in the case of In re J.A. Nordberg could only be carried
out by a compromise or arrangement between the company and its members, whereas
in the case before us the provision was. made in the
charter of the company itself for variation from time to time of the special
privileges and rights attaching to the various classes of shares.
For reasons given above we hold
that the Court below was wrong in proceeding on the assumption that the
resolution of August 2 required the sanction of the Court and, as such sanction
was not obtained, the resolution was invalid. We further hold that the court
below was wrong in holding that the resolution of October 11 could not be
considered apart from the August resolution.
The August resolution was, in our
judgment, a perfectly valid resolution and did not require the sanction of the
Court for it validity. That resolution had the effect of sweeping away the
rights and privileges attaching to the ordinary and deferred shares and left
those two classes of shares with precisely the same rights. That being so, all
that the company proposed to do by the October resolution was to consolidate
the ordinary and deferred shares, and in so doing did not in any way interfere
with the preference or special privileges attaching to either of those classes
of shares, for the simple reason that no such preference or special privileges
attached to either of those classes of shares at the date of the October
resolution. The Proviso to Section 54 had therefore no application to the
present case. The October resolution, however, required confirmation by the Court as by that resolution the share capital of the
company was being reorganized by the consolidation of the ordinary and deferred
shares and such consolidation did modify the conditions contained in Pargraph 5
of the memorandum of the company.
It was contended that if the August resolutions validly
took away the special rights and privileges attaching to the ordinary and
deferred shares, the ordinary and deferred shares could not therefore be
regarded as different classes of shares and as such required no consolidation
and therefore Section 54 had no application. We cannot agree with this
contention. The shares still remained as ordinry and deferred shares though the
special rights and privileges attaching to each class had been swept away. In
our judgment, even after the August resolution a deferred share could not have
been sold as an ordinary share and it follows, therefore, that a proposal to
make these two classes of shares into one class did involve a consolidation of
the different classes of shares.
It is manifest from the observations made above that the
decision of the Court below is erroneous and that the application filed by the
company was wrongly rejected by that Court.
But it is contended on behalf of the opposite party. that,
howsoever erroneous in law the decision of the Court below may be, we cannot
interfere with the same, as the Court below had undoubtedly jurisdiction to
entertain and decide the application and, in the exercise of that jurisdiction,
it has not acted illegally or with any material irregularity.
It is settled by the decision of their Lordships of the
Privy Council in Amir Hasan Khan v. Sheo Baksh Singh and Balakrishna Udayar v.
Vasudeva Ayyar, that
'Section 115 applies to jurisdiction 'alone, the irregular
exercise, or non-exercise of it, or the illegal assumption of it'
and that
'the section is not directed
against conclusions of law or fact in which the question of jurisdiction is not
involved.'
It follows that if a Court has jurisdiction to decide a
question, and in deciding that question arrives at an erroneous decision on a
question of fact or of law, it cannot be said to have acted illegally or with
material irregularity in the exercise of its jurisdiction. In other words, a
mere error of law in deciding a case by a Court having jurisdiction cannot be
said to be an illegal or irregular exercise of jurisdicition possessed by that
Court, vide The District Board of Farrukhabad v. Ikhlaque Hussain and Om
Prakash v. Muhammad Ishaq.
The question that we have to decide is whether or not in the
present case the Court below execrised its jurisdiction illegally or with
material irregularity and, after giving our best consideration to the point, we
have come to the conclusion that the question must be answered in the
affirmative.
The Court below was invited by the application filed by the
company to confirm the special resolution passed by the company for the
consolidation of the two classes of shares. It, however, for the reasons
assigned by it, refused to concentrate its attenion on that resolution alone,
and wrongly assumed that that resolution could not be considered apart from the
August resolution. Having arrived at this erroneous conclusion it preceeded to
consider the validity of the resolution of August 2, and wrongly decided that
that resolution was invalid. It then proceeded to consider both the resolutions
together and decided that those resolutions taken together fell within the
purview of the Proviso to Section 54 and, as the majority in number of
shareholders required by the Proviso had not passed those resolutions, it could
not confirm the same. In other words, the Court below did not judicially
consider what it ought to have considered and decided something that it was not
called upon to decide. Indeed the Court below deprived itself of the
jurisdiction that it undoubtedly possessed under Section 54 by taking an
erroneous view of law as regards the validity or otherwise of the August
resolution which was a matter wholly foreign to the proceedings before it.
This, in our judgment, amounted to a material irregularity in the exercise of
its jurisdiction by the Court below. The case before us is not a case in which
the Court below has taken an erroneous view of the law as regards the matter in
controversy before it, but is a case in which the Court below has denied to
itself the jurisdiction to confirm the October resolution by erroneously
assuming that it could
not do so unless it was also competent to confirm the resolution of August 2.
This irregularity committed by the Court below led it to the conclusion that it
would not confirm the October resolution, and, as such, the case falls within
the purview of Clause (c) to Section 115, Civil Procedure Code.
For the reasons given above we
allow this application, set aside the order of the Court below and grant the
application filed by the company in terms of the reliefs contained in it.
Having regard to all the circumstances of the case we direct the parties to
bear their own costs both here and below.
[1933] 3 Comp. Cas. 89 (CA)
in the COURT OF APPEAL
Scientific Poultry Breeders Association Ltd.,
In re
Lord
Hanworth, M. R., Lawrence, L. J., Romer, L. J.
OctOBER 18,
1932
Lord Hanworth, M.R. —This appeal
must be allowed. It raises an important point, and a point to which the learned
Judge has, of course, given careful consideration.
By section 4 of the
Companies Act, 1929, it is provided that: "A company may not alter the
conditions contained in its memorandum except in the cases, in the mode and to
the extent for which express provision is made in this Act." One turns,
therefore, to the following section, section 5, as it is
now in this present Act, which provides that: "Subject to the provisions
of this section, a company may, by special resolution alter the provision of
its memorandum with respect to the objects of the company, so far as may be
required to enable it —(a) to carry on its business more economically or more
efficiently; or (b) to attain its main purpose by new or improved means."
I pause there for a moment. It is quite clear that by the section that I have
read the intention of the Legislature was to prevent too easy an alteration of
the conditions contained in the memorandum of association of a company; but it
is also plain from the terms of section 5 that there was no intention to shut
out a company from making some alteration which was of a nature and quality to
enable it to carry on its business more economically or more efficiently, or to
attain its main purpose by new and improved means. Bearing in mind that those
subsidiary words are in section 5, one turns to see what are the main
provisions of section 5, which deal with an alteration of the provisions of its
memorandum with- respect to the objects of the company. Now those few words
"with respect to" are no doubt words which are not easy of
definition. The probability is that the Legislature intended that they should
not be too definite, and to give a discretion to the Court, but the
sub-paragraphs (a) and (b) show the sort of course which was intended to be
followed, namely, providing for the efficient and economical carrying on of the
main objects of the company.
Now in the present case we have a company which by special provisions has
confirmed the alteration for which it is now sought to receive the sanction of
the Court, and the alteration in effect is to remove a restriction in clause 4
of the memorandum of association. It removes the portion of the proviso of
clause 4 which prohibits any member of the council of management or governing
body of the association receiving any sum in respect of his services—I am putting
it quite shortly, and in lieu of that it introduces the words: "Provided
that nothing herein shall prevent any member of the association deriving any
profit or other advantage out of the funds of the association, or otherwise
from or under any scheme or schemes established under clause 3 (k)
hereof." And, "provided that nothing herein shall prevent the
payment, in good faith, of reasonable and proper remuneration to any officer or
servant or member of the council or governing body." Now those two provisos,
so amended, remove a possible difficulty with arises under the interpretation
of sub-clause (k) of clause 3, and also definitely remove any prohibition
against the payment of a reasonable proper remuneration to a member of the
council or governing body.
Upon the facts that are before us it has been made plain and those facts
have been accepted by the learned Judge, that those alterations are sought in
the interests of carrying on the main purpose of the association, which is broadly
speaking, the encouragement of poultry husbandry. Since the company was
incorporated, which was in January, 1929, it has outgrown its system, which was
efficient and good enough to carry on the business of some 350 members and
their dealings under sub-clause (k), which amounted to some £20,000; but which
was insufficient and inefficient for carrying on the business of some 20,000
members, and dealing in their commercial operations under sub-clause (k), which
now involves a turn over of something like half a million pounds. It is not the
object of the association, namely, the encouragement of poultry husbandry, that is sought to be altered. What is asked for
is that this encouragement of poultry husbandry should be undertaken, and made
efficient, by a system and organisation adequate to cope with its largely
increased numbers, and consequently largely increased commercial dealings.
Now Eve, J., has given his approval and blessing to the good faith with
which these alterations are effected, to the purpose which is sought to be
achieved, and to the alterations in their terms. But he has felt himself unable
to accede, or to do what he would apparently wish to do, namely, to approve
these alterations by reason of the terms of sub-section 1 of section 5 of the
Companies Act, 1929, and particularly to the words " with respect to the
objects of the company, " because his view is that enabling a payment to
be made now to a member of the council or governing body of the association is
a fundamental alteration of the objects of the company. I find myself unable to
accept the view. Indeed I have some little difficulty in following Eve, J.,
because at the outset of his judgment he said: " The object of the pending
application is to obtain confirmation by the Court of a special resolution
altering the memorandum of association with respect to its objects, in order
to' enable it to carry on its business more efficiently." Now, as has been
pointed out, there is often a difficulty in determining what is
an object, and what is a power of the company. The two gradually fade
into one another, but it would appear plain enough that the object with which
this company was founded is still the main purpose of it. There is no intention
to alter its system or its effecting the same object.
What is pointed out is that efficiency is lost, because it is difficult to find
the human element to control these operations unless provision is made for an
adequate payment to the persons who practically have to give their whole time
to it. Eve, J., has found himself unable to do this, because he says it would
be an alteration of one of the fundamental objects of the association. I think
myself that the metaphorical term leads one astray. One has not to see whether
it is fundamental or not, or to decide whether it is fundamental in one sense
or another. One still has to see whether or not the main object of the
association is maintained, and to see whether or not, while that object is
maintained, there is something ancillary to that object, namely, the method of
carrying that object into operation. In my view that is the true summary of the
alterations which are sought, and in that sense they
fall within the words "with respect to the objects of the company."
I find myself in agreement with the Court of Session in Incorporated
Glasgow Dental Hospital v. Lord Advocate, and particularly with the
observations made by Lord Hunter, who said this [1927] S.C, at p. 406):
"It is quite clear that the whole objects of the company may not
necessarily be contained in a single clause, and that even in the objects
clause you necessarily have material that deals with the objects only in that
sense and enabling the proper attainment of those objects to be arrived
at" ; and he characterises the alteration sought as an alteration
"admittedly for the better attainment of the real object of this
company." Those two sentences appear to apply with great force to the
present application, and under those circumstances I think it is right that it
should be acceded to.
With regard to the case that was before Russell, J., as he then was I do
not think that offers any impediment, because what he was dealing with there
was an application which would have cancelled the sanction on which a certain
limitation of the company rested. There was no reason for it and he refused to
do it. It is not a case which really deals, as the Court of Sessions case does,
with the meaning and interpretation to be but upon the words "with respect
to." For these treasons I think the appeal must be allowed and the order
asked for granted.
Lawrence L. J. —This appeal raises the question
whether the proposed alterations of a memorandum are alterations with respect
to the objects of the company within the meaning of section 5, sub-section 1 of
the Companies Act, 1929. In my opinion that section ought not to be construed
too narrowly, and I agree with the interpretation placed upon it by the Lord
Justice Clerk in the case of the Incorporated Glasgow Dental Hospital v. Lord
Advocate, where he says that the corresponding section in the 1908
Act—section-9, sub-section 1—might be read as if it provided that the company
might alter any provision to be found within the four corners of its memorandum
which related to the objects of the company. Now, placing that interpretation
upon section 5, sub-section 1, the question is whether
the proposed alteration relates to an object to be found within the four
corners of the memorandum. In my opinion it does. There is a power in clause 3
(k) " To establish manage, supervise or conduct any scheme or schemes by
which members of the association may be enabled to buy or sell to the best
advantage poultry, poultry produce, poultry food, and others things of any kind
relating to the poultry industry, or for all or any of the foregoing purposes."
Now in close connection with that provision, and with some of the other
provisions to which I need not refer, one has to read clause 4 of the
memorandum, which provides that, "The income and property of the
Association, when so ever derived, shall be applied solely towards the
promotion of the objects of the association as set forth in this memorandum of
association," and then follow the other provisions which have been read to
the Court. It seems to me that all the provisions of clause 4, although not
contained in the objects clause of the memorandum, are so associated with the
objects as to cause any alterations therein to be alterations with respect to
the objects of the company within the meaning of section 5 of the Act.' The
main purport of the present alterations is to provide for the remuneration of
the persons constituting the governing body of the company, the work having
increased so as to make it reasonable that such work should no longer be
conducted without remuneration, and also to enable the members to derive some
profit by way of discount and other benefits from the carrying out of any
scheme under clause 3 (k). The view I take is that the clause which it is
proposed to alter and the alterations themselves are matters so closely connected
with the objects of the association enumerated in clause 3 that they come well
within the expression of alterations "with respect to" the objects of
the company contained in section 5. Now the learned Judge has come to the
conclusion that the alterations are desirable and put forward by the company in
good faith; but he has come to the conclusion that the alterations are such as
fundamentally to alter the character of the company. In one sense that second
finding seems to show that in the learned Judge's opinion the alterations are
alterations with respect to the objects of the company, because the alteration
is an alteration in the method of applying the income and property of the
association, derived from the carrying out of those objects, and with the greatest respect to the learned
Judge, I think that the fact that the alterations substantially alter the
objects is not the relevant consideration for the purpose of ascertaining
whether the Court has jurisdiction to sanction the alterations. It may well be
that if the alteration is of such a character as to substantially alter the
main object for which the company was formed, the Court ought not to sanction
the alteration under section 5, sub section 1, although it might come within
the words of the section; but in a case like the present, where the alterations
are desirable for the purpose of more efficiently carrying on the main objects
of the company, which are left unaltered, but which may be attained by improved
means, I am of opinion that the alteration come within the scope of section 5,
sub-section 1, even although they do alter the character of the company, in
this sense, that for the first time the members of the association will be
entitled to derive profits from the undertaking, and the members of the
governing body of the association will be enabled to receive remuneration for
this services in directing the affairs of the association.
For the reasons I have stated I
think that the learned Judge has taken too narrow a view of the scope of section
5, sub-section 1, and that the alterations are such as the Court has power to
sanction under that section, with the result that, as there is no question as
to the desirability of sanctioning the alterations, the alterations ought to be
sanctioned.
Romer, L. J.—I agree. In my
opinion the provisions contained in clause 4 of the memorandum of association
of this company are provisions with respect to the objects of the company. It
is not always easy to distinguish between objects of a company, property so called,
and powers given to the company for the purpose of carrying out those objects.
Take, for example, a power to mortgage. In one sense this is merely a power; in
another sense it is a subsidiary object of the company, and it is included
usually in the objects clause in the memorandum; so, too, the express power
contained in the objects clause to remunerate members of the company for
services rendered to the company. In one sense it is not an object. Perhaps it
more properly should be referred to as a power; but it is a provision relating
to the manner in which the company may carry out its objects. Now in the
present case there is no such power to be found in the objects clause of
the company. On the other hand, there is to be found in clause 4 a provision
that the company shall not, except to a certain extent, remunerate the members
of the company for services rendered; it shall not distribute the profits of
the company amongst the members; in the words, we find in clause 4 a provision
that the objects of the company in whatever other manner they may be carried
out, are not to be carried out in that manner; none the less, though it is
negative in its terms, it is a provision in respect to the objects of the
company.
I entirely associate myself with the remarks made by the Lord
Justice-Clerk and Lord Hunter in the Scottish case of
[1957] 27 COMP. CAS. 361 (
HIGH COURT OF
P.B. MUKHARJI J.
Matter No. 311 of 1957
FEBRUARY 22, 1957
P.B. MUKHARJI J. - This is an application by the Indian Iron & Steel Co. Ltd., seeking the court’s confirmation of the alteration of the memorandum of association of the company effected by the special resolution passed on the 7th December, 1956, at a general meeting of its shareholders. The special resolution is carried by the requisite majority.
The special
resolution reads as follows :
“That
sub-clause 3(16) of the memorandum of association of the company be deleted and
submitted by the following two sub-clauses :
16(a) To subscribe, contribute
or guarantee money for any national, charitable, benevolent, political public,
general or useful object or funds or for any
exhibition.
16(b) To establish and support
or aid in the establishment and in support of associations, institutions,
funds, trusts and conveniences calculated to benefit persons who are or have
been employed by or who are serving or have served the company or its
predecessors-in-business or the dependents, connections of such persons and to
grant pensions and allowances and to make payments towards insurances.”
The original
clause in the memorandum on this point was in the following terms
:
“To establish
and support, or aid in the establishment and support of, associations,
institutions, funds, trusts and conveniences calculated to benefit employees or
ex-employees of the company, or its predecessors-in-business or dependents or
connections of such persons, and to grant pensions and allowances, and to make
payments towards insurance and to subscribe or guarantee money for charitable
or benevolent objects, or for any exhibition, or for any public, general or
useful object.”
The
application is being made under section 17 of the Companies Act, 1956. Due
notices under direction of this court have been given to the shareholders,
creditors, debenture holders and the Registrar of Joint Stock Companies.
Pursuant to such notices which were also published in the newspapers no one has
come forward to oppose the application. Learned Advocate-General appeared for
the applicant and I heard him at great length and detail not only because the
opposite view was unrepresented in this court but also because the application
raises the very large and important question of how far a company should be
allowed to divert its funds for political purposes.
Prima facie,
the amendment sought is striking. The applicant is a company engaged in the
manufacture and production of iron and steel. That is its business. That is its
object. For a steel industry to claim to contribute to political funds of
political parties, therefore, appears to be a remarkable departure from the
business of production and manufacture of iron and steel.
The reason put
forward by the company for making this departure is stated in paragraph 6 of
its petition. It is states there that:
“The
prosperity of the company’s business is very much dependent upon the industrial
policy of the Central Government of the day. Further, the company’s principle
business being the manufacture of iron and steel, the sale and distribution of
the company’s products, the prices to be received by the company for the same
and the manufacturing and other policies to be followed by the company are all
subject to and closely related to the requirements of the Central Government,
with which the company has intimate dealings, transactions and connections. In
order to enable the company to carry on its business more efficiently it is
necessary that the company should be enabled to contribute to the funds of
political parties which will advance policies conductive to the interest of
industries in general and of the company in particular, and also the company
should be able to contribute to other funds and objects of national
importance.”
To the cynic
it appears to be a plea of the company to have a legal sanction to bribe the
Government of the day, to induce policies that will help the company in its
business. A company’s policy should be determined by its shareholders who
subscribe to its capital, and carried out by its board of directors, who manage
the company. Such policy should, therefore, stand on its own merits and on the
convictions and conscience of its shareholders. To induce the Government of the
day by contributing money to the political funds of political parties, is to
adopt the most sinister principle fraught with grave dangers to commercial as well
as public standards of administration. The object is stated plainly to be “to
contribute to the funds of political parties which will advance policies
conducive to the interest of the company.” Persuasion by contribution of money
lowers the standard of administration even in a welfare state or democracy. To
convert convictions and conscience by money is to pervert both democracy and
administration. Its dangers are manifold. Joint stock companies are not
intended to the adjuncts to political parties and possible sources of revenue
for these parties. They are statutory bodies working under statutory conditions
for different purposes. Secondly, it will induce the most unwholesome
competition between business companies by introducing the race, who could pay
more to the political funds of political parties. In that competition business
interest is bound to suffer in the long run. In the bid for political
favoritism by the bait of money the company who will be the highest bidder may
secure the most unfair advantage over its rival trader companies. Thirdly, it
will mark the advent and entry of the voice of the big business in politics and
in the political life of the country. The individual citizens although in name
equal will be gravely handicapped in their voice because the length of their
contribution cannot ever hope to equal the length of the contribution of the
big companies. The man who pays the piper will then call the tune. The tune of
political life, therefore, is liable in the long run to become the tune of the
big trading companies and concerns. That will be bad both for business and for
politics. It will be alike bad for public life as well as commercial life.
American
decisions are no guide in this Indian context on this particular point. The
American Senate, Congress and State Legislatures have the wisdom the discern these dangers and legislate against them.
TENDOLKAR J., of the Bombay High Court, in deciding a similar application of
the Tata Iron and Steel Company on the 11 January, 1957, has referred to three
American decisions but I am afraid the special statutes there determine the
American decisions and their principles cannot be applied in
But in
In the absence
of such legislation in
A company
under the Companies Act means a company formed and registered under the Act or
an existing company as defined in section 3 of the statute. The statute lays
down no limitation about the objects and purposes of a company except that the
purpose of a company must always be a “lawful purpose” as provided in section
12 of the Act. Section 12 of the Companies Act provides that any seven or more
persons or where the company to be formed will by a private company any two or
more persons associated for any lawful purpose may, by subscribing their names
to a memorandum of association and otherwise complying with the requirements of
the Act in respect of registration, form an incorporated company with or
without limited liability. The purpose of this company is production and
manufacture of steel and iron and therefore certainly a “lawful purpose” within
the meaning of section 12 of the Act. One of the essential requirements of the
memorandum of every company is that it shall state the objects of the company.
That is provided in section 13 of the Act. One of the objects now of the
company after the proposed amendment is to enable it to contribute money to
political funds or political objects is not legally prohibited and therefore
such a contribution is within the meaning of the expression of “lawful purpose”
in section 12 of the Act. To draw a distinction between the word “purpose” in
section 12(I) of the Act and the word “objects” in section 13 of the Act is to
attempt to make a distinction without a difference. The purpose in this context
is the object, and the objects is the purpose. To
distinguish between the purpose and object on the ground of what is main and
what is subsidiary is not to draw a distinction on principle but to attempt a
difference in degree for which I see no practical utility. My construction is
that whatever purpose is not prohibited by law remains a “lawful purpose”
within the meaning of section 12 of the Act.
To describe
contribution to political funds or political parties as bribery may be helpful
in pointing out the dangers inherent in the situation but is incorrect as a description
in law. It is not bribery under any of the legislative enactments at present,
prevailing in
In this view
of the matter it is, therefore, clear that under sections 12 and 13 read with
section 3 of the Companies Act a company can certainly be formed and registered
one of whose objects or purposes is to contribute to the political funds of
political parties. It is not necessary to elevate this narrow legal doctrine to
any high political philosophy or ideals of democracy more professed than
honoured in the present age or to confuse the issue by discussing the views of
Locke, Bentham, Rousseau, Bagehot and Dicey.
The next
question that arises is the consideration whether the situation is different
when it is not a case of formation of a company with such purpose or object,
but an alteration of the memorandum and the objects clause in the memorandum in
an existing company. This requires reference to another section of the
Companies Act. Section 17 of the Act provides that a company may by a special
resolution alter inter alia the provisions of its memorandum with respect to
the objects of the company so far as may be required to enable it to do certain
things expressly and categorically specified in sub-clauses (a) to (g) in that section.
Sub-clause (2) of section 17 of the Companies Act, 1956, stipulates that the
alteration shall not take effect until and except in so far as it is confirmed
by the court on petition. It is this sub-section which gives the court the duty
as well as the power to confirm this alteration even though it has been passed
by a special resolution of the shareholders at a general meeting. If the
shareholders were the only judges of their own interest then I do not see why
there should be such a legislative provision to insist that such an alteration
even though passed by a special resolution of the shareholders should have to
be confirmed by the court on petition.
Now the
specific purposes for which the objects of the memorandum can be altered are
important. In sub-clauses (a) and (b) of section 17(1) of the Act the two
specific purposes mentioned are :
“(a) to carry on
its business more economically or more efficiently ;
(b)
to attain its main purpose by new or improved means.”
The other
clauses from (c) to (g) appearing in section 17(1) of the Act are not relevant
for the purposes of this application. The present alteration of the memorandum
has to be tested by sub-clauses (a) and (b). If they pass that test of
satisfying either or both of the sub- clauses (a) and (b) of section 17(1) then
there is no legal bar to the alteration nor any legal objection to the court
confirming such alteration.
My
construction of section 17(1) of the Act leads me to the conclusion that the
sub-clauses (a) to (g) are a limitation on the companies’ capacity by its
special resolution to alter its memorandum in respect of its objects. A company
can alter the objects of its memorandum by a special resolution only to the
extent required to enable it to do any of the things specified in sub-clauses
(a) to (g) and for no other purpose. That is the limitation.
I shall now
take up sub-clause (a) of section 17(1) of the Act and apply the test contained
therein to the facts of the present case.
The question
then becomes whether a company’s contribution to the political funds of
political parties can be said “to be required to enable it to carry on its
business more efficiently.” The words “economically” and “efficiently” are
designedly vague with large import, for the obvious purpose of enabling the
company to alter its memorandum in respect of its objects with as much freedom
as possible. The crux of the problem then is, can it be said that a company by
contributing its moneys to the political funds of political parties carries on
its business more economically or more efficiently ?
It is no doubt true that iron and steel are commodities of national concern in
any modern political state. It is equally true that such an industry or
business has to come in close and constant touch with the Government and the
administration, be it of collaboration or friction. Efficiency, as I conceive
it, is certainly involved in the idea of running the business in such a manner
that it will steer clear between the devil of too much of governmental, political
and administrative interference and the deep sea of their patronage. Business
efficiency is a word of large connotation. A healthy relationship between the
Government and administration on the one hand and the iron and steel industry
on the other, does in my view lead to business efficiency in the modern age. I
do not consider it requires any straining of language to arrive at that
interpretation of business efficiency. Tact and discretion as much as practical
wisdom are part of this relationship and, therefore, of business efficiency.
Good and harmonious relationship is a manifest part of business efficiency. I
am, therefore, of the opinion that the proposed alteration of the objects of
the memorandum of the company successfully passes through the test provided in
sub-clause (a) of section 17(1) of the Companies Act, 1956.
It is
unnecessary for me, therefore, to proceed to interpret further the words “new
or improved means” in section 17(1) (b) of the Act to find out if they can be
construed to mean a company’s contribution to the political funds of political
parties. I, therefore, do not feel inclined to express any opinion on
sub-clause (b) of section 17(1) of the Act.
As a result of
this interpretation no discrimination is created between the companies which
are being formed today with an object clause similar to the present one which
requires no confirmation of the court at the time of formation and such other
existing companies who having no such clause previously want now to suitably
alter them to include such object. In the former case it comes within the
expression “lawful purpose” used in section 12 of the Companies Act, 1956, and
in the latter case it comes within the expression of carrying on the business
“more efficiently” used in section 17(1) (a) of the Act.
This view or
the interpretation is forfeited by section 293(1) of the Companies Act, 1956,
which by its sub-clause (e) provides that the board of directors shall not,
except with the consent of such company in general meeting, contribute, after
the commencement of the Act, to charitable and other funds not directly
relating to the business of the company, any amounts the aggregate of which
will, in any financial year, exceed Rs. 25,000, or 5 per cent. of its average net profits, whichever is greater. That
provision appears to permit the board of directors even without the consent of
the general meeting to contribute to funds not directly relating to the
business of the company so long as the contribution does not exceed the limits
specified therein. The inference seems to be that with the permission or
consent of the general meeting, the limit can be increased. I shall interpret
the words “other funds” to include a company’s contribution to the political
funds of political parties, and that certainly would be funds not directly
relating to the business of the company within the meaning of that expression
in sub-clause (e) of section 293(1) of the Act. In other words, I interpret
this provision in the Companies Act to be an indication that such a
contribution far from being unlawful or legally prohibited is permissible.
I shall
conclude my study of the Companies Act on this pint by making a brief reference
to the fact that a company under the Companies Act in India is not necessarily
a business or a commercial company but may be a limited company for promoting
science, religion, charity or any other useful object such as provided in
section 25(1) (a) of the Companies Act where the word “limited” also can be
dispensed with. In other words, there can be a company for any useful object. I
should be taking too fastidious a view if I were to hold that contribution to
the political funds of political parties is not a “useful object.”
Interpreting
the relevant provisions of the Companies Act as I do, it will be inappropriate
in my judgment to consider the question of the former disability of the trade
unions under the old Trade Union Acts of 1871-76 upon which the House of Lords,
in Amalgamated Society of Railway Servants v. Osborne, pronounced its judgment.
It was held in that case that there was nothing in the Trade Union Acts from
which it could be reasonably inferred that trade unions were intended to have
the power of collecting and administering funds for political purposes. LORD
SHAW expressed the opinion in that case that the rule which purported to confer
on the trade union a power to levy contribution from members for the purpose of
securing parliamentary representation was fundamentally illegal and in
violation of that sound policy which was essential to the working of
representative Government. LORD SHAW based his decision on the fundamental
principle that a member of the Parliament must be free and should not be paid
mandatory of any man or organisation of men. Nor should he be entitled to bind
himself to subordinate his opinions on public questions to others for wages or
at the peril of pecuniary loss. [See 1910 A.C. 87 at p. 115]. The purposes of
the special statute relating to the trade unions are not similar to the
Companies Act, 1956, which I am considering. It is also a historic fact that
upon this question trade union legislation has passed through many vicissitudes
of fortune and crisis in ideas.
The learned
Advocate-General also referred to the decision in Cahill v. London Co-operative
Society Ltd. That again was a decision on a special statute, the Industrial and
Provident Societies Act, 1893, and is not applicable to the facts of the
present case. There a co- operative society registered under that particular
statute was by its rules authorised to constitute and allocate a certain
percentage of its net profits for political purposes was held not to be ultra
vires the society and was lawful under the Industrial and provident Societies
Act. The rule made under this Act in that case provided, “the rules of every
society registered under this Act shall provide for the profits being
appropriated to any purposes stated therein or determined in such manner as the
rules direct”. LUXMORE J., upon the construction of that rule, held that it was
wide enough to authorise expenditure for political purposes.
Cases under
different statutes are not helpful in deciding a question of this nature. The
wide powers of amendment given by section 17(1) (a) of the Companies Act, 1956,
to amend objects in order to enable a company to carry on its business more
economically or more efficiently are, in my opinion, large enough to permit a
company to contribute to the political funds of political parties as a measure
of efficient business management on the grounds that I have already stated.
The next
problem is whether this alteration should be sanctioned and confirmed by the
court unconditionally or upon certain terms and conditions. Section 17(2) of
the Companies Act, 1956, expressly provides that the alteration shall not take
effect until and except in so far as it is confirmed by the court on petition.
In other words it means that the alteration shall take effect only in so far as
it is confirmed by the court. Sub-section (5) of section 17 of the Companies Act,
1956, indicates the scope of the court’s power in this act of confirmation. It
provides, “the court may make an order confirming the alteration either wholly
or in part, and on such terms and conditions, if any, as it thinks fit, and may
make such order as to costs as it thinks proper.” It means that in making the
order confirming the alteration the court can do so on such terms and
conditions as it thinks fir. There appears to be no limitation upon the powers
of the court in respect of the terms and conditions that it may choose to
impose while confirming the alteration wither wholly or in part. By sub-section
(6) of section 17 of the Act, the statute gives a guidance
to the court that in exercising its power under this section, the court shall
have regard to the rights and interests of the members and creditors of the
company and of every class of them.
In the Tata
case, TENDOLKAR J. added the word ‘useful’ as a condition of his confirming the
alteration in the memorandum of the Tata Iron and Steel Co. Ltd. The learned
Judge also indicated that the company should show their profit and loss account
every year single contribution directly or indirectly made to a political
party, although in the formal order it was not introduced as a condition
because the company’s counsel conceded and undertook to do so.
The learned
Advocate-General of this State appearing for the company, however, asked me to
consider the question whether such terms and conditions could be included in
the court’s order for confirmation. In his submission to this court he argued
that such a term or condition could not be imposed by the court’s order. That
argument now required consideration.
Section 17(5)
of the Companies Act, 1956, uses the same expression “terms and conditions” as
section 5(4) of the English Companies Act, 1948. The learned Advocate-General
relied on Buckely’s Commentary on the Companies Acts, 12th Edition, page 32, to
develop this line of his argument. It is said there that if the alteration of
the objects is such that the name of the company becomes misleading a condition
my be imposed that the name be changed in the manner
as the court thinks fit. Thus, an alteration of name which should convey the
enlarged field of operation was required, from Foreign and Colonial Government
Trust Co., and Government Stock Investment Co., on their extending their area
of investment from Government securities to general securities; from Indian
Mechnical Gold Extracting Co., on its extending its area of operation beyond
India, from Oriental Telephone Co., on its extending its business from
telephonic to other electric supply; from Alliance Marine Assurance Co., on its
combining with its previous business fire, life and accident business ; from
National Boiler Insurance Co., on its combining with its previous business
other business not covered by those words ; from Egyptian Delta & Co., when
it ceased to confine its operations to the Delta ; and from Mutual Property
Insurance Co., Ltd., when it introduced into its business that of the life insurance.
Buckley points out, “the order under earlier Acts was commonly postponed until
the condition had been complied with and the petition directed to stand over
with liberty to apply as in Foreign & Colonial Government Trust Co., In re ; but an order has been made in the form “the company
undertaking to alter its name within three months confirm the special
resolutions as in Government Stock Investment Co. In re” The court has also
under these provisions imposed conditions such that the company should execute
a floating charge on all its assets in favour of the debenture-holders who had
not a security on any of the company’s property. In In re Lancaster Banking
Co., the court as a condition required advertisement of orders made under these
provisions.
I do not think
that there can be a set pattern in which all the conditions that the court may
impose can be limited. The court’s hands in this respect are in my view free
and unfettered. The learned Advocate-General contends that a condition under
section 17(5) of the Companies Act, 1956, means a condition precedent not a
condition subsequent. I am not prepared to limit the scope of condition in that
way. I think, a condition can not only be a condition but also a condition
concurrent or even a condition subsequent. The main burden of the learned
Advocate-General’s argument in this respect was to suggest to this court that a
condition such as TENDOLKAR J. suggested in this judgment in the Tata case by
saying “I would have felt disposed to impose it as a condition of
confirmation,” in respect of showing the contribution in the balance sheet
every which in this case was not necessary because the company undertook to do
so, would be difficult for the court to enforce. The learned Advocate-General’s
contention is that the memorandum is altered by the Court’s order with that
contention. Thereafter, suppose the company does not observe that condition.
That cannot vitiate, according to the Advocate-General, the contributions made
under the altered memorandum. Nor can that court in the case of such a breach
of the condition revoke its sanction because there is not provision in the
Companies Act by which a court can by itself alter the memorandum of a company
on the breach of a condition such as this. I realise the force of the learned
Advocate-General’s argument. At the same time I feel that the expression used
in section 17(5) of the Companies Act, 1956, is not merely “condition” but also
“terms”. In order, therefore, to avoid the difficulty of enforcing the breach of
a condition after having once altered the memorandum and given sanction to such
alteration, the best course appears to be to sanction this alteration of the
memorandum for a limited period of years after the expiry of which the sanction
will lapse and stand withdrawn so that the altered memorandum will no longer
remain effective after the expiry of that time unless by an application again
made to the court at the end of the period of time and upon the company
satisfying the court that it has faithfully carried out the conditions of
showing in the balance sheet the contributions that it has made to the
political funds of political parties, the court extends the period of operation
of the altered memorandum. That will give the court power to see that its orders
have not been violated and the conditions that it has imposed have been
respected by the company. I am satisfied on a construction of the expression
“on such terms and conditions as it thinks fit” under section 17(5) of the
Companies Act, 1956, these terms and conditions can be imposed and enforced, if
necessary.
It is
essential that three should be the fullest publicity to the fact that a company
is contributing some of its money to the political funds of political parties
both in the general interest of the industry concerned in which this company is
engaged as well as in the particular interest of the shareholders. Having
regard to the dangers of the powers of money to purchase views, it will be
highly undesirable in my view to encourage any kind of secrecy in respect of
such payment. Such payments or contributions must, in my view, be made in the
full light of the day, so that shareholders in particular, commerce in general,
Parliament and Legislatures all over the country may know what these contributions
remain honest, within the limits of business prudence, and reasonable the
companies have nothing to lose by this wholesome publicity.
With respect
to the other condition of adding the word “useful” as done by TENDOLKAR J. in
the Tata case I do not think it is necessary to impose such a condition in the
present application, because in this case it is already there in the memorandum
as altered by the special resolution.
I, therefore,
make the following order on this application :
(I) I confirm clause 16(b)
as amended by the special resolution without imposing any condition.
(II) I confirm also clause
16(a) of the memorandum as altered by the special resolution on the following
terms and conditions :
(i) That it shall remain
effective and operative for a period of six years from this date and this
sanction by the court will lapse and stand revoked upon the expiry of the said
period of six years unless further extended as hereinafter ordered ; and
(ii) that during this period of
six years the company shall show in their balance-sheet and profit and loss
account every year every single contribution directly or indirectly made to any
particular political party by name, the amount and date of contribution and
shall the same under the head of “miscellaneous expenditure” in Part I of
Schedule VI of the Companies Act, 1956, read with clause 3(x)(i) of Part II of
Schedule VI of the Companies Act, 1956, setting out the form of balance-sheet
and the requirements as to profit and loss account ; and
(iii) that upon the company
satisfying this court on a verified petition at the end of this period of six
years that it has faithfully carried out the above directions of this court
showing its contributions to the political funds as aforesaid and upon its
desiring to continue to do so the company will be apply for and obtain
continuance of this court’s sanction to the alteration in the memorandum
contained in clause 16(a) as amended by the special resolution of the 7th
December, 1956, passed at company’s general meeting for such further period
again upon such terms and conditions as the court thinks fit under section
17(5) of the Companies Act, 1956.
(III) I impose no condition
limiting the amount of contribution and leave the question of amount to the shareholders’
wisdom and discretion in accordance with the Companies Act, 1956.
I, therefore,
confirm the alteration of the objects of the memorandum of the company on the
above terms. The company shall bear its own costs of this application.
Order
accordingly.
[1974] 44 COMP. CAS. 214 (
high court of
Delhi
Bharat Grain Merchants Association Ltd., In Re
S. Rangarajan, J.
COMPANY PETITION NO. 7 OF 1972
WITH COMPANY APPLICATION NO. 146 OF 1972
May 12, 1972
T. M. Chandwani and H. L. Anand for the
petitioners.
H. S.
Bhatia for the Registrar of Companies.
Daljit
Singh for the objecting shareholder.
This is a petition by the
petitioner-company (Delhi Bharat Grain Merchants Association Ltd.) for confirmation
of the alteration of the memorandum of association of the company by thespecial
resolution passed at the general meeting of the company held on December 18,
1971, that the word "cotton" be added after the word
"grains" and before "and oils & oilseeds of all kinds"
in clause III, sub-clause 1, thereof.
The petitioner-company has
been, among other things, regulating and maintaining a clearing house for
fixing and declaring market rates and settlement dates for fixing brokerage,
for the periodical settlements of contracts and differences, for passing on the
delivery orders for clarification, control, regulation and admission of
members, for declaring members as defaulters for non-payment of dues and doing
various other such acts in the course of such business mentioned in paragraph 6
of the memorandum of association of the company.
This petition was opposed
by Raj Kumar Bansal, who claims to be one of the first directors of the
company, owning 20 shares of the face value of Rs. 100 each which were paid up
to the extent of 50%. Including the said Raj Kumar Bansal all the seven
subscribers were allotted 20 shares each The company
was formed with the object of doing ready and forward business of food-grains
and jaggery. Necessity appears to have arisen for including cotton among the
goods in respect of which the company wanted to do ready and forward business
because forward trading in food-grains and jaggery had been banned.
All that has been stated by
the petitioner in the petition is that the alteration of the memorandum of
association was necessary for carrying on the business of the company more
economically and more efficiently. When it is objected that Raj Kumar Bansal
did not have any notice of the said general meeting of the company it has been
stated by the petitioner-company that Raj Kumar Bansal had only subscribed his
name to the memorandum but failed to pay the share money to the company and
that his shares were forfeited on account of non-payment of share money. It is
further stated that the opposition by Raj Kumar Bansal is at the instance of
his father-in-law (Shri Ram Dayal Gupta), who is a director in a rival company
Messrs. Punjab Exchange Ltd. It is, however, stated by Raj Kumar Bansal that he
had paid a sum of Rs. 1,000 towards 50% value of the 20 shares. This has,
however, not been supported by the production of any receipt.
Raj Kumar Bansal filed a
petition (No. 26 of 1972) under section 155 of the Companies Act stating that
the forfeiture of his shares was invalid and asking for rectification of the
said register. Yet another application (C.A. No. 146 of 1972) has been filed by
Raj Kumar Bansal praying that Company Petition No. 7 of 1972 may be stayed till
the disposal of Company Petition No. 26 of 1972.
To dispose of Company Petition
No. 26 of 1972 evidence would have to be recorded. On the other hand Company
Petition No. 7 of 1972 is stated to be urgent because the company's request for
the issue of necessary permission by the Government will be held up and would
not be considered unless the memorandum of association is altered. I find no
ground whatever for staying the hearing of Company Petition No. 7 of 1972. The
language of section 155(2) of the Companies Act makes it clear that even if the
court is to grant the application the court may direct the company to pay the
damages, if any, sustained by any party aggrieved. This being the remedy
indicated by section 155 itself no ground has been made out for staying the
hearing of Company Petition No. 7 of 1972. Company Application No. 146 of 1972
is, therefore, dismissed.
Shri Daljit Singh, learned
counsel for the objector (Raj Kumar Bansal), attempted to cover a very wide
ground to start with, but realising that he could not challenge the validity of
the general meeting held on December 18, 1971, on the ground that no notice
went to him because he was not on that date a member according to the company,
he (Shri Daljit Singh) confined his attention to whether the special resolution
could be properly confirmed. It would be necessary to read section 17(1)(a) and (d) of the Companies Act:
"17. (1) A company may, by special
resolution, alter the provisions of its memorandum so as to change the place of
its registered office from one State to another, or with respect to the objects
of the company so far as may be required to enable it—
(a) to carry on its business more economically or more
efficiently;...,
(d) to carry on some business which under
existing circumstances may conveniently or advantageously be combined with the
business of the company".
The petitioner-company has
not been doing any business itself in food-grains, etc. It has been only acting
as a kind of a clearing house, a task which has been specifically and fully
referred to in paragraph 6 of the memorandum of association. For this purpose
it would hardly matter if it acted as a clearing house in respect of
food-grains, as it was formerly, or cotton, as it is now sought to be amended.
The true legal position is that the business must remain substantially the same
and the additions, alterations and changes are only steps-in-aid to improve the
efficiency of the company. This was so held by Ramaprasad Rao J. of the Madras
High Court in In re Rajendra Industries (Private) Ltd.
who followed a decision of the Punjab High Court rendered by Khanna J. (as his
Lordship then was) in In re New Asiatic Insurance Co. Ltd. A question arose in the Punjab case whether a
company which was carrying on life insurance business could after taking over
of such business by the Central Government be allowed to include within the
scope of its memorandum business in engineering works, cotton, import and
export. Khanna J. allowed the application on the ground that the proposed
business must be one which can (i) conveniently or advantageously be combined
with the business of the company, and (2) that this must be so under the
existing circumstances and not under hypothetical circumstances.
My attention has also been
invited to yet another decision of the Allahabad High Court in Juggilal
Kamlapat Jute Mills Co. Ltd. v. Registrar of Companies ,
in which it was held that the addition of "some business" includes a
new business which could be conveniently or advantageously combined with the
existing business. A company in that case resolved to alter the objects to
include business in rubber. The Registrar of Companies opposed the application
on the ground that an entirely new business is sought to be added and that it
was alien to the existing business. Allowing the said application Mathur J.
observed as follows :
"......the objects for which the company was
formed are so wide and general that the company can carry on many businesses
not connected with jute, and hence confirmation of the alteration shall not be
contrary to the spirit of the objects of the company. Further, the new business
to be started by the company must be one for which there is a demand and which
will prove advantageous to the members and creditors thereof. Nothing has come
to my notice which may show that there is a greater demand for goods which can
be manufactured under the existing memorandum of association than for rubber
goods desired to be manufactured by the company.
To put it differently, the
manufacture of rubber goods shall not, under existing circumstances, be
detrimental to, nor shall be destructive of, or inconsistent with the existing
business, and can be advantageously combined with the existing business of the
company. Considering that the company has the business experience and can
instal and run the rubber factory, it can be held that this business can also
be conveniently combined with the existing business".
There are a number of
decisions of the Calcutta High Court on this question out of which it may be
sufficient to refer to the decision rendered by B. C Mitra J. in In re Standard General Assurance Co.
Ltd.
A number of cases, English and Indian, have been
referred to. The following observations which apply with considerable force to
the present case appear well worth quoting.
"In a trading compay,
whose aim is to earn profits for the benefit of shareholders, the directors and
shareholders of the company are the best judges of the trading policy of the
company and so long as the requirements of the statute are complied with and
the policy pursued by the company through the objects clauses in its memorandum
is not fraudulent or unfair to any class of its members and does not violate
the statutory provisions, the court should not easily or lightly interfere with
the decision of the shareholders and directors of the company and also of
creditors, if any. But the decision of the shareholders, creditors and directors,
is not final and it is for the court to see if the statutory requirement has
been complied with and the alterations sought for are not contrary to or
inconsistent with the objects clauses in the memorandum as they stand.
The doctrine of paramount object
or main object of the company which have received judicial notice in several
cases is a matter, which in my view, is material for consideration in
applications for an order for winding up of the company on the just and
equitable ground or in other applications, where the question of winding-up is
material, for instance, in an application under section 397 of the Act. This is
the view which has been taken in all the cases discussed above, in which the
question was whether the company should be wound up on the just and equitable
ground. If the substratum of the company is gone, that may be a good ground for
making an order for winding up of the company on the just and equitable ground.
But the loss of substratum of the company is not by itself a ground on which
this court should decline to confirm alterations in the memorandum of association of a company, if the
conditions mentioned above are fulfilled".
Judged
in the light of the above principles, I can find no cogent reasons for refusing
to confirm the alteration of the memorandum of association of the company. The
objection which has been raised in the matter of the suitability of the
petitioner company operating with reference to cotton also is not one for this
court to consider, but for the appropriate authorities of the Government. Even
so far as the objector is concerned the matter will again come up before the
company, if permission to operate in cotton is granted, when the objector, if
he succeeds in getting his name back in the register of members in the
meantime, would be able to discuss and himself vote at the said meeting.
The
alteration of the memorandum of association of the company by the special
resolution passed at the general meeting of the company held on December 18,
1971, is confirmed and the petition is accepted accordingly. Formal order will
be drawn up by the office in Form No. 15. The petitioner will be entitled to
his costs. Counsel fee Rs. 250.
Petition allowed.
[1970] 40 COMP. CAS. 1216 (GUJ)
HIGH COURT OF
Motilal Hirabhai Spg. Wvg. & Manufacturing Co. Ltd., In re
D. A. DESAI, J.
JUNE 23, 1970.
C. C. Gandhi for the petitioner.
B.
S. Shah for the landlord.
D.
A. Desai, J.—This is a petition under section 17(1) of the Companies Act,
1956, praying for confirmation of the proposed alteration in the memorandum of
association of the company adopted as per the special resolution passed at the
general meeting of the company held on 16th June, 1969. The Motilal Hirabhai
Spinning, Weaving and Manufacturing Company Ltd. (hereinafter referred to as
"the company") was incorporated in 1889,
under the Companies Act then in force. From the commencement of the business
till 1941, the company carried on the business of manu facturing cotton yarn
and cotton cloth and selling the same. In the year 1941, in view of the then
prevalent financial circumstances of the company, the members of the company
adopted a special resolution at the extraordinary general meeting held on May
15, 1941, to close the business of manufacturing cotton yarn and cotton cloth
and also resolved to sell and dispose of the textile machinery of the company
and authorise the board of directors to carry out this resolution. Pursuant to
this resolution, the textile machinery was sold and since then the company is
not doing business of manufacturing cotton yarn and cotton cloth or any
business incidental to the manufacture of cotton yarn and cotton cloth. There
is some controversy as to whether the company is doing any business since 1941,
and if so, what, to which aspect I would presently advert. It may, however, be
stated that from 1941 till the filing of the present petition, the only thing
the company appears to be doing is to lease out land in its possession and from
the income derived therefrom, dividend at the rate of 10 per cent, is being
distributed to its members. The issed and subscribed capital of the company is
Rs. 9,90,000 divided into 9,900 shares each of Rs. 100 fully paid.
Though the company was primarily formed for manufacturing cotton yarn and
cotton cloth which was its main object, its memorandum of association provides
for a number of other objects. But it appears that between 1889 and 1941 when
the company closed down its mills, the company did not carry on any other
activity except that of manufacturing cotton yarn and cotton cloth and selling
the same.
At
the annual general meeting of the company held on 16th June, 1969, a special resolution
was unanimously adopted proposing certain alterations in the objects clause of
the memorandum of association of the company. The proposed alterations are to
be found in paragraphs 13-a to 13-d at pages 86 to 90
of the record. In short, it may be stated that by the proposed alteration in
the objects clause of the memorandum of association, the company wants to
provide as its objects every conceivable activity in the world of commerce and
industry entirely unconnected with each other commencing from maunfacture of
textiles to photographic materials, pharmaceuticals, setting up of hotels,
restaurants, cafe, tavern, preparing refreshments and consumable articles and
also to start theatres and other places of public entertainments, to set up
cold storage and refrigeration plants. The company also wants to adopt as its
objects the business of stationers, printers, lithographers and it as well
wants to enter into the field of transport activity. The minutes of the meeting
shows that this resolution was unanimously adopted by 17 members of the company
attending the annual general meeting. Thereafter the company filed the present
petition praying for an order confirming the proposed alteration.
On
the petition being admitted, the court directed that the petition be advertised
in a Gujarati daily, Sandesh, and, an English daily,
Times of India, and the Gujarat Government Gazette, and, accordingly, various
advertisements were issued. A notice was also issued to the Registrar of
Companies as provided by section 17. In response to the notice, the Registrar
of Companies appeared and filed an affidavit at page 153 of the record and
contested the petition. One Mohamed Kayamuddin Gulamnabi Uraizee, claiming to
be mutwalli of a public trust known as "Abdul Razak Saheb Roza and
Masjid", also appeared and filed his affidavit at page 163 of the record
and contested the petition. A question has been raised whether Mohamed
Kayamuddin Gulamnabi Uraizee can be permitted to contest the petition.
Mr.
C. C. Gandhi, learned advocate appearing for the petitioner-company, urged that
the alterations proposed by the company as per special resolution would fall
under clauses (a) and (d) of section 17(1) of the Companies Act. It is,
therefore, necessary to consider whether the proposed alteration would fall
under clauses (a) and (d) of section 17(1) of the Companies Act. They are as under :
"17. Special resolution and confirmation by court
required for alteration of memorandum.—(1) A company may, by special
resolution, alter the provisions of its memorandum so as to change the place of
its registered office from one State to another, or with respect to the objects
of the company so far as may be required to enable it—
(a) to carry on its business more economically or more
efficiently;...
(b) to carry on some
business which under existing circumstances may conveniently or advantageously
be combined with the business of the company."
The
scheme of section 17 indicates that a company may alter the objects clause of
its memorandum of association but the proposed alteration must be such as would
fall within one or the other clauses of sub-section (1) of section 17. There is
no unfettered or uncontrolled power conferred on a company to alter the objects
clause of the memorandum of association. The power to alter is circumscribed by
various clauses of sub-section (1) of section 17 Therefore, when the court is
called upon to confirm the proposed alteration in the objects clause
notwithstanding the fact that the same has been approved by a special resolution
which indicates that it has secured statutory majority as envisaged by section
189 and further notwithstanding the fact that no member or creditor has
appeared to contest the petition, the court should examine the petition to find
out whether it is open to the company to alter the objects clause and if so
whether the proposed alteration falls within one or the other clauses of
sub-section (1) of section 17.
At
the outset Mr. C. C. Gandhi for the company unequivocally stated that the
proposed alteration would fairly and squarely fall within sub-clauses (a) and
(d) of sub-section (1) of section 17. Clauses (a) and (d) have been set out by
me. The language of clauses (a) and (d) unmistakably indicate that before any
alteration in the objects clause is sanctioned, which enables the company to
start or undertake a new business activity, the company must invariably be
doing some business at the relevant date. If on the date when a special
resolution is adopted proposing alteration in the objects clause or on the date
when the court is called upon to accord sanction to the proposed alteration,
the company is not shown to be doing any business, in other words, if the
company is virtually a defunct company, the court will have no jurisdiction to
sanction the proposed alteration in the objects clause. This is implicit in the
language used in clauses (a) and (d). Under clause (a) a proposed alteration
can be sanctioned if by the new activity the company can undertake that it can
carry on its business more economically or efficiently. It postulates some
existing business which can be carried on more economically or efficiently by
an activity that can be undertaken under the altered objects clause. In order
to enable the company to carry on its present or existing business more
economically or efficiently, the court would sanction an alteration in the objects clause which
would empower the company to undertake a new business activity. If the company
is not shown to be carrying on any business at all, no question arises of
carrying on such non-existent business more economically or efficiently by
empowering the company to undertake a new activity. I would presently point out
that, since 1941 till to-day, the company is not carrying on any business and,
therefore, the proposed alteration would not fall within clause (a).
The
next question is whether the proposed alteration would be covered by clause
(d). It would be open to the company to alter the objects clause of its memorandum
of association in order to carry on some business which under the existing
circumstances may conveniently or advantageously be combined with the business
of the company. Such a case would be covered by clause (d). In order to attract
the application of clause (d), the company must be presently doing some
business and its proposed new business could be conveniently and advantageously
combined with the existing business. Before clause (a) or (d) could be invoked,
it pre-supposes that there must be an existing business of the company which
the company must be carrying on. and with this
existing business the new business, which is proposed to be started, after
alteration in the objects clause, could be conveniently and advantageously
combined. It would, therefore, appear that if the company is presently carrying
on no business, certainly there is no question of altering the objects clause
by which the new business can be started which can be conveniently or
advantageously combined with the existing business. Carrying on some business
falling within the objects clause of the memorandum of association in force of
a company is a condition precedent to the court exercising jurisdiction under
section 17 by confirming the proposed alteration in the memorandum of
association by which the company seeks power to start entirely new and
independent business but which is of such a nature that it can conveniently or
advantageously be combined with the existing business. If, therefore, in the
facts and circumstances of this case, it can be shown that the company is not
presently carrying on any business in the oridinary sense of the term, the case
would not fall under clause (d). In this connection, I would refer to In re
Eastern Woollen Mills Ltd. In that case, the
company closed its business of manufacturing woollen textiles some time before
the company adopted a resolution for altering its memorandum of association.
After adopting the special resolution, the company moved the court for
confirming the alteration. The company sought to bring its case under clause
(d) of section 17(1). Rejecting the application for confirmation, Shelat J. (as
he then was) observed as under :
"The
relevant words occurring in clause (d) are 'may conveniently or advantageously
be combined with the business of the company'. It is somewhat obvious that
these words in clause (d) would mean that the proposed alteration in the
memorandum of association would be in respect of a new business which can
conveniently or advantageously be ' combined' with a business existing at the
date of the proposed alteration and which business is being carried on at such
relevant date by the company. That condition is not fulfilled by the
petitioners."
Mr.
Gandhi sought to distinguish this case by saying that the company by the
proposed alteration wants to start business as printers and the company had
commenced that business prior to the alteration in the objects clause but that
could not be said to be existing business of the company, because the company
was not empowered by its memorandum of association as it then stood to
undertake such a business and that activity of the company was ultra wires the
company. That of course is true. The question however is whether the company
can seek to alter its memorandum so as to enable it to start new business at a
time when the company is not carrying on any business. If the company is
carrying on some business in a proper grammatical sense of those words,
obviously, it would be open to the company to alter its memorandum of
association so as to enable it to start a new business which must of necessity
be of such a character that it can be conveniently or advantageously combined with
its existing business. But the language of clause (d) leaves no room for doubt
that the company must be carrying on some existing business before it can take
recourse to the provision contained in clause (d) to enable it to alter its
memorandum of association which would empower it to start a new business. In
the afore-mentioned decision reference is also made to In re Drages Ltd. In that case, the principal object of the
company was to carry on business of house-furnishers. The company met with
indifferent success and at the relevant time the company had ceased to
undertake new work in the said business and was concerned only with the
collection of the outstanding instalments due on its hire-purchase agreements.
The company desired to recommence trading after cessation of the hostilities
but proposed to use its available capital in carrying on a trust investment
business. The company applied to the court to confirm an alteration in its
memorandum of association urging that a trust investment business could be
advantageously combined with its present business within the meaning of section
5(1)(d) of the Companies Act, 1929. The court,
construing section 5(1)(d) of the English Companies
Act, which incidentally is couched in the same language as section 17(1)(d) of
our Companies Act, observed that since the company was not carrying on any
business at the time when the application was made, there was no existing business
with which the proposed business could be combined either conveniently or
advantageously as the section requires. It,
therefore, appears crystal clear that before a company can seek to alter its
memorandum of association so as to enable it to start new business which can be
conveniently or advantageously combined with the existing business, it must be
shown to the satisfaction of the court that on the date of the proposed
alteration, the company was carrying on business and ordinarily it must be a
business for which the company was formed.
The question is whether the
petitioner-company is carrying on or doing any business at the relevant date so
that by the proposed alteration the company may start a new business activity
which would help in carrying on existing business more economically or more
efficiently be combined with the existing business or the new business activity
could be conveniently or advantageously combined with the existing business.
This company, since the commencement of its business in the year 1889, was
carrying on business of manufacturing cotton yarn and cotton cloth and selling
the same. If clauses (1), (2), (3) and (4) of the objects clause in the
memorandum are properly studied, it is indisputable that the main object for
which the company was started was to set up a textile mill and to carry on
business of manufacturing cotton yarn and cotton cloth and sell the same. The
only activity of the company, till the year 1941, was running of a textile mill
by the company in
Mr.
Gandhi in this connection pointed out that each clause in the memorandum of
association is an independent clause not connected with any other clause nor even in any way clouded by the name of the company. It
was very strenuously urged that the theory of main object and subsidiary object
does not hold the field any more and that each clause in the objects clause of
the memorandum of association is an independent clause empowering the company
to carry on or to pursue the activity that can be legally undertaken under one
or other clauses. In this connection Mr. Gandhi referred to Palmer's Company
Law, 20th edition, page 81, wherein it is observed that the present"
practice is to add to the catalogue of possible or conceivable objects
invariably a clause which provides that each of the objects specified in the
clause shall be regarded as independent objects and shall not be limited or
restricted (except where otherwise expressed) by reference to any other
paragraph of the objects clause. It was also urged that there is such a clause
in clause 3 of the memorandum of association of this company. A specific
reference was made to clauses 1, 12 and 13 set out in the model or specimen of
memorandum of association in Palmer's Company Precedents. In fact, particular reference
was made to clauses 12 and 13. Clause 12 empowers the company to sell, improve,
manage, develop, exchange, lease, mortgage, dispose of, turn to account, or
otherwise deal with, all or any part of the property and rights of the company.
By clause 13, a declaration is made that the objects specified in the various
sub-clauses of the objects clause shall be regarded as independent objects and
shall be construed independently of the other sub-clauses of it and that none
of the objects mentioned in any sub-clauses shall be deemed to be merely
subsidiary to the objects in any other sub-clause (except where otherwise
expressed in such sub-clauses). After referring to these clauses 12 and 13, Mr.
Gandhi pointed out that sub-clause (32) of clause 3 of the memorandum of
association of the petitioner-company is in pari materia with clause 12 set out
in Palmer's Company Precedents and the declaration made in sub-clause (38) of
clause 3 of the memorandum of association is in pari materia with clause 13 as
set out in Palmer's Company Precedents. Having pointed out that clauses 12 and
13 as set out in Palmer's Company Precedents are to be found in the memorandum
of association of the company which has the effect of treating each clause as
the main object and as providing independent objects of the company, it was
urged that the same effect should be given to the various sub-clauses of clause
3 of the memorandum of association of this company. Having said this, it was
attempted to be urged that the activity of the company of leasing out the land
since the closure of the mills is an independent activity carried on under an
independent clause and would be at least a business carried on by the company
and that would be the existing business of the company.
Sub-clause (23)(1) of the memorandum of association of the company
authorises the company to construct, maintain and alter any building or works
necessary, convenient or beneficial for the purposes of the company and to lay
out land for building purposes and to build on, improve, let building on lease,
and otherwise develop the same in such manner as may seem expedient to the
management for the advancement of the company's interest. Sub-clause (32)
empowers the company to sell, improve, manage, develop, exchange, lease, mortgage,
enfranchise, dispose of, turn to account or otherwise deal with all or any part
of the property and rights of the company. Referring to these two clauses read
with the declaration made at the foot of sub-clause (38), it was urged that the
company by the objects clause of its memorandum of association was empowered to
carry on independently the business of leasing land or superstructures and to
obtain profit therefrom and that if such activity is carried on uninterruptedly
for a period of 30 years, it would certainly be a business of the company. It
is indisputable that the company was incorporated for achieving the main object
of starting a textile mill and the main object of the company was to undertake
the activity of manufacturing cotton textiles including cotton yarn. Apart from
the first three sub-clauses of clause 3 of the memorandum of association, the
name of the company by itself indicates that the company was primarily
incorporated for the purpose of manufacturing and selling cotton textiles. As
usual, inflated objects clause in the memorandum of association permitted the
company to carry on other activities. But, in my opinion, these activities
would be ancillary and incidental to the main activity. It may be that near and
around the textile mill, the company may have open piece of land and may not
need it for its purpose and may lease the same. But for giving the land on
lease, the company would require the authority otherwise the act of the company
may be termed ultra vires. For avoiding some such eventuality, the company
usually provides a very inflated objects clause in its memorandum of
association. But from such inflated objects clause in the memorandum of
association, it cannot be said that the company was set up for starting each activity
as an, independent activity and for which the company was incorporated. In
fact, it cannot be disputed that each company has its own main activity and
provides in its objects clause for its incidental and ancillary activities. To
say that this company was formed for carrying on business of leasing land is
something very difficult to accept. If the company was incorporated for
starting a textile mill and in fact it did start a textile mill and even
carried on the business of manufacturing cotton textiles and selling the same
for over 52 years and their because of its financial difficulty closed down the
textile mill and as a necessary consequence leased out the unused
super-structures and land, it cannot be said that the company is carrying on
business. I am not prepared
to accept that this company is carrying on business of leasing land or
superstructures. As the company was not wound up, the land and superstructures
were lying idle. The directors considered it proper to lease the land and earn
rent out of it. But such an activity cannot be said as carrying on business of
the company. If the company is not shown to be carrying on any business, then
the question of altering the memorandum so as to enable the company to start a
new business which may conveniently or advantageously be combined with the
existing business, does not arise.
Mr.
Gandhi, however, took me through various decisions indicating as to what should
be the approach of the court to an application of this nature. I would briefly
refer to some of these decisions. First case referred to by Mr. Gandhi was In
re Hearts of Oak Life and General Assurance Co. Ltd. In that case, a petition for alteration of the
memorandum of association including the name of the company was sought to be
contested by a company bearing almost an identical name urging that if the
proposed alteration is confirmed, it would give an opportunity to the company
to pass off the goods. The question considered was whether the petition for
alteration of memorandum of association could be contested by the other company
on the ground alleged by it. The contention raised by the other company was
overruled. The question considered is entirely different, namely, who are the
persons who should be permitted or would be entitled to contest a peti tion
filed under section 17. I would refer to this aspect when I consider the
affidavit filed by Mohmed Kayamuddin Gulamnabi Uraizee. But the decision in no
way assists in disposing of the point herein raised.
The next case referred to was Motilal Padampal Sugar Mills Co. (P.) Ltd., In re .
The company in that case was carrying on business of manufacturing and selling
sugar. A special resolution was adopted by which the company wanted to empower
itself to carry on the trade and business of steel makers, re-rollers,
foundrymen, etc. The petition was contested by the Registrar of Companies,
inter alia, on the ground that the business of manufacture and sale of sugar
cannot be conveniently or advantageously combined with the business of
steelmakers, re-rollers, etc. The question posed before the court was whether additional
business is one which may conveniently or advan tageously be combined with the
existing business of the company Indisputably that
would be the question but that is not the point for consideration at this
stage. Therefore, it is not necessary to consider this decision any further.
Mr. Gandhi next referred to Dalmia Cement (Bharat) Ltd., In re
.
In that case by the proposed alteration the company wanted to add to its
objects a clause so as to enable the company to do export business in all varieties of goods and commodities. The petition was
contested by the Registrar of Companies. While confirming the proposed
alteration, it was observed that the question whether the proposed business can
be conveniently or advantageously combined with the existing business of the
company will depend a great deal upon the opinion of the directors. If the
directors considered that, under the existing circumstances, it will be
convenient to combine the new objects with the existing objects and if it
appears that that conclusion may be fairly arrived at, the court ordinarily
would not go behind it and hold an inquiry as to whether the opinion of the
directors is well founded or is justified. On the facts of that case, the court
reached a conclusion that it is not possible to say that the view of the
company that the export business can be conveniently or advantageously combined
with the existing business is not fair or reasonable and, therefore, the
alteration was confirmed. It is not for a moment suggested in this case by me
that due weight should not be given to the commercial judgment of the directors
as well as of the shareholders disclosed in the special resolution. The question
considered by me is entirely different, namely, whether clause (d) at all could
be invoked in the circumstances of the present case. Reference was next made to
Juggilal Kamlapat Jute Mills Co. Ltd. v. Registrar of Companies
.
The effect of the word "combined" in clause (d) of section 17(1) has
been considered in that case. It is observed that the new business should not
be detrimental to the existing business of the company nor is the new business
meant to replace the existing business which would, immediately or in stages,
be discontinued. In other words, the additional business must not be
destructive or inconsistent with the existing business. The court has also
considered in that case that the unanimous or majority decision of the
shareholders of the company to alter the memorandum of association is not
binding on the court, but is a factor in favour of the confirmation thereof
though, in relation to such case, the court has a discretion not to confirm the
alteration or to confirm the same in part.
It
is true that while considering the petition for alteration in the objects
clause of the memorandum of association, the court should give due weight to
the judgment of the directors and shareholders as expressed in the special
resolution adopted by the company. It is equally true that the court should
consider very broadly what new business can be combined conveniently or
advantageously with the existing business and, while so considering, the factor
which should be taken into consideration is whether the new business would be
such as would not have he effect of destroying or being totally inconsistent
with the existing business of the company that it may be stopped or given up by
gradual tages. However, the court's jurisdiction while considering the case
under section 17(1)(a) and (d) is limited and it is limited by the language of
the clauses. Before the court would proceed to confirm any alteration in the
objects clause of the memorandum of association the proposed alteration must be
covered by one or more clauses of section 17. According to the petitioner the
proposed alteration would be covered by clauses (a) and (d) of section 17(1).
If the case is to be covered by clause (a), it must be shown that by the
proposed alteration, the existing business of the company can be economically
or efficiently carried on. If the proposed alteration is sought to be covered
by clause (d), it must be shown that the new business which may be started, if
the alteration is confirmed, would be such which could be conveniently or
advantageously combined with the existing business. In either case, the company
ought to be carrying on some business in praesenti. There must be some existing
business of the company which the company is carrying on, on the date on which
the company either adopts a special resolution or moves the court for
confirmation of the proposed alteration in the memorandum of association. If
such be the limit of jurisdiction of the court, in this case, the company is
shown not to be carrying on any business, in the sense in which I have
understood the words as discussed hereinbefore, and this company cannot alter
its memorandum of association. The present position of the company is clearly
set out in paragraph 7 of the petition, wherein it is stated that the company
is not carrying on any business activity except leasing the properties of the
company. In fact, it is a defunct company. The only useful activity, if it can be
said to be useful, is of leasing out the land which is not being put to any use
for carrying out any of the objects, express or implied, near or remote, direct
or indirect. If, in such circumstances, the company merely leases out the land,
I fail to see how it can be said that the company is carrying on some business
and if the company is not shown to be carrying on any business, it cannot by
the proposed alteration seek power to start a new business which can be
conveniently or advantageously combined with the existing business. Viewed from
this angle, in my opinion, this petition must be dismissed.
One
last objection of Mr. Gandhi may be noticed. It was urged that this court
should not permit Mohmed Kayamuddin Gulamnabi Uraizee to appear and contest this
petition. Mr. Uraizee claims to be the mutawalli or a trustee of a public trust
known as "Abdul Razak Saheb Roza and Masjid". Survey Number 210 of
Sherkotda Taluka, according to Mr. Uraizee, belongs to the aforementiond trust
and though it is admitted that the company is the lessee of the said survey
number, I would not give any nomenclature to this lease because the question
may be in dispute between the parties. I must, however, state that Mr. Gandhi
stated that by a decision in a suit, the lease is held to be a permanent lease
in favour of the company. It was urged that in a petition filed by the company
seeking confirmation of the proposed alteration in the memorandum of association, persons
who are entitled to object are at best the members and creditors of the company
and none else. It was urged that, at any rate, Mr. Uraizee may be styled as a
landlord and in that capacity he is not entitled to appear and contest the
petition. It is an interesting question as to who is entitled to contest the
petition filed by the company seeking confirmation of the alteration in the
memorandum of association. Section 17 itself gives a
clue as to who would be entitled to appear and contest the petition.
Undoubtedly, the members and creditors of the company as also the
debentute-holders would be entitled to appear and contest the petition. In the
facts of tnis case, it is not necessary for me to decide whether a landlord or
for that matter anyone interested in the company would be entitled to appear
and contest such a petition in view of the language of sub-section (3) of
section 17. But, as I do not propose to take into consideration any contention
raised in the affidavit of Mr. Uraizee, and as this petition is being disposed
of for the reasons hereinbefore mentioned, it would not be necessary to take
into consideration this interesting question in this petition. I, therefore,
need not refer to one or two cases on this point cited by Mr. Gandhi.
Before
parting with this judgment, it is necessary to refer to one or two aspects. It
is undoubtedly true that this court while considering a petition under section
17 must give due weight to the judgment of the directors and shareholders. But
before due weight is given to their judgment it must be shown to the
satisfaction of the court that they had applied their mind to all the aspects
of the matter, and that their judgment represent the voice of a large majority.
The issued and subscribed capital of this company is Rs. 9,90,000
divided into 9,900 ordinary shares each of Rs. 100 fully paid. I was told that
these 9,900 shares are being held by 850 shareholders. The annual general
meeting of this company, at which the special resolution proposing the
alteration in the memorandum of association was adopted, was attended by 17 out
of 850 members. I was rather keen to know their shareholding. But the
information could not be gathered on the spur of the moment. At any rate, 17
out of 850 is by itself an eloquent figure. It must be confessed that the
decision was unanimous. Three out of 17 were directors including the chairman
of the company. Even this aspect would not have weighed with me because if the
persons concerned do not attend the meeting after notice they take the
consequence. The special resolution runs into four closely typed printed pages
having as many as 30 different clauses. Each clause sets out a new object,
which, if sanctioned, would enable the company to start a new activity and it
is profitable to examine what diverse activities the directors and shareholders
thought of undertaking by amending the memorandum of association. They desired
to empower the company to undertake business in Pharmaceuticals, photographic
materials, transport
activity, cinema theatre, hotel and restaurant and many others. This defunct
company for over thirty years just sprang to life in 1969 and decided to start
all these activities, with a fund too small, if not utterly negligible This
itself shows what commercial judgment was brought to bear upon the subject by
the directors and shareholders when they adopted this special resolution which
can be properly styled as omnibus resolution. In fairness to Mr. Gandhi, it
must be said that at the final hearing of this petition, he invited the court
to consider, giving up all the clauses of the special resolution, only two
clauses 13-a and 13-b set out in the further affidavit filed by Mr. N. S. Vidya
at pages 157 to 159 of the record. By these two clauses the company wanted to
empower itself to establish cold storage plant for preservation of foodstuffs and
other edible articles and to carry on the business of constructing and managing
theatres, recreation places, and halls, hotels, cinematographic shows, etc.
From a number of varied and absolutely diverse activities which the company
wanted to start after empowering itself by necessary
alteration in its memorandum of association, at the end the company confined
itself to the aforementioned two alterations only. This shows that the
directors had hardly any conception of what they were doing and the shareholders
possibly did not know what they were doing. I was told that in the year 1951,
the company sought alteration in its memorandum of association by addition to
its objects clause which was confirmed by the Bombay High Court. Even though
alteration was made in 1951 except of continuing to lease the land as an
incidental activity no new activity was undertaken by the company. I think the
proposed alteration appears to be an exercise in futility and this court need
not confirm the same.
In
view of the aforesaid discussion, the petition is dismissed. The petitioner to
pay costs of the Registrar of Companies quantified at Rs. 60. No order as to
costs of the landlord.
[1973]
43 Comp. Cas. 353 (Punj. & Har.)
HIGH COURT of PUNJAB
AND HARYANA
v.
Registrar of Companies
R.S. NARULA, J
AUGUST 26, 1971
D.S. Dang and R.N. Narula for the petitioner.
D.N, Awasthy for the respondent.
Narula, J.—The only question which calls for decision in this
application for confirmation of the special resolution of the
petitioning-company dated April 30, 1971, adding two new items to the objects
clause of its memorandum of association is whether the new businesses sought to
be authorised under the amended objects clause can or cannot be
"conveniently and advantageously combined with the business of the company
under existing circumstances" within the meaning of that expression as
used (subject to minor modification) in clause (d) of sub-clause (1) of section
17 of the Companies Act, 1956, hereinafter called "the Act".
The Industrial Cables (
The objects for which the
company was formed are set out in clause (3) of its memorandum of association
and have been reproduced verbatim in paragraph 4 of this application. The
scheme of the objects is that entries (i) to (vii) therein deal with
mechanical, electrical and engineering works, entries (viii), (xi) and (xii)
relate to business of merchants and carriers, entry (ix) deals with textiles
and entry (x) with mining businesses. (A printed copy of the memorandum and
articles of association of the company is annexure "A" to the
petition). Entry (xiii), which deals with zamindari, agriculture, land and
finance, development of land and buildings and earning of rental income, is
directly relevant for the purpose of deciding this petition and is, therefore,
quoted below:
"To carry on all or
any of the business of or usually carried on by zamindars or land companies;
and to irrigate, cultivate, improve and develop any lands and properties whether belonging to the
company or not and to develop the resources thereof by clearing, fencing,
cultivating, planting, manuring, farming, letting, or otherwise, with power to
advance money to other persons for any of the purposes aforesaid".
On
March 29, 1971, the board of directors of the company passed its resolution No.
14 in the following words :
"The
managing director put before the board a note in connection with
diversification of the company's activities and emphasised its importance. He
further went on to explain the significance of carrying on scientific research
or associating with scientific research associations and informed the board
that it is necessary to amend the objects clause of the present memorandum of
association of the company.
Resolved
that approval be, and is hereby, granted for the amendment of clause No. 3 of
the memorandum of association of the company, to enable the company to
diversify its activities allied or otherwise and the secretary be and is hereby
authorised to take such actions as may be necessary for the amendment of the
objects clause of the memorandum of association.
Further
resolved that the secretary be and is hereby further authorised to take the
approval of shareholders by way of special resolution in the annual general
meeting being held on 30th April, 1971, and make a petition to the High Court
and to take such action as may be required to comply with the various
formalities as provided by the Companies Act, 1956, for the amendment of the
memorandum of association".
General
meeting of the company was held after due notice on April 30, 1971, in
pursuance of the above-quoted resolution of the board of directors. At that
meeting, the following special resolution was duly passed in accordance with
section 189 of the Act:
"Resolved
as a special resolution that in order to enable the company to carry on its
business more economically and efficiently and to attain its main purposes by
new and improved means as well as to enable it to carry on fresh business which
under the existing circumstances can conveniently and advantageously be
combined with the existing business of the company, the provisions of the
objects clause of its memorandum of association be and are hereby altered in
the manner set out below :
(A) After the present sub-clause (xiii) and
before the present sub-clause (xiv) of clause (3) of the company's memorandum
of association, the following shall be inserted as sub-clause (xiii-a):
(xiii-a)To carry on the business of hotel, restaurant, cafe,
road house hotel, holiday camp, caravan site and apartment-house keepers and to
provide all services that may be necessary, desirable or advantageous in
connection with the said business, and to fit up and furnish any property for
the purpose of letting the same to visitors or guests whether in single rooms,
suites, chalets, caravans, movable structures, cottages, as shops, offices,
show windows, or otherwise, and to buy, sell, import, produce, manufacture or
otherwise deal in food and food products, meat, groceries, fruits,
confectionery, wine, spirit, beer and alcoholic beverages, tobacco, druggist
supplies, beverages, linen, furniture, furnishings and other articles.
(B) After the present sub-clause (xxix) and
before the present sub-clause (xxx) of clause (3) of the company's memorandum
of association the following shall be inserted as sub-clause (xxix-a):
(xxix-a)To subscribe, donate, establish, provide, maintain,
conduct, subsidise, undertake, carry on and promote studies, research
laboratories, experimental workshop for scientific and technical researches and
experiments, tests of all kinds and scientific and technical investigations and
inventions by providing, subsidising, endowing or assisting laboratories,
workshops, libraries, lectures, meetings and conferences and by providing, or
contributing to the remuneration of scientific or technical professors or teachers
and by providing or contributing to the award, scholarships, prizes, grants to
students or otherwise and generally to encourage, promote and reward studies,
researches, investigations, experiments, tests, and inventions of any kind that
may be considered by the company likely to assist in business which the company
is authorised to carry on or otherwise useful for the company"
A
copy of the resolution of the board of directors and a copy of the special
resolution passed unanimously in the general meeting of the company have been
filed with the petition as annexures thereto. Broadly speaking, the objects
sought to be added by the alteration in question cover two fields,viz.,
(1) to
empower the company to make donations or subscriptions, etc., for scientific
research : and
(2) to fit
up and furnish any property as a guest house or a hotel, restaurant, etc., and
to do business of hoteliers, etc.
Notice
of this petition was issued to the Registrar of Companies,
"With reference to the contents of para. 7 of the said petition, the
deponent submits that the additional objects as stated in sub-clause (xiii-a)
of memorandum of association cannot be conveniently and advantageously combined with the existing business of the company. The
company is at present engaged in the manufacture and sale of cables. The new
business proposed to be set up by the company, namely, the business of hotel,
restaurant, cafe, road house, hotel, holiday camp, caravan site and
apartment-house keepers, etc., is not in any way directly or indirectly connected
with the said business. The existing sub-clauses of the objects clause of
memorandum of association also do not indicate any connection of the said new
business with any of the present objects. The proposed alteration does not fall
under any of the clauses (a), (b) or (d) of sub-section (1) of section 17 of
the Companies Act, 1956".
The Registrar has, however,
stated that so far as the second proposed addition in the objects clause of the
memorandum of association of the petitioning-company is concerned (viz.,
sub-clause (xxix-a) authorising the company to make donations, etc., for
scientific research) the Registrar does not oppose the same. No other objection
against any of the two proposed amendments has been received from any source.
It has not been disputed,
and indeed it is clear from the balance-sheets and profit and loss accounts of
the company shown to me, that the company is already dealing in buying and
selling lands and property. The annual report of the company for the period ending
October 31,1964 (filed with L.M. 105 of 1971), shows amongst its "current
assets" land for sale at Mewla worth Rs. 3,29,256 as on October 31,1963,
and worth Rs. 6,912 at the end of the relevant period. This, and other entries
to which reference is hereinafter made, clearly show that the land was treated
and shown by the company all along as one of its stock-in-trade. On the
expenses side of the trading account of the company in the same annual report,
cost of land sold is shown to be Rs. 3,22,344.25. On
the income side Rs. 5,27,275 are shown to have been
earned by sale of land (plots). In the 12th annual report and accounts for
1967-68 (also filed with the same L.M.) "Land for sale at Mewla and
Hissar" is shown amongst "current assets" to be worth Rs. 76,087
as on October 31, 1967, and worth Rs. 21,93551 at the
end of the year. In the profit and loss account for the same period, profit on
sale of land at Hissar is shown as Rs. 57,336.51 by subtracting Rs. 78,043.49,
the cost of the land sold from the sale proceeds amounting to Rs. 1,35,380. The profit earned by the sale of land at Hissar is
shown under the heading—"Stock in hand as on 31st October, 1968". In
the balance-sheet contained in the annual report and accounts of the company
for 1969-70, land for sale at Mewla is shown under "current assets"
as worth Rs. 6,912 on the opening day and worth the same value on the closing
day. Under the heading "Income" in the profit and loss account for
the same year, Rs. 27,500 is shown on the income side to have been received for
the year ending October 31, 1969, by sale of land at Hissar. My reference was invited to these
facts and figures by Mr. Dang, the learned advocate for the company, to show
that the business of dealing with land and property on an extensive scale is
one of the existing businesses of the company. It cannot, therefore, be said
that the proposed new business is not connected with the existing businesses of
the company. Relevant portion of section 17(l)(d) of
the Act states :
"17. (1) A company may, by special resolution, alter the provisions
of its memorandum .... with respect to the objects of
the company so far as may be required to enable it—.............
(d) to carry on some business which under
existing circumstances may conveniently or advantageously be combined with the
business of the company;.."
Whereas
Mr. Dang contends that the new business in question is covered by the
above-quoted provision, Mr. D.N. Awasthy, the learned counsel for the
Registrar, submits to the contrary.
The
principles on which a special resolution amending the objects clause of the
memorandum of association of a company may or may not be confirmed by the court
under section 17(1)(d) of the Act may be summarised thus:
(1)A
company is normally free to alter its objects clause as it is for its members
to decide as to what business the company should carry on from time to time.
The court cannot embark on an enquiry into the question whether the opinion of
the members of the company is or is not justified or well-founded. This is
particularly so when the resolution of the company is unanimous and there is no
objection to the proposed alteration by any creditor or any other persons
interested in the company. The court will not lightly interfere with the
unanimous decision of the share holders subject to the restrictions contained
in section 17.
(2)It
is not necessary that the proposed new business must be ancillary or similar to
the existing business or businesses of the company "Some business" in
section 17(1) means and implies some new business not already provided for in
the objects clause and not necessarily ancillary to the existing businesses.
The proposed new business may even be entirely new and may amount to a
departure from the old businesses.
(3)The
special resolution is not confirmed by the court if it is found that the
proposed new business would be so inconsistent or
incongruous with its existing businesses as to be destructive thereof. This is
clearly suggested by the use of the word "combined "in section
17(d)of the Act as two mutually destructive things cannot be combined together.
(4)The
resolution will be confirmed only if the court finds that the company is in
sound financial position to embark upon and carry on the new businesses and
that the substratum of the company has not already been so corroded as to make it improbable for the company
to carry on the new business profitably.
(5)The expected and
intended advantage of the proposed new businesses to the shareholders of the
company must also be kept in view. And,
(6)No hard and fast,
inflexible and rigid, rule can be laid down for determining whether the
proposed new business can or cannot be conveniently and advantageously combined
with the business of the company. This question has ultimately to be decided in
accordance with the facts and circumstances of each case that may come up
before the court and must be decided in the perspective of the question being
essentially a business proposition which has normally to be determined by the
persons engaged in the business of the company and without the court
introducing a new bar to the amendment of the objects clause of a company,
which restriction is not prescribed by the legislature. Nor is the interest of
the public at large relevant in all cases.
It does not appear to me to
be necessary to refer to the facts and circumstances of cases covered by a
chain of authorities, to which my attention was invited in this respect by the
counsel for the petitioner. In fairness to Mr. Dang, however, I may notice those
judgments :—In re Ambala
Electric Supply Company Ltd.,
In re Modi Spinning and Weaving Mills Co. Ltd.,
In re Motilal Padampat Sugar Mills Co. (Private) Ltd,
In re Dalmia Cement (Bharat) Ltd. ,
In the matter of Standard General Assurance Co. Ltd.,
Juggilal Kamlapat Jute Mills Co. Ltd. v. Registrar of Companies ,
In re New Asiatic Insurance Co. Ltd.
and Straw Products Ltd. v. Registrar of Companies .
On the facts and
circumstances of this case, to which reference has already been made, I am
satisfied that the financial position of the company is more than sound, that
the rights and interests of the members of the company and the rights and
interests of the creditors of the company are not likely to be prejudicially
affected by the alteration in question and that the proposed new business under
the existing circumstances, can be conveniently and advantageously combined
with the previously authorised businesses of the company. I am unable to find
any legal impediment in the confirmation of the special resolution. I,
accordingly, allow this application and confirm the special resolution, passed
in the 14th annual general meeting of the company, dated April 30, 1971
(annexure "C" to the petition). The Registrar, who appears to have
contested this application without any just cause, shall pay the costs of the
company. Formal order shall be drawn in accordance with law.
[1967] 37 COMP. CAS. 20 (ALL)
Juggilal Kamlapat Jute Mills Co.
Ltd.
V.
D
COMPANY PETITION NO. 29 OF 1964
NOVEMBER
19, 1965
JUDGMENT
This is a
petition under section 17 of the Companies Act, 1956, of Juggilal Kamlapat Jute
Mills Company Limited (to be referred hereinafter as the company) for
confirmation of the alteration to the memorandum of association of the company.
The company
was registered on the 7th of February, 1931, under the provisions of the Indian
Companies Act, 1913, as a company limited by shares
with its registered office at
It was
recently that the directors of the company desired to manufacture goods of
natural rubber, synthetic rubber and reclaim rubber, after a sister concern, J.
& K. Commercial Corporation Ltd., obtained a letter of intent for
industrial licence from the Government of India to establish a factory for
reclaim rubber and also obtained an import licence (which it may be noted is
not transferable for importing plant and machinery for producing reclaim rubber
under Belgium credit.)
The company
held an extraordinary general meeting on September 30, 1964, and, in accordance
with the Companies Act, 1956, unanimously passed the following by a special resolution :
Resolved that
the memorandum of association of the company be altered by adding a new clause
4(A) as specified below after clause 4:
"4(A) To
undertake and carry on business as manufacturers of natural rubber, synthetic
rubber and reclaim rubber and all kinds of rubber goods and rubber by-products
and allied materials and to take all steps incidental to such business
including acquisition of the requisite raw materials either by cultivation,
purchase, processing or otherwise."
As provided in
section 17 of the Companies Act, 1956, alteration to the memorandum of
association with respect to the objects of the company does not take effect
until, and except in so far as, it is confirmed by the court on petition. The
present petition was, therefore, made for the confirmation of the alteration to
the memorandum of association.
When the
notice of the extraordinary general meeting was given to the shareholders for
the consideration of the proposed alteration to the memorandum of association,
it was merely indicated that the board of directors of the company, after
giving its most careful consideration to the aspect of installing a rubber
factory, was of the opinion that the company could conveniently and
advantageously combine with the existing business, the business of installing
and running a reclaim rubber factory at Kanpur as one of its units; and that
the company had the resources, business expenence and facilities at its
disposal to work a business of the type proposed. This opinion of the board of directors
is contained in the explanatory statement accompanying the notice of the
extraordinary general meeting. From the minutes of the general meeting it
appears that after a free and frank discussion, the above resolution was put to
the meeting and was declared carried unanimously. The shareholders of the
company who attended the meeting or sent their Proxy were generally members of
the Singhania family. Outsiders consisted of Sri Stanley D. Noronha and Sri
P.D. Chandrana and two Agarwals representing the deities of the Singhania
family. In one way, every one is connected with the Singhania family or the
singhania group of companies.
A few details
have, however, been given in paragraph 8 of the petition to suggest why the
proposed alteration can be conveniently or advantageously combined with the
existing business of the company. These grounds are as below
:
"(a)
The existing resources and administrative set up of the company are adequate
and competent for installing and running the rubber reclamation plant. (b) The
company already holds an industrial licence granted by the Government of India.
In the meantime, the company has already received an import licence for
importing the plant and machinery under
It is further
mentioned that the company is in a sound financial position and has adequate
arrangements for working capital (paragraph 10 of the petition); and that the
company has taken a loan of Rs.27 lakhs from the National Industrial
Development Corporation, New Delhi, for modernisation and expansion of the
plant of the company and the Corporation has accorded its approval to the proposed
alteration to the memorandum of association (paragraph 9 of the petition).
The company,
at no time, issued debentures; and the big creditors of the company, namely,
J.K.Charitable Trust, J.K.Synthetics Ltd. and J.K.Commercial Corporation, gave
their consent in writing to the proposed alteration. In the circumstances, it
was not considered necessary to issue notice of the petition to the creditors
of the company.
The petition
is opposed by the Registrar of Companies, U.P.,
The petition
is apparently governed by clause (d) of section 17(1) of the Companies Act,
1956, whereunder a company can, by special resolution, alter the provisions of
its memorandum of association with respect to the objects of the company :
"to
enable it to carry on some business which under existing circumstances may
conveniently or advantageously be combined with the business of the
company."
Alteration to
the memorandum of association is to enable the company to carry on "some
business", which can include a new business. Consequently, the court
cannot refuse to confirm the alteration to the memorandum of association simply
because the change is desired to carry on a new business, not connected with,
nor having any relation to, the existing business or businesses of the company.
The
restriction imposed by clause (d) of section 17(1) of the Companies Act, 1956,
is that the business must be one which can, under existing circumstances, be
conveniently or advantageously combined with the business of the company. The
new business desired to be undertaken by the company must, therefore, be one
which can be combined with the business of the company, which would ordinarily
mean the existing business, and not a business not undertaken but could be
undertaken under the existing memorandum of association. To lay down an
inflexible rule as to the nature of a new business, which can be conveniently
or advantageously combined with the business of the company, is difficult, if
not impossible. Consequently, whatever the courts may lay down shall be by way
of illustration and not to completely exhaust the scope of the above provision.
Further, it is possible that what can be conveniently or advantageously
combined with the business at one time cannot be so combined at another
occasion. They are the existing circumstances which shall be the basis of
determination whether the new business can be combined with convenience and
advantage with the existing one.
The word
"combine" used in section 17(1)(d) of the
Companies Act, 1956, strongly suggests that the new business should not be
detrimental to the existing business of the company, nor is the new business
meant to replace the existing business which would, immediately or in stages,
be discontinued. This has often been expressed by saying that the additional
business must not be destructive of, or inconsistent with, the existing
business: see In re Parent Tyre Co. Ltd., In re Modi Spinning and Weaving Mills
Co. Ltd., In re Motilal Padampat Sugar Mills Co. (Private) Ltd. and In re
Ambala Electric Supply Co. Ltd. It is immaterial whether the new business is or
is not akin to or connected with the existing business. For example, a person
dealing in the purchase and sale of foodgrains can do insurance business, and
thus combine a business which has nothing to do even remotely with the existing
business. Further, at occasions, combination of a similar business without
determent to the existing business may not be possible.
Whether the
new business is or is not detrimental to the existing business shall depend
upon the facts and circumstances of the case. For example, if the existing
business is not being run efficiently or is running at a loss, and it is
possible to run it efficiently or at a profit, by making improvements or by expanding
the plan, and even then no attempt is made to efficiently run the existing
business, the opening of a new business shall invariably be detrimental to the
existing business and it cannot be said that the new business can be combined
with the existing one. But where there is not scope for expansion or for making
improvements in the existing plant, or under the existing circumstances, it is
advisable to reduce the existing business , the
opening of a new business can amount to combination thereof with the existing
one. Further, the opening of the new business shall be to the advantage of the
members of the company and its creditors, and that would be an instance of a
new business being advantageously combined with the existing business of the
company under the existing circumstances.
A contrary
view was, however, expressed in Punjab Distilling Industries Ltd. v. Registrar
of Companies, where an alteration to the memorandum of association to carry on
a new business was not confirmed because it had nothing to do even remotely
with the existing business and it could not be said that the new business would
be conducive to and economical or efficient in doing the existing business.
This is clearly in conflict with the earlier decision of the same High Court in
In re Ambala Electric Supply Co. Ltd..
In In re
Bhutoria Brothers (Private) Ltd., alteration to the memorandum of association
to carry on a new business was not confirmed on the ground that it could not,
by any stretch of language or imagination or business principles or commercial
possibilities, be regarded as a business which could conveniently or
advantageously be combined with the business of the company in the existing
circumstances. However, certain observations made therein can suggest that a company
cannot be permitted to carry on an unrelated new business. It was observed :
"For
instance, business in clocks, musical instruments and in surgical goods would
be a very strange new-comer into a business in agricultural, mineral and animal
products and live-stock."
This case is
thus distinguishable on fact; and as laid down therein also, the company can be
permitted to carry on a new business provided that such business can, under
existing circumstances, be conveniently or advantageously combined with the
existing business of the company and such business is not detrimental to the
existing business.
The other
question which often arises, and has been raised in the instant case also,
pertains to the power of the court while confirming or refusing to confirm the
alteration to the memorandum of association. The court's power can easily be
deduced from the provisions of section 17 of the Companies Act, 1956.
Sub-section
(1) of section 17 details the nature of alterations which can be made in the
memorandum of association and sub-section (2) thereof provides that the
alterations shall not take effect until, and except in
so far as, it is confirmed by the court on petition. Consequently, any
alteration to the memorandum of association, not covered by sub-section (1),
cannot be confirmed by the court. An order confirming the alteration, either
wholly or in part, is passed under sub-section (5) and before confirming the
alteration the court must satisfy itself on the points covered by sub-section
(3), namely, that sufficient notice has been given to debenture-holders and
persons interested and that the debt or claim of objecting creditors has been
discharged or determined, or has been secured. Sub-section (4) also requires
that notice of the petition for confirmation of the alteration to the
memorandum of association shall be served on the Registrar of Companies to
enable him to file objections and to make suggestions, if any, with respect to
the confirmation of the alteration.
Sub-section
(6) of section 17 lays down whose rights must be kept in mind while confirming
the alteration. The sub-section provides that :
"The
court shall, in exercising its powers under this section, have regard to the
rights and interests of the members of the company and of every class of them,
as well as to the rights and interests of the creditors of the company and of
every class of them."
Consequently,
the court can refuse to confirm the alteration if it is of opinion that the
alteration is not in the interest of the members of the company or any of its
creditors.
Sub-section
(7) of section 17 can also be of help in the determination of the above
question. It provides that :
"The
court may, if it thinks fit, adjourn the proceedings in order that an
arrangement may be made to the satisfaction of the court for the purchase of
the interests of dissentient members; and may give such directions and make
such orders as it thinks fit for facilitating, or carrying into effect, any
such arrangement :
Provided that no part of the capital of the company may be expended in
any such purchase."
In other
words, the court can, if considered necessary, confirm the alteration to the
memorandum of association even though not passed unanimously but is a mere
majority decision.
On reading the
various sub-sections of 17 together, it can be laid down as a safe rule that
the court can refuse to confirm the alteration to the memorandum of association
to the extent it is not in the interest of the members of the company or of its
creditors and is not covered by sub-section (1) thereof; and that the court can
confirm the alteration, either wholly or in part, or subject to such terms and
conditions as it may deem fit, on being satisfied that the alteration being
confirmed is not beyond the scope of sub-section (1) and does not adversely
affect the rights and interests of the members of the company and-or of its
creditors. No hard and fast rule can be laid down as to the quantum of evidence
necessary for the satisfaction of the court : this
shall invariably depend upon the facts and circumstances of the case. For
example, where the company is in a sound financial position and the alteration
is not objected to by its shareholders and creditors, the court may take a
lenient view and act like a court of revision; and in others, like a court of
appeal.
In view of
section 17(5) of the Companies Act, 1956, the learned advocate for the
petitioner-company conceded the above legal position; but urged that
confirmation of the alteration should be a rule and the court may refuse to
confirm, or confirm in part, in exceptional circumstances only. Reliance was
placed upon the English case of Parent Tyre Company Ltd., In re 1,
wherein it was observed that :
"The
question whether any given additional business is one which may conveniently or
advantageously be combined with the business of the company carried on at the
time when the special resolution is passed must,in my
judgment, be determined by the persons engaged in the business of the company.
It is essentially a business proposition, whether an additional business can or
cannot be conveniently or advantageously carried on under existing
circumstances with the business of the company."
The High
Courts in
The above
English case was followed in In re Ambala Electric Supply Co. Ltd. 4
where the proposed alteration to the memorandum of association was confirmed as
a whole on the finding that no one other than the Registrar of Companies had
opposed the petition and the company was in a sound financial position.
The English rule
appears to have been followed in entirety by the Madras High Court in In the
matter of Dalmia Cement (Bharat) Ltd. 5, though therein no reference was made
to the case of In re Parent Tyre Co. ltd. 1. It was observed
:
"But
whether the business can conveniently or advantageously be combined with the
business of the company will depend a great deal upon the opinion of the
directors. If the directors consider that, under the existing circumstances, it
will be convenient and advantageous to combine the new objects with the
existing objects; and if it appears that that conclusion may be fairly arrived
at, this court will not go behind it and hold an enquiry as to whether the
opinion of the directors is well founded or is justified. In the very nature of
things, such an enquiry will not be possible for this court to undertake."
In this case
the proposed alteration to the memorandum of association was confirmed because
the view of the company was not unfair or unreasonable.
In re Bhutoria
Brothers (Private) Ltd.1 , it was held that so long as the two requirements of
clause (d) of section 1791) of the Companies Act, 1956 were observed, namely,
that the new business was one which could conveniently or advantageously be
combined with the existing business of the company and this was possible under
the existing circumstances and not under hypothetical circumstances, the
shareholders and the management of the company should be left free to add to or
reduce their business by suitable alterations to their memorandum.
Indian Iron
and Steel Co. Ltd., In re 2 is a case under clause (a) of section 17(1) of the
Companies Act, 1956. However, with regard to the circumstances in which the
court can refuse to confirm the proposed alteration to the memorandum of
association, it was observed :
"If the
shareholders were the only judges of their own interest then I do not see why
there should be such a legislative provision to insist that such an alteration
even though passed by a special resolution of the shareholders should have to
be confirmed by the court on petition."
To sum up, the
unanimous or majority decision of the shareholders of a company to alter the
memorandum of association is a factor in favour of the confirmation thereof;
but the court has the discretion, a discretion to be exercised judicially, in
the interest of the members of the company and its creditors, not to confirm
the alteration or to confirm the same in whole or in part, or subject to such
terms and conditions as it deems fit provided that the proposed alteration
falls within the scope of section 17(1) of the Companies Act, 1956. In the
instant case, being one under clause (d) thereof, the new business can be
conveniently or advantageously combined with the existing business of the
company, under the existing circumstances and not under hypothetical
circumstances. Naturally, the new business must be one which is not detrimental
to, and, as observed in In re Parent Tyre Co. ltd. 3, is not destructive of, or
inconsistent with, the existing business.
Coming to the
facts of the instant case, the special resolution for the proposed alteration
to the memorandum of association was passed unanimously in an extraordinary
general meeting convened for the purpose; and no shareholder had appeared in
court to oppose the confirmation of the alteration. The three big creditors of
the company and also the National Industrial Development Corporation,
There is
nothing to show that there is scope for expansion of or making improvements in
the existing plant. The company being in a sound financial position can expand
its business, and this can be done by starting a new business permissible under
the memorandum of association or one which can be undertaken after alteration
to the memorandum of association. As already mentioned above, the objects for
which the company was formed are so wide and general that the company can carry
on many business not connected with jute, and hence
confirmation of the alteration shall not be contrary to the spirit of the
objects of the company. Further, the new business to be started by the company
must be one for which there is a demand and which will prove advantageous to
the members and creditors thereof. Nothing has come to my notice which may show
that there is a greater demand for goods which can be manufactured under the
existing memorandum of association than for rubber goods desired to be
manufactured by the company.
To put it
differently, the manufacture of rubber goods shall not, under the existing
circumstances, be detrimental to, nor shall be destructive of, or inconsistent
with the existing business, and can be advantageously combined with the existing
business of the company. Considering that the company has the business
experience and can install and run the rubber factory, it can be held that this
business can also be conveniently combined with the existing business.
The proposed
alteration to the memorandum of association is not general and vague and can be
confirmed as a whole.
It is not
necessary that the alteration be confirmed only after the company obtains an
industrial licence for opening the new factory : in
fact, it is desirable to have the memorandum of association altered before
taking steps for obtaining industrial licence. Consequently, the present
petition cannot be said to be premature.
The petition
is hereby allowed and the proposed alteration to the memorandum of association is
confirmed.
Petition
allowed.
[1975] 45 COMP. CAS. 151 (GUJ)
New
Asarwa Mfg. Co. Ltd., In re
B.K. MEHTA, J.
JUNE 25, 1974
I.M.
Nanavati and M.G. Doshit for the Petitioner.
G.B.
Desai for the Registrar of Companies.
B.K. Mehta, J.—This is a petition under section
17 of the Companies Act, 1956, for confirming alterations of the memorandum of
the company annexed to the petition at annexure "B". The
petitioner-company was registered under the Companies Act No. VI of 1882 on October 6, 1913 under the name of
"Harivallabhdas Mulchand Mills Co. Ltd" as a company limited by
shares. The name of the original company was changed to "New Asarwa
Manufacturing Company Ltd". from February 15,
1961, and a fresh certificate of incorporation dated the 15th February, 1961,
was issued by the Registrar of Companies,
"A. To purchase from Sheth Chimanlal Girdharlal
at Rs. 3 lakhs inclusive of the cost of preparation of documents, stamp,
registration, etc the factory known as 'the Hitechhu Spinning and Manufacturing
Company Limited' situate at Ahmedabad together with all its machinery buildings, etc., which factory
was purchased at a court auction by the said Sheth Chimanlal Girdharlal for Rs.
2,75,001 (rupees two lakhs, seventy-five thousand and one only) and to expand
the business of weaving cloth, etc., to dispose of useless machinery, that is,
to expand the weaving department by replacing and/or adding new machinery for
the old machinery for the manufacture of yarn, cloth, etc., and if necessary to
start dyeing and printing departments, etc., and all other works which can be
operated manually or by steam or by electricity.
B To purchase or to take on lease the land
wheresoever necessary for the purpose of building the factory as mentioned
above and for any other work connected therewith.
C To
carry on all or any of the business mentioned hereunder.
To purchase or sell
by immediate or future delivery cotton, silk, wool, jute, seeds, etc., from any
part of India or from England, America or Egypt, to purchase and gin cotton and
to sell or cause to be sold all types of manufactured goods in Ahmedabad or at
any other place and to do all work incidental thereto.
D To amalgamate
with any other company if deemed proper by the company to do so".
The
petitioner-company commenced its business and continued the same till 1972 in
which year, the petitioner-company sold its undertaking on April 29, 1972, for
a sum of Rs. 40 lakhs only. It appears from the balance-sheet of the company
for the year ending 31st December, 1972, that the petitioner-company had
received licences to deal in cotton and the directors reported to the
shareholders in their report enclosed to the balance-sheet that they had
started the said business in cotton. It also appears from the balance-sheet
that after making adjustments against the losses of the previous years, there
was a total loss of Rs. 20,35,072 at the end of the
year. In the balance-sheet of the company for the year ending 31st December,
1973, which has been placed on the record today on behalf of the
petitioner-company it has been observed in the
directors' report that during the year the company had done cotton business and
employed the funds in fixed deposit of scheduled banks. It has been also
observed that the manufacturing activities of textiles was
continued by getting cloth woven by outside agencies.
At
the extraordinary general meeting held on April 23, 1974, a special resolution
sanctioning the alteration to clause 3 of the memorandum of association was
duly passed unanimously. The proposed alterations in the objects clause of the
memorandum of association have been annexed at annexure "C" to the
petition. The petitioner company has, therefore, approached this court for
sanction to the said alterations under section 17 of the Companies Act, 1956.
For the purposes of the
alteration of the objects clause, the petitioner-company has divided the
proposed objects into main objects and other incidental objects as the future
objects of its business. The main object of the future business of the
petitiouer company is intended as under :
"To acquire and take
over from Echem Investment Private Limited as a going concern the business of
cinema exhibition carried on by the said Echem Investment Private Limited in
the name and style of Shital Theatres at
The other objects of the
company are, inter alia, to carry on business as proprietors, managers and
renters of cinema, theatres, music halls, concert and dance halls, discotheques
and other places of amusement and entertainment of every kind of film producing
studios, recording studios and television studios and also to carry on the
business of exhibiting cinematograph films and of organising the production,
management and performance of plays, dramas, comedies, operas, operettas,
burlesques, pantomimes, revues, musical and other pieces, ballets, shows, radio
and television entertainments of every kind, and of organising, managing and
holding concerts, recording sessions and dances, etc., The petitioner-company
incidentally intends to carry on the business as proprietors of restaurants
hotels, refreshment and tea rooms, cafes and milk and snack bars and to carry
on the business as bankers, confectioners, tobacconists, farmers, ice manufacturers,
etc. The petitioner-company also intends to carry on the business which may be
really incidental to their main business of exhibitors, which have been set out
in sub-paras. (1) to (12) of para. B to clause 3. The
petitioner-company also intends to carry on incidentally the business of
spinning and weaving and all other incidental business activities in relation
thereto as this happened to be their original business. These activities have
been referred to in sub-paras. (14) to (17) of para. B of
clause 3. The petitioner-company also intends to act as financing agency
and to carry on all incidental business activities in relation thereto. These
activities have been described in sub-paras. (22), (24), (25) and (28) of para.
B of clause 3. The company also intends to carry on
the general business of land agent and to purchase, grant, lease, exchange,
hire or otherwise lands and properties of any tenure or any interest in the
same in India and to erect and construct houses, buildings or works of every description
of any land of the company. These activities have been enumerated in sub-paras.
(31), (37), (38) and (39) of para. B to clause 3. The
company also intends to act as an investment company and to carry on all
incidental activities thereto. The said activities are described in sub-paras.
(44), (45) and (46) of para. B to clause 3. In order
to effectuate the main and incidental objects which have been described above,
the company wants to have sufficient powers in that behalf and, therefore, in
para C of clause 3 the incidental and
ancilliary objects have been enumerated in sub-paras.
(47) to (56) and (60) to (72) and (78) to (83), (86), (88) and (89).
The second ground of
objection of the Registrar is that the business which the petitioner-company is
intending to carry on is entirely a new business, which cannot be said to be
incidental or ancillary or even akin or alike to the existing business of the
patitiorer-company. It is no doubt true that the main business activities in
which the petitioner-company wants now to engage itself is the exhibition of
films and all the business activities incidental
thereto. However, by sub-paras. (14) to (17) of
paragraph B of clause 3 in the proposed amendments the company has also
indicated that it would engage itself in the business of manufacturing textiles
as well as dealing in cotton and other fibres. The objection of the Registrar
that this new business cannot be conveniently or advantageously be combined
with the business of the company in the existing circumstances is in my opinion
misconceived. The new business intended by the petitioner-company having regard
to the changed circumstances, namely, that the original undertaking of the
petitioner company has been sold away for a sum of Rs. 40 lakhs, whereby the petitioner-company
has received such a big amount, can conveniently with its present business of
some manufacturing activities as well as its business of dealing in cotton, be
put to profitable use by investing the same in some lucrative line. No
circumstances have been pointed out by the Registrar nor brought on record by
any other affected party that it would not be convenient or advantageous for
the petitioner-company to engage itself in the main business of exhibition of
films with the existing business of the petitioner-company. It is an accepted
position that a large sum of Rs. 40 lakhs is lying with the company which has
for temporary purposes been placed in fixed deposit with the scheduled banks.
The contention of the petitioner-company that it should be permitted to utilise
this large fund in such business which will earn a fair and reasonable return
so as to ensure the dividend to the shareholders is perfectly justified. The
petitioner-company intends to acquire as a going concern the business of cinema
exhibition of M/s. Echem Investment Private Ltd. which is a holding-company and
the acquisition of cinema business by the said holding-company would be in the
mutual interest of the petitioner-company and the holding-company. It is an
established legal position that in deciding as to whether sanction to the
alteration of a memorandum should be granted or not, the court should not
reject an application ex facie merely because the new business is wholely
different from and bears no relation to the existing business of the company.
All that should be essential and borne in mind is that it should be capable of
being conveniently and advantageously continued with the existing business and is not destructive of or
inconsistent with the existing business (vide Modi Spinning & Weaving Mills
Co. Ltd. In re ,
Juggilal Kamalpat Jute Mills Co. Ltd. v. Registrar of Companies ,
In re Rajendra Industries (P.) Ltd. and In re New Asiatic Insurance Co. Ltd.).
It is no doubt true that the court may refuse
to confirm an alteration unconnected with the existing objects or where the
change has altered the basis of the company. But it cannot be said here that
the proposed alterations will change the basis of the company or destroy the
existing business. As has been stated above, the petitioner-company does not
want to abandon its present business activities of manufacturing textiles or to
deal in cotton. It wants to put the large fund which is now at its disposal on
account of the disposal of the undertaking of the petitioner-company to more
purposeful use which will earn reasonable profits for the shareholders and with
that purpose in view, it wants to have as its object the business of exhibition
of films and for that purpose to acquire the running business of the
holding-company. The other objects which have been classified by the
petitioner-company in paragraph B of clause 3 include the present activities of
textile manufacturing, dealing in cotton and the business in land and
constructional activities. If the petitioner-company takes over the business of
the holding-company, viz., of exhibition of films, it cannot be gainsaid that
it will be convenient as well as advantageous to run the new business along
with the old. By no stretch of imagination it can be said that the new business
will destroy the old one. In these circumstances, therefore, the objection of
the Registrar that it would not be convenient or advantageous for the
petitioner-company to engage itself in new business along with the present
business should be rejected.
The third objection of the
Registrar that this will deprive the State of its revenue is entirely
misconceived and it is to be stated merely for rejecting it. Simply because the
petitioner-company could have resorted to an alternative course of action by
floating a new company it cannot deprive the petitioner-company if it can
legally do so to alter the objects to achieve the same purpose. I have not been
able to appreciate which are the other provisions of the Companies Act which
can be impediments in the way of the petitioner-company in getting sanction
from this court for the proposed alterations in their objects. The Registrar of
Companies has not pointed out any other provision of the Companies Act which
would be a bar to the grant of sanction prayed
for by the company.
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Petition
allowed and proposed alterations (save and except certain deleted sub-paras.) sanctioned
for insertion in the object clause 3.
[1967] 37 COMP. CAS. 331 (
HIGH COURT OF
New Asiatic Insurance Co Ltd., In re
H
R KHANNA, J.
C.D. NO. 2D OF 1965
APRIL
21 1965
JUDGMENT
This petition under
section 17 of the Companies Act (I of 1956)has been
filed on behalf of the New Asiatic Insurance Company Limited (hereinafter
called the "company") for confirmation of the alterations of the
memorandum of association of the company.
The petitioner
-company was registered on 21st November,1933, under
the Indian Companies Act,1913. Its registered office is in Connaught Circus,
(4) To undertake and execute any contracts for work involving the
supply or use of any machinery and to carry out ancillary or other works
comprised in such contracts.
(5) To carry on all or any of
the business of importers, exporters, merchants, ship-owners, charterers of
ships and transport, cartage and haulage contractors, garage proprietors,
owners and charterers of road vehicles, aircraft, tugs, barges and boats of
every description, lightermen and carriers of goods and passengers by road,
rail, water of air, carmen, cartage contractors and agents, forwarding,
transport and commission agents, customs agents, stevedores, wharfingers, cargo
superintendents, packers, haulers, warehousemen, storekeepers, electricians and
job masters.
(6) To carry on business as
proprietors of flats, and to let on lease or otherwise apartments therein, and
to provide for the tenants and occupiers thereof all or any of the conveniences
commonly provided to flats, suites and residential and business quarters.
(B)Sub-clause(p) be deleted and in its place, the following sub-clauses be
incorporated:_To carry on any other business, industry or trade whether
manufacturing commercial or otherwise that may seem to the company capable of
being conveniently carried on in connection with the above objects or
calculated, directly or indirectly, to enhance the value of or render
profitable any of the company's properties or rights or which it may be advisable
to undertake with a view to improving, rendering valuable, or turning to
account any property, real or persona, belonging to the company or in which the
company may be interested. To do all or any of the above things either as
principals, agents, trustees, contractors or otherwise and either by or through
agents, sub- contractors, trustees or otherwise, and either alone or in
conjunction with others and to do all such things as are incidental or
conducive to the attainment of the above objects.
(C) Consequent to such
alterations as aforesaid, the sub-clauses of clause 3 be
re-numbered suitably."
The background
for passing the above resolution, as given by the petitioner is that in the
year 1956 the life insurance business of the company was taken over by the
Central Government under the provisions of the Life Insurance (Emergency
Provisions) Act, 1956, and thereafter the company carried on general insurance,
investment, financing and other business. Due to various reasons, the earnings
from the general insurance business did not provide a satisfactory return. The
company ceased to accept any fresh insurance business with effect from 1st
January, 1961, and consequently, the company's registration under the Insurance
Act, 1938, was cancelled with effect from 1st December, 1961. The company,
however, continued to carry on its investment business, and its income for the
years 1961,1962 and 1963 consisted mainly of
dividends, interest and profits on the sale of investments. The directors and
shareholders of the company felt that better returns could be given to the
shareholders if some industrial or commercial activity is undertaken, and
therefore resolved to extent the business of the company as per resolutions
passed. It is stated that taking up industrial activity will be profitable to
the company and can be advantageously and conveniently combined with the
investment business and this would lead to a more economic and efficient
carrying on of the business of the company. The deposits of the company with
the Reserve Bank of
Notice of the
petition was given to the creditors , shareholders and
other persons interested in the company by publication in the Delhi Gazette,
Hindustan Times and Nav Bharat Times. Notice was also given to the Registrar of
Companies. No one apart from the Registrar of Companies has opposed the
petition. According to the Registrar , the company has
been doing no business after 1st December, 1961, except in investment of funds,
which was only ancillary to its main object and its income since 1961 consisted
mainly of dividends, interest and profits on the sale of investment. The
Registrar has further stated that the proposed object can neither be carried on
more economically or efficiently nor can the new objects be conveniently and
advantageously combined with the existing investment business. The substratum
of the company, it is stated, has gone and it is liable to be wound up.
Reference has also been made by the Registrar to a complaint dated 17th
November, 1964, from R.L.Rajoo, a shareholder of the company, protesting
against the proposed extension of the business.
At the hearing
of the petition Mr. Ved Vyas on behalf of the petitioner has stated that,
though seven new objects were mentioned in the special resolution reproduced
above, the petitioner does not press for the 7th object, which is mentioned in
clause (b) of paragraph 6 of the petition, and the petition should be deemed to
relate only to the first 6 clauses of that paragraph. An affidavit has also
been filed that R.L.Rajoo, shareholder, who made the complaint to the
Secretary, Company Law Board, has sold his shares by transfer deed dated 7th
December 1964. Registration thereof was sanctioned by the directors and as such
Rajoo ceased to have any interest in the company since then.
Section 17 of the Companies Act deals with the special resolution for
alteration of the memorandum of a company and its confirmation by the court. Sub-sections (I) and (2) of that section
read as under:
"(I) A company may, be
special resolution, after the provisions of its memorandum so as to change the
place of its registered office from one state to another, or with respect to
the objects of the company so far as may be required to enable it- (a) to carry
on its business more economically or more efficiently; (b) to attain its main
purpose by new or improved means; (c)to enlarge or change the local area of its
operations; (d) to carry on some business which under existing circumstances
may conveniently or advantageously be combined with the business of the
company; (e) to restrict or a abandon any of the objects specified in the
memorandum; (f) to sell or dispose of the whole, or any part, of the
undertaking, or of any of the undertakings, of the company; or (g) to
amalgamate with any other company or body of persons.
(2) The alteration shall not
take effect until, and except in so far as, it is confirmed by the court on
petition."
Mr. Ved Vyas
on behalf of the petitioner has stated that the proposed alterations fall
within the purview of clauses (a) and (d) of sub- section(I).
Before these clauses can be invoked, it has to be shown that the company is
carrying on an existing business. So far as this matter is concerned, the
averments made in the petition, which are supported by the affidavit of K.S.
Dhaddha,secretary of the company, show that the
company has continued to carry on its investment business, and its income for
the years 1961,1962 and 1963 consisted mainly of dividends, interest and
profits on sale of investments. The Registrar too admits that the company has
been carrying on the business of investment of funds, though, according to him,
this business was only ancillary to its main objects and the income of the
company since 1961 consisted mainly of dividends, profits and interest on sale
of investments. According to the statement of assets and liabilities of the
company as on 31st December 1963, the investment and cash deposits amounted to
Rs. 27,85,994 while loans on mortgage of properties
and shares amounted to Rs. 8,89,600.The report and accounts for the year 1963
have also been produced at the hearing of the petition and they contain more
details of investment. The profit and loss of the company for the year 1963
shows that gross interest and dividends amount to Rs. 2,17,152.
Mr. Ved Vyas has urged that the investment business carried on by the company
was an independent business and not an ancillary business. He has in this
connection referred to Standard General Assurance Co. Ltd., In re A.I.R. 1965
Cal.16, 23, where on similar facts the investment business of the company was
held to be independent business and not something ancillary to the insurance
business. It was observed:
“In my opinion
the applicant's investment cannot be regarded as investments made pursuant to
the provisions of the Insurance Act. There can be no doubt that the investment
business now carried on by the company is an independent investment business
and is in no way connected with the general insurance business carried on by
the applicant. The applicant was free to utilise the funds available to it any
manner it pleased and it had chosen to invest the funds in the securities
mentioned in the said balance sheet. Such investment, in my opinion, must be
treated as an independent investment business. The applicant therefore is at
present carrying on a substantial investment business."
The above
authority supports the petitioners, and looking to the nature and extent of
investments,I am of the view that the contention of
Mr. Ved Vyas that the investment business of the company was independent and
not ancillary to its main objects should be accepted.
In deciding as
to whether a company should be allowed to start additional business, I am of
the view that an application made in this behalf is not to be disallowed merely
because the new business is wholly different from and bears no relation to the
existing business of the company. All that is essential is that it should be
capable of being conveniently and advantageously combined with the existing
business and is not destructive of or inconsistent with the existing business
and this must be so under the existing circumstances and not under hypothetical
circumstances. In Ambala Electric Supply Co. Ltd., In re [1963]33 Comp. Cas.585,591-92, the company was registered in 1931 and had as its
main object the generation, accumulation and supply of electricity. In 1956, it
obtained bulk power from Bhakra Nangal Hudro Electric Grid, and, as a
consequence, its motors and power house ceased to be of any utility. The
company thereafter started a cold storage plant. When the licence of the
company for generation of power expired in July, 1962, the company passed a
special resolution in October, 1962 to establish cold storage and certain
allied businesses. The application was resisted by the Registrar who contended
that with the expiry of the licence of the company it had no existing business.
It was held that the company carried on cold storage business since January,
1956, and so it was not correct to say that the company had no existing
business. The additional business proposed by the company was held to be not
destructive of or inconsistent with the business already carried on and as such
the objection raised by the Registrar was repelled. Dealing with the scope of
section 17(I)(d), Capoor J. quoted with approval the following observations
made in Bhutoria Brothers(Private)Ltd., In re [1958]28 Comp. Cas.122.
"That
provision says that the memorandum may be altered with respect to the objects
of the company to enable it to carry on `some business'. The words `some
business' in that clause apparently must include business other than the
business which is already being carried on under the existing memorandum.
Therefore, the
addition of `some business' may be the addition of a business which is entirely
a new departure from the business already carried on. The only requirement of
the statute law in India is that such business must be one which can (I)
conveniently or advantageously be combined with the business of the company and
(2) that this must be so under the existing circumstances and not under
hypothetical circumstances. So long as these to limits are observed.,I should think that the shareholders and the management of
the company should be left free to add to or reduce their business by suitable
alterations in their memorandum."
In Modi
Spinning and Weaving Mills Co. Ltd., In re [1963]33 Comp. cas.
901. decided by Broome J., the relevant headnote reads
as under:
"The
objects clause of the memorandum of company permitted the company to
manufacture yarn and cloth, but it was actually carrying on the manufacture of
artificial silk cloth from yarn purchased in the market. The shareholders
unanimously passed a special resolution for adding to the objects clause of the
memorandum the production of industrial and power alcohol with the object of
producing acetate yarn for the manufacture of silk. It was held that the
Registrar had taken a too narrow view of the matter. The company was entitled
to pursue the plan for production of acetate yarn itself for the manufacture of
silk. Even otherwise, the new business was one which could be conveniently
carried on with the existing business, though it was different in nature, and
there was no reason for refusing to confirm the resolution for alteration of
the memorandum."
The following
observations of Lawrence J. in Parent Tyre Co. Limited, In re [1923] 2 Ch.222,228. were quoted with approval:
"It is
essentially a business proposition, whether an additional business can or
cannot be conveniently or advantageously carried on under existing
circumstances with the business of the company. The additional business of course , must not be destructive of or inconsistent with the
existing business: it must leave the existing business substantially what it
was before; but the additional business may be one which is different from the
original business and yet may well be capable of being conveniently and
advantageously combined with the business which is being carried on."
The above
observations were also referred to with approval in the case of Standard
General Assurance Co. Ltd., In re A.I.R.1965 Cal.16, which is an authority
practically on all fours. In the aforesaid case a company, which was previously
carrying on insurance business, passed a special resolution to carry on the business
as manufacturers of and dealers in chemicals, petro-chemicals drugs, essence,
acids etc.; to carry on the business of engineers, metallurgists, iron steel
and brass founders; to execute contracts for the supply of machinery' to carry
on business of importers, exporters; to render pecuniary or other assistance
for helping settlement of industrial or labour problem. The application under
section 17 of the Companies Act, filed on behalf of the company, after are
exhaustive review of the case-law, was allowed and the special resolution was
confirmed. In the present case I find that the material on the record shows
that the assets of the company exceed its liabilities by over Rs. 39 lakhs.
Satisfactory arrangements have been made with regard to settlement of all
pending liabilities of the company. The company is in good financial position
and has sufficient working capital. It would also appear from the material on
the record that the shareholders are of the view that better returns are likely
to be given to the shareholders if some industrial or commercial activity is
undertaken by the company. The new business suggested is not inconsistent with
or destructive of the previous business. It is also significant that the
special resolution was passed unanimously and none of the shareholders, who are
the persons directly concerned, has appeared to oppose the petition. In the
circumstances, I am of the view that the petitioner-company should be permitted
to alter its memorandum so that it may extend its business activity.
Mr. Ved Vyas
on behalf of the petitioner states that the petitioner company in the near
future proposes to carry on the business of engineers, metallurgists, textiles
and importers and exporters as mentioned in clauses(I), (2) and (5) of para 6
of the petition. The resolution in so far as it relates to the alterations
mentioned in clauses (I),(2) as well as (5) of para. 6 of the petition is confirmed. So far as the business mentioned in the other
clauses is concerned, as there is no prospect of its being started in the near
future, the question of granting confirmation of the resolution in respect of
that business does not arise for the time being. The application in respect of
the alterations mentioned in clauses (3),(4) and (6)
is, therefore, not accepted.
I may state
that the name of the company at present is New Asiatic Insurance Company
Limited. As the company has ceased to carry on insurance business, the use of
the word"insurance" in its name would appear to the incongruous. Mr.
Ved Vyas states that, in view of this incongruity, the petitioner-company has
already applied to the Central Government for change of name and has suggested
a number of names for approval. I also direct, as was ordered in the case of
Standard General Assurance Co. Ltd., In re [1963] 33 Comp. Cas.901 that this
order confirming the alterations would not take effect until the petitioner's
name is changed.
The petition
is allowed to the extent indicated above. In the circumstances of the case, the
parties are left to bear their own costs.
Petition
allowed.
[1964] 34COMP. CAS. 86 (ALL.)
HIGH COURT OF
Motilal Padmapat Sugar Mills Co. (Private) Ltd., In Re.
C.P.
No. 13 of 1963
SEPTEMBER
30, 1963
JUDGMENT
A private limited company known as Messers. Motilal Padampat Sugar Mills Company of
"To carry
on the trades and business of steel makers, re-rollers, foundry men, steel
fabricators (in all its branches and variations) and in particular as
manufacturers of steel hoops (hot and cold rolle), bars and rods, tool steel,
gate channels, steel castings, etc., for sale or for internal consumption, iron
founders, mechanical engineers, tool makers, brass founders, metal workers,
boiler makers, mill wrights, machinists smiths and to buy, sell, manufacture,
repair, convert, alter, let on hire and deal in plant, machinery, implements,
rolling stock, conveyances, and hardware of all kinds."
A resolution
recommending this amendment was passed unanimously at an extraordinary general
meting of the shareholders of the company held on February 12, 1963. Notice has
bene issued to the creditors of the company but none has come forward to file
any objection. The petition, however, is opposed by the Registrar of Companies
on various grounds, which I now proceed to deal with seriatim.
The basic
objection put forward by the Registrar is that the new business of
manufacturing steel goods is a totally new departure for the company, having
nothing in common with the existing business that is being carried on at
present. But as pointed out in the case of In re Patent Tyre Company Limited
the mere fact that the additional business proposed to be undertaken by a company
is a new departure is not fatal to a petition of this nature. The real question
to be decided is whether the additional business is one which may conveniently
or advantageously be combined with the existing business of the company. P. O.
Lawrence J. remarked :
"The
additional business, of course, must not be destructive of or inconsistent with
the existing business: it must leave the existing substantially what it was
before ; but the additional business may be one which is different from the
original business and yet may well be capable of being conveniently and
advantageously combined with the business which is being carried on. I think it
would be placing altogether a too narrow construction upon section 9, to hold
that, because the additional business involves a new departure which was not
contemplated by the original memorandum, therefore it does not fall within the
purview of the section."
In the present
instance I see no reason to hold that the new business of manufacturing steel
goods would be in any way inconsistent with or destructive of the existing
business of sugar manufacture, oil manufacture, etc.; and no circumstances has
been brought to my notice that would lead to the inference that these business
cannot be conveniently or advantageously combined together and run by a single
company.
It is
contended, however, on behalf of the Registrar that even if the proposed new
business is capable of being combined with the existing business, the amendment
in the objects clause of the articles of association should be strictly
confined to the particular line of new business which the company is about to
undertake. The position is that the company has been granted a licence for the
manufacture of steel castings only and the Government of India has refused to
grant any licence at present for the manufacture of thinner sections and
re-rolling billets. The Registrar, therefore, suggests that the articles of
association should be amended in such a way as to allow the company to
manufacture steel castings only ; and that amendments
permitting the manufacture of other kinds of steel goods should be applied for
later on as and when the licences for the manufacture of such goods are granted
by the Government. It seems to me, however, that the view taken by the Registrar
in this matter is too narrow and technical, and that no useful purpose would be
served by adopting the procedure proposed by him. The petitioning company
wishes to embark on the manufacture of steel goods of various kinds, and there
is no reason to think that it proposes to restrict itself to the particular
category, viz., steel castings, for which it has initially been granted a
licence. As soon as the factory for the manufacture of steel castings gets into
full production, I have no doubt that the company will take steps to start the
manufacture of other items of an allied nature ; and I do not see why the
company should be compelled to come to this court again and again for each such
item.
In certain
respects, however, I feel that the proposed additional clause is a trifle too
wide in its scope. The purpose of the amendment is to allow the company to
embark on the manufacture of steel goods ; and in this
context the reference to brass founders and metal workers scarcely seems
appropriate. I propose, therefore, to delete these two items. The word "er
cetera" coming after the words "steel castings" is also open to
objection on the score of vagueness and that too should be deleted.
The Registrar
suggests that as the fresh business which the company proposes to undertake is
an absolutely new departure having little affinity with the present business of
sugar and oil manufacture, it would be advisable to direct the company to
maintain separate accounts and prepare separate balance-sheets and profit and
loss account for the new business so that the shareholders may be in a position
to judge whether the venture has proved a success or not. Counsel for the
company states that he has no objection to preparing a separate profit and loss
account in respect of the new business for a limited number of years ; but he points out that the preparation of a separate
balance-sheet would be difficult, as it would not be possible to specify the
precise capital assets that should be treated as having been earmarked for the
new project. This objection appears to have some force and I accordingly
propose to direct the company to prepare only a separate profit and loss
account in respect of the new business and that too for a period of five years
only, starting from the year in which the new factory commences production.
The final
suggestion put forward on behalf of the Registrar is that certain clauses
relating to interpretation which appear in the existing articles of association
of the company should be deleted ; but it seems to me
that such action would be outside the scope of the present proceedings and I do
not propose to make any such change, while dealing with this petition.
The result is
that I confirm the amendment proposed by the petitioner in the memorandum of association,
with the exception of the word "er cetera" and the words "brass
founders, metal workers" appearing therein, which are to be deleted; and I
further impose the condition that the company shall, each year, in addition to
its general balance-sheet and profit and loss account, prepare a separate
profit and loss account in respect of the new business which is to be
undertaken in pursuance of the amendment, for five successive years starting
with the year in which the new factory commences production.
[1975] 45 COMP. CAS. 226
SABYASACHI MUKHARJI, J.
COMPANY PETITION NO. 369 OF 1973
(COMPANY APPLICATION NO. 276 OF 1973)
MAY 10, 1974
Sabyasachi
Mukharji, J.—This is an application under section 17 of the Companies
Act, 1956, for sanction of the alteration of the memorandum of association. The
company carried on mainly the business of colliery as the name itself suggests.
The colliery business has been taken over by the State as a result of
nationalisation. The company, therefore, proposes to venture into new fields.
The fields now proposed to be taken by the company are many and are entirely
new. The question is whether such alteration should be sanctioned by the court.
It has duly received the approval of the shareholders. Notice has been given to
the creditors and none is opposing this. The balance-sheets for the last two
years indicate that the financial position of the company is not unsound in the
sense that the assets are more than the liabilities and for the last two years
the company has been making profits. Only the Registrar of Companies is
opposing this application. In my opinion, the alteration should be sanctioned.
In this connection reliance may be placed on the decision of the Orissa High
Court in the case of Straw Products Ltd. v. Registrar of Companies
,
and also the decision of the Punjab and Haryana High Court in the case of
Industrial Cables (
Counsel
for the Registrar of Companies, however, drew my attention to the decision of
this court in In re Bharat Mining Corporation Ltd.,
where it was observed by P.B. Mukharji J., as
the learned judge then was, that it would be illogical to allow an alteration
of business whereby the company was permitted to do business activity which had
nothing to do with the business of the company and that would be misleading. It
is true that in a case like this normally such diversification should not be permitted
which would defeat the business already carried on by the company but in this
case the business that was carried on by the company previously cannot any
longer be carried on and that is not because of any inability of the company to
carry on the business but because of the nationalisation. It is true that the
original objects permitted other ventures but when a company is incorporated
various ventures are thought of but a company generally pursues those ventures
which are either profitable or feasible and, therefore, the very fact that the
company had other objects does not disentitle it to diversify its objects in
the peculiar facts and circumstances of this case. After all the company has
assets, its directors and shareholders want to carry on business, such business
activity would not be illegal or contrary to public policy and the attempt to
carry on the business does not appear to be motivated by any desire to defeat
the creditors. In this state of affairs if the shareholders of the company have
thought it fit to go in for new ventures and have complied with the provisions
of law, I see no objection under section 17 in allowing this alteration
subject, however, to the reasonable suggestion by counsel for the Registrar of
Companies for alteration by the company of its name appropriately. Furthermore,
it has to be borne in mind that the days of devotion to single purpose or
limited purposes both for institutions and men are gone. We are living in an
age of multipurpose institutions and projects, men and institutions must go in
for multifarious activities and ventures. Whether, however, that is a desirable
trend or not is another debate outside the realm of company jurisprudence.
Therefore, there will be an
order in terms of prayer (a) of the petition subject to the company's altering
its name appropriately with the new ventures. The company must pay to the
Registrar of Companies costs of this application.
[1967] 37 COMP. CAS. 563 (MAD)
T
RAMAPRASADA RAO, J.
APRIL
7, 1967
JUDGEMENT
The
petitioner, Rajemdra Industries (Private) Limited, is seeking for confirmation
of the alternation of the memorandum of association as accepted by the company
at its meetings held on the 24th of December,1966.
When the
application came up before me, I casually persued the various objects which are
sought to be introduced into the memorandum of association by reason of a
resolution of the company and confirmation of which is now sought for. I
directed notice to the Register of Companies and wanted a report to be
submitted by him whether the objects now sought to be introduced into the
memorandum are substanditally and totally different from the original objects
of the company and whether they are in any way ancillary or incidental to them.
The Registrar in his report dated 20th of March, 1967, states that in his
opinion there appears to be substantial changes in the main clauses of the
company and that the company is to diversify its activities and which, according
to him, were unrelated to the existing objects of the company. Inter alia, he
invited my attention to objects clauses 5,6,7,9,10 and
12 and states that these objects appear to change the very phase and substratum
of the company.
The company,
no doubt, was originally incorporated for the purpose of carrying on the
business of manufacture, purchase and sale of all metals and also to carry on
the business of manufacture of hardware materials of all kinds of metals. There
are of course various other objects to indicate that the primary intent of the
company when it incorporated itself was for the purchase and sale of articles
made out of tin, aluminimum, etc. It is now stated that, on account of the
present industrial advancement and technolgical development in all kinds of
business including that undertaken by the company, it is neither conductive to
the interest of the company nor its general body of shareholders to keep the
status quo without being alive to the vast industsrial development arount it. Originally
cans were manufactured out of tin sheets. Such tin sheets have become very
difficult of procurement and therefore the company intends to import certain
articles and raw materials in order to develop their original business.
Contemporaneous with this object, the company also wishes to manufacture and
deal in lathes, plaaning machines, etc., to manufacture, import, export and
deal in electric motors, etc., to carry on all or any of the business of
air-condictioning, agricultual, automobile, aviation, etc. On a first reading
of these objects which are now sought to be introduced by virtue of the
resolution of the company, they appear to be far away from the acrediated
objects on which the company rested at the time of its incorporation. But it
has to be remembered that while sanctioning a memorandum of a company, if the
business is substantially remining the same and if the changes, additions or
alterations asked for by the company are only steps in aid to improve its
efficiency, this court should not refrain from sanctioning such an application.
One other principle also which occurs to me is that the interest of the
shareholders is the primary criteria which has to be weighted and considered
before the objects of a company can be amended. . No doubt, a unanimous
resolution of the shareholders or a majority resolution thereof would not
furnish a sufficient indicia for alteration being
granted straightaway. But if the alteration is not intended to oppress any
section of the shareholders or deprive them of their legitimate rights and
expectations, then any request for such alternation ought not to be lightly
brushed aside.
In this case,
though, no doubt, the company is seeking for an alternation of its memorandum
so as to add, inter alia, objects 5, 6 and 7, etc., thereof, yet it does not
appear that such addition to the object would in any way be prejudcial or
destructive to or inconsistent with the main business of the company. What was
originally manufacture of tin cans is now sought to be
substituted by the manufacture of machinery or parts of machinery. This
additional business, in my opinion, is not destructive or inconsistent with the
main business, operations contemplated by the company. The company has stated
that it has excesss of assets over liabilities to the tune of Rs. l ,65,793. It, therefore, follows that they have no
creditors as such and by expanding their activities with the consent of the
shareholders it would not in any way prejudice the interests of the body of
creditors as well.
Mr.Nilakantan,
learned counsel for the petitioner, referred to me a decision in In re New
Insurance Co. Ltd. (1965) 2 Comp. L.L.24., wherein the question arose whether
under similar circumstances the memorandum of association can be altered. In
fact, in that case, the company was carrying on life insurance business. After
the life insurance was taken over by the Central Government, the company could
not profitably carry on its business and stoped the same. Therefore the company
resolved to alter the objects of the company so as to include businesses in
engineerng works, cotton and importing and exporting. Khanna J., on an
application to the court under section 17 of the Act for confirmation of the
alternation of the memorandum of association which was opposed, as in this case
only by the Registarar of Companies, held that the applications has to be
allowed. As observed by the learned judge, the only requirement of the statute
law in India while sanctioning an alteration of a memorandum appears to be that
the proposed business must be one which can (1) conveniently or advantageously
be combined with the business of the company, and (2) that this must be so
under the existing circumstances and not under hypothetical circumstances.
I am,
therefore, satisfied that this application is maintainable and accordingly
order prayer therein. The certified copy of this order as and when secured by
the applicant from this court shall be produced before the Register within
three months thereafter.
[1967] 37 COMP. CAS. 430 (
HIGH COURT OF
Bharat Mining Corporation Ltd., In re
P
B MUKHARJI, J.
COMPANY PETITION NO. 218 OF 1966
December
12, 1966
JUDGMENT
This is an
application to alter the memorandum of association of the company in terms of the
resolution set out in paragraph 6 of the petition passed at a general meeting.
The alterations relate to the objects clause.
The company is
the Bharat Mining Corporation Limited.The objects of this company in the
memorandum are set out mainly in article 3 and its 22 sub-clauses. What is now
intended to be done is to add new sub-clauses (23) to (34) after clause 3,
sub-clause (22), of the existing objects. The intended new clauses are as follows :-
"(23) To
enter into contracts with the Government and other persons for
:
(A)
Construction of buildings, walls, boundary walls, bridges, dams and
embankments.
(B) Levelling
of land, tanks, river beds and canals.
(24) To
construct buildings and houses and give them on lease or rent.
(25) To
construct buildings and houses and sell them.
(26) To do all
kinds of fabrication works of steel, aluminium, copper, zinc and alloys.
(27) To
purchase, sell and erect various types of machineries and their parts.
(28) To purchase, sell, acquire and otherwise deal in shares,
debentures and securities of other limited companies.
(29) To purchase and let on the hire commercial vehicles for road
transportation of goods and commodities.
(30) To
finance purchase of goods of third parties against mortgage of the goods purchased.
(31) To sell
goods on hire purchase system.
(32) To lend
money on interest with or without security.
(33) To build
hotels and restaurants run and manage them as owners.
(34) To buy sell land, buildings, hotels, restaurants and
business premises."
The fate of
this application depends on a proper application of section 17 of the Companies
Act, 1956. The learned counsel for the petitioner relies mainly on section
17(a), (b), and (d) of the Act. These statutory provisions state that a company
may be special resolution alter the provision of its memorandum with respect to
the objects of the company so far as may be required to enable it, (a) to carry
on its business more economically or more efficiently, (b) to attain its main
purpose by new or improved means, and (d) to carry on some business which,
under existing circumstances, may conveniently or advantageously he combined
with the business of the company. The question, therefore, in this application
is whether the proposed alterations satisfy the tests so laid down by these
statutory provisions.
Scanning and
analysing the proposed alteration, I have no doubt in my mind that they do not
satisfy the statutory requirements. I do not think that these alterations are
required to enable the company to carry on its business more economically or
more efficiently or that they are necessary to attain its main purpose by new
or improved means or that they come within the concept of "some business
which, under existing circumstances, may conveniently or advantageously be
combined with the business of the company." The business of the company as
its name implies and the memorandum and the objects indicate is mainly mining.
It is called a mining corporation; no doubt, it has other subsidiary and
ancillary powers as stated in the articles and in the memorandum. But they are
in essence associated objects and related purposes. Its main business is
mining.
The proposed
clauses 23, 24 and 25 in my view are unnecessary and illogical as being
covered, for all practical purposes, by existing clause 3(5) of the
memorandum.If these clauses 23, 24 and 25 are intended to be "new"
business, then certainly they do not satisfy the specific statutory standards
involved in the words "economically", "or more
efficiently", "to attain its main purpose by new or improved
means" or "which may conveniently or advantageously be combined with
the business of the company". "The business of the company" is
not really a business to deal independently with construction of buildings,
walls, bridges, dams and embankments, levelling of land, tanks, river beds and
canals or to construct buildings and houses and give them on lease or rent or
to construct buildings and houses and sell them independently (as contemplated
in proposed clauses 23 to 25) but all of them or any of them can be resorted to
in connection with the business of the company under clause 5 of the
memorandum. "The business of the company" is mining. These proposed
clauses, if introduced, will make it also a real estate company.
Again the
proposed clause (26) to do all kinds of fabrication works of steel, aluminium,
copper, zinc and alloys is already covered by clause 3(4)(a) of the existing
memorandum of association. Proposed clause (27) to purchase, sell and erect
various types of machinery and their part without qualification will convert
this company of a mining corporation into a machine company. So far as
machinery is required the company is already covered by clause 3(6) of the
existing memorandum. Proposed clause (28) is covered by existing clause 3(14)
of the memorandum. Proposed clause (29) is similarly covered by clause 3(4) (g)
of the existing memorandum. Proposed clause (30) is covered also by existing
clause 3(14) of the existing memorandum. Proposed clause (31) is to sell goods
on hire purchase system which is a different type of business altogether.
Proposed clause (32) is already covered by existing clause 3(20) of the
memorandum. Proposed clauses (33) and (34) relate to building hotels and
restaurants and doing business in them will be an activity which has nothing to
do with the business of the company.
In this view
of the matter, I do not think that this court should sanction the proposed
alterations of the objects. The principles are sufficiently well-settled by such
decisions of this court as In the matter of Bhutoria Brothers Private Limited
([1958] 28 Comp. Cas. 122; 61 C.W.N. 897.), In the matter of Indian Iron &
Steel Company Limited ([1957] 27 Comp. Cas 361; 61
C.W.N. 374.). and in the matter Standard General
Assurance Co.Ltd. AIR 1965 CAL. 16. It is unnecessary
for me to discuss here again those well-settled principles with the name of the
company as the Bharat Mining Corpn. Ltd., it will be not only illogical but
misleading to the world dealing with this company to introduce these
independent and separate businesses which cannot, by any means, be called
business, which, under the existing circumstances, may conveniently or
advantageously be combined with the business of the company as in section
17(1)(d) or that these new businesses are necessary to enable the company to
carry on its existing business more economically or more efficiently or to
attain its "main" purpose by new or improved means as in section
17(1)(a) or (b) of the Act.
The Registrar
of Joint Stock Companies has appeared through learned counsel to oppose this
application. No doubt the Registrar has not filed any affidavit-in-opposition
but I do not think any affidavit is necessary, for his opposition is based on
principles which I have discussed above and which arise on the existing
memorandum and the proposed changes or alterations.
For these
reasons, this application is dismissed. There will be no order as to costs.
[1970] 40
COMP. CAS. 458 (
HIGH COURT OF
v.
Hoolungooree Tea Co. Ltd.
A.N. RAY AND S.K. MUKHERJEA, JJ.
AUGUST 16, 1968
A.N.
Ray, J.—This appeal is against the judgment and order of Sen J.,
dated 10th June, 1968. The order was made on the notice of motion dated 25th
April, 1968, taken out by the plaintiff, inter alia, for an order of injunction
restraining the defendants and each one of them, their servants, agents and
assigns from holding the proposed extraordinary general meeting of the company
on April 29, 1968, and passing any resolution thereat pursuant to the purported
notice dated March 30, 1968, and the explanatory statement annexed thereto and
also injunction restraining the defendants and each one of them, their
servants, agents and assigns from holding any shareholders' meeting of the
company pursuant to any purported notice such as or similar to the said notice
dated March 30, 1968, and the purported explanatory statement annexed thereto,
and further injunction restraining the defendants from giving effect to or
acting upon any resolutions which may be passed in any such meeting, and
injunction restraining the defendants, their servants and agents from
committing any further violation of the provisions of section 342 of the
Companies Act, 1956, and from having the affairs of the defendant No. 1 managed
by any person or persons other than defendant No. 2.
The
defendant No. 1 is Hoolungooree Tea Co. Ltd. and the defendant No. 2 is Andrew
Yule and Co. Ltd. and the plaintiff-appellant is a shareholder in the
defendant, Hoolungooree Tea Company. The defendant No. 2, Andrew Yule and Co.
Ltd., is the managing agent of the said tea company. The appellant is a
registered shareholder of 300 ordinary shares of the defendant tea company. The
appellant alleges that through his friends and relatives he holds more than 10
per cent, shares of the tea company.
The
plaintiff instituted Suit No. 1009 of 1968 on 25th April, 1968, inter alia, for
a declaration that the notice dated 30th March, 1968, and the explanatory
statement annexed thereto are illegal, void and not binding against the
plaintiff and for an injunction restraining the defendant from holding any
extraordinary general meeting of the company on April 29, 1968, and passing any
resolution thereat pursuant to the purported notice dated 30th March, 1968, and
for other injunctions. The appellant's case in short is that the defendant,
Andrew Yule and Co. Ltd., managing agents, are alone entitled to manage the
affairs of the company. The plaintiff alleged that the defendant-company
mismanaged the sum of Rs. 23,10,000. The plaintiff
challenged the notice dated 30th March, 1968, whereby the extraordinary general
meeting of the company was called to be held on 29th April, 1968. The plaintiff
also alleges that on a perusal of the notice and the explanatory statement it
appears that the defendant No. 1 proposes to alter the memorandum and articles
of association and the same are sought to be altered in order to amalgamate the
defendant No. 1 with three other companies, viz., Basmatia Tea Co. Ltd.,
Murphulani Tea Co. Ltd. (Assam) and Rajgarh Tea Co. Ltd. The plaintiff alleges
that the said purported notice dated March 30, 1968, and the explanatory
statement annexed thereto are misleading, tricky, and do not furnish the
requisite or necessary information for consideration of the resolution. The
notice is also impeached to be ultra vires the Companies Act and the articles
of the company. The plaintiff also alleges that the managing agents were to
retire with effect from 1st April, 1968, but the notice dated 30th March, 1968,
is not signed by the managing agents and therefore the notice is illegal. It
was contended before the learned judge first that the notice of the meeting was
not valid as it was signed by the director, secondly, the explanatory statement
was said to be tricky and, thirdly, the notice was said to be mala fide. The
learned judge repelled all the contentions advanced.
Counsel
for the appellant contended that there was a prima facie case that the company
could not act on the basis of the notice which was challenged by the plaintiff
as illegal and ultra vires of the Companies Act and the memorandum of articles.
It was said that if there was a prima facie case, there should be an
injunction.
It
was contended by counsel for the appellant, first, that without a specific
power of amalgamation in the memorandum the company could not amalgamate with
any company. Counsel for the respondent on the other hand contended that the
company in the present case gave a notice that the company wanted now the bare
power to amalgamate. That is why a meeting was called. It was also said on
behalf of the respondent that the company would later on have to make the
necessary application for actual amalgamation. The notice impeached in the suit
was said by counsel for the respondent not to be anything more than a notice
for the proposed power of amalgamation. The notice also suggests that the
company sought the bare power to amalgamate in aid of subsequent actual
amalgamation with three other companies.
It
is not necessary on an interlocutory application to decide this question as to
whether a company can amalgamate with other companies without specific power in
the memorandum. The question is academic for the reason that the company seeks
first to have the power to amalgamate and the company will thereafter make the
necessary application for actual amalgamation.
Interesting
and elaborate arguments were made by counsel for both the parties as to various
types of amalgamation. The various provisions of the Companies Act and, in
particular, sections 391 to 396 and 494, were referred to by counsel for both
parties in aid of their rival contentions. Counsel for the appellant contended
that the provisions contained in section 17 of the Companies Act indicated that
if a company wanted to amalgamate with another company and if no such power was
found in the memorandum it would not be lawful for the company to amalgamate
without incorporating such power in the memorandum. Counsel for the respondent
on the other hand contended that the provisions contained in sections 391 to
396 and 494 of the Companies Act would indicate that amalgamation would be a
statutory right in certain cases and in other cases amalgamation would be
resorted to by the company on the strength of specific power in the memorandum.
For the purpose of the present appeal it need be only said that if a company by
virtue of its power in the memorandum desires to amalgamate with another
company without coming to a court of law such amalgamation would be valid and
there could be cases where a company desiring to amalgamate would have to come
to a court of law. The power to amalgamate may flow from the memorandum or it
may be acquired by resorting to the statute. Section 17 of the Companies Act
indicates that a company which desires to amalgamate with another company will
take necessary steps to come before a court for alteration of its memorandum in
aid of such amalgamation. The statute confers a right on a company to alter its
memorandum in aid of amalgamation with another company. The provisions
contained in sections 391 to 396 and 494 illustrate some instances of statutory
power of amalgamating a company with another company without any specific power
in the memorandum.
It
will again appear how a company under section 394 of the Companies Act may
apply to the court for sanctioning of a compromise between a company and any
such persons as are mentioned in section 391 of the Act and if it is shown to
the court that the compromise has been proposed for the purpose of or in
connection with any scheme for the reconstruction of any undertaking, the court
may either by the order sanctioning the compromise or arrangement or by a
subsequent order make provisions, inter alia, for all or any of the following
matters, namely :
(i) the transfer to the transferee company of the whole or part
of the undertaking;
(ii) continuation
by or against the transferee company of any legal proceedings pending by or
against any transferor company ;
(iii) the dissolution without winding up of any transferor
company.
It
was said that a company would not have in its memorandum as one of its objects
dissolution of the company. An order for dissolution of a company without
winding up is thus made by the court in sanctioning compromise or arrangement
which are forms of amalgamation. Reference may be made
to Buckley on the Companies Arts, 12th edition, page 592, where in a discussion
under section 287 of the English Companies Act, which corresponds to section
494 of the Companies Act, 1956, and section 213 of the Companies Act, 1913, and
section 208C of the Companies Act, 1913, as amended in 1930, it is stated that
a company cannot by clauses in its memorandum of association take power to effect
that which section 287 authorises upon terms other than those which section 287
imposes. The sale of some part of a company's assets may be but the sale of all
its undertaking and assets and the distribution of proceeds cannot be a
corporate object. Buckley, therefore, states that the latter cannot under a
clause for that purpose introduced into the memorandum be made without regard
to the provisions of section 287 of the English Act. In other words, the
requirements of section 287 of the English Act or section 494 of the Companies
Act are supreme and cannot be controlled by the memorandum.
In
order to amalgamate there has to be a scheme of amalgamation and it is to be
stated which company is to be amalgamated with which company and it is also to
be stated why an amalgamation is sought for. The company in the present case
has proposed a meeting to be held for a bare power of amalgamation. The company
has also made an application for alteration of the memorandum. The company will
afterwards make an application under section 391 of the Companies Act when the
company will have the actual scheme of amalgamation. The court will not
consider the resolution unless 3/4th of the majority of the company will pass
that resolution. There are provisions in the Companies Act for public
advertisement and notice to the Central Government and everything is subject to
sanction by the court. Therefore, it cannot be said that in such cases where a
company is required to obtain an order of court there could be any amalgamation
without an order of court. In the present case, counsel for the respondent
rightly contended that a bare power was being sought and if thereafter the
plaintiff or any shareholder would not approve of the scheme which the company
would propose there would be room for such protest. The company has not come
with any actual scheme of amalgamation at the present moment,
It
may be said that there are four methods for effecting reorganisation of a
company. One of the methods is to be found in section 391 following, a second
method is compulsory amalgamation by the Government under section 396, the
third method would be what is contemplated in section 494 of the Companies Act
and the fourth method is amalgamation without coming to court. In order to have
voluntary amalgamation without coming to court there must be power in the
memorandum for that purpose.
The
contention on behalf of the appellant was that without power in the memorandum
there could be no amalgamation. Counsel for the respondent on the other hand contended
that there could be amalgamation without coming to court if such a power
appeared in the memorandum itself. The other method would be to come before the
court whenever there would be an amalgamation. The provisions to which
reference has been made indicate that in all cases where a company desires to
amalgamate under an order of court necessary application is to be made to a
court. There are instances in the Companies Act of amalgamation by virtue of
power in the statute and sections 396 and 494 illustrate that statutory power
without recourse to power in the memorandum. In the present case, the company
started with a resolution asking for power to amalgamate. It also appears to be
a fact that the company has made an application for alteration of objects.
Counsel for the respondent company rightly contended that in view of the fact
that the company was only asking for a bare power of amalgamation in the
resolution and the company would later on come with the necessary application
before the court for amalgamation there was no scope for interlocutory relief
of injunction.
It
is not necessary to express any opinion on the rival contentions of the parties
as to whether the plaintiff's case is correct and as to whether the plaintiff is
entitled to an injunction in the suit. Suffice it for the purposes of the
present appeal to say that the company has asked only for a bare power to
amalgamate and that the company has also made the necessary application for
amendment of the memorandum of the company. The shareholders and all persons
affected by any proposed amalgamation will have sufficient opportunity of
meeting the case of actual amalgamation when the company will apply and the
court will issue notice to the shareholders as also to the other persons as
contemplated in the Companies Act.
The
other contention on behalf of the appellant was that the notice in the present
case, namely, the explanatory statement, was not adequate. It has been the
accepted view in various decisions starting from the decision in Henderson v.
Bank of Australasia,
as will appear also in the Bench decision in East India Commercial Co. Private
Ltd. v. Raymon Engineering Works Ltd.,
that the notice would have to be considered in the circumstances of each case
as to whether it is adequate and reasonable. One of the tests is whether notice
would be adequate or sufficient as far as an absent person is concerned.
Another test is how the meeting itself would understand the notice. In the
present case the notice stated that the company proposed to amalgamate with
other companies and the company gave the names and the company also issued
circulars giving information. Counsel for the appellant contended that the
notice in the present case did not indicate as to whether the amalgamation was
financially advisable or whether it was commercially proper. It was said that
the financial position of the companies should have been given as to enable the
shareholders to find out the necessity as well as the basis of amalgamation.
There again, it must be said that the explanatory statement that was given was
in aid of the resolution which wanted a bare power to amalgamate. When the
company would make the necessary scheme for amalgamation the company would have
to give proper and sufficient materials in order to enable the shareholders to
express their views. The entire scheme then would come before the court. The
court would scrutinise it and the statute recognises adequate safeguards as to
whether the scheme should be accepted. That stage has not yet arisen.
The
third contention on behalf of the appellant was that the explanatory notice was
not signed by the managing agents but was signed by a member of the board. It
was said, relying on the articles of the company, that there was management
vested in the board and by reason of articles 124, 125, 127 and 129 the
management of the whole affairs of the company was delegated to the managing
agents and the board could not issue any notice. Reliance was placed on the
decision in Haycroft Gold Reduction and Mining Co. case,
in support of the contention. It will appear in the present case that there is
no challenge as far as the notice is signed by the board. The notice appears to
be by order of the board. The notice is issued with the authority of the board.
Articles 66 and 67 of the company empower the board to call an extraordinary
general meeting. The board can call a meeting and sign the notice there for.
The managing agency agreement further says in clause 12 that the managing
agents are to work subject to the superintendence, control and directions of
the board. Article 137 and section 368 of the Companies Act also state that the
managing agents are subject to the superintendence, control and directions of
the board. It was said on behalf of the respondent that the issue of notice in
the present case was a ministerial act. In the present case, it appears, first,
that there is power of the board to issue notice, secondly, the managing agents
are subject to control, superintendence and directions of the board and,
thirdly, the notice informs the holding of the meeting and there was no violation of the statute and the managing agents did not
complain. Counsel for the respondent rightly contended, on the authority
of the decision in Browne v. La Trinidad
that if there was any irregularity it could be cured.
Some
arguments were advanced as to the distinction between individual rights on the
one hand, and corporate rights on the other with regard to the affairs of the
company. It is not necessary to decide that aspect of the case. They will be
decided in the suit.
The
present appeal raises the only question whether there should be an injunction
or not. The questions in suit are all left open to be decided at the trial. The
other question is whether there should be an interim injunction or not pending
the determination of the suit. As I have indicated, the matter which has been
kept in the forefront is that the company has asked for a bare power and there
is an application pending for alteration of the memorandum and thereafter the
company will take steps for amalgamation. There does not exist
any necessity for injunction. Counsel appearing on behalf of the appellant also
contended that the company proceeded mala fide in the present case. It was said
that a certain amount or that a sum of Rs. 23,10,000
was obtained by the company and that there has been mismanagement. It was also
said that the dividends were not declared. There is no allegation in the
petition about the depression of profits or that the amalgamation is not for
any real purpose but for an ulterior purpose. There is no averment that the
scheme is mala fide. There is no allegation that the directors represented
incorrect statement. It appears that one of the grounds in appeal is that the
scheme is mala fide but there is nothing in the pleading and there is no
allegation. The allegation that is made with regard to the mismanagement may be
relevant in other proceedings under the Act. Further, allegation of
mismanagement would not be relevant at this stage because the statute provides
sufficient safeguards on the application of the company before the court for
amalgamation. Sections 17, 391 and 394 of the Companies Act are statutory
safeguards. The court will investigate the matters and if relevant the court
will express its opinion on the scheme. The statute, particularly sections 17,
391 and 394, contemplate notice to the Registrar in one case and notice to the
Central Government in the other case.
For
these reasons I am of opinion that the learned judge was correct in his order.
The judgment is affirmed. The appeal is dismissed. Costs of the appeal will be
costs in the cause. Certified for two counsel. Interim
order is vacated.
S.
K. MUKHERJEA J.— I agree.
Appeal
dismissed.
[1959] 29 COMP. CAS. 157 (AP)
HIGH COURT OF ANDHRA PRADESH
In Re Commercial And Industrial Bank Ltd., In re.
MANOHAR
PERSHAD, J.
ORIGINAL PETITION NO. 14 OF 1958
AUGUST
1, 1958
MANOHAR
PERSHAD, J. - This is a
petition on behalf of the Commercial and Industrial Bank Ltd., Hyderabad, under
section 17(2) of the Indian Companies Act seeking court's confirmation of the alteration
of the memorandum of association of the company effected by two special
resolutions of the company unanimously passed at an extraordinary general
meeting of the company held on 9th November, 1947.
The first
special resolution suns as follows :
"This
extraordinary general meeting of the shareholders of the company resolves that
the objects clause of the company as set out in clause III of its memorandum of
association be and is hereby altered as under :
1. (a) Delete the
existing sub-clause 1 and in its place insert the following :
'To acquire
by purchase, lease, mortgage, exchange, hire-purchase or otherwise, land,
buildings and hereditaments of any tenure or description, plantations, any
estate or interest therein, mills, factories, plant, machinery, apparatus,
appliances, works, vessels, boats, barges, launches, lorries, cars, wagon
carts, stock-in-trade, patents, inventions, trade marks, copyrights, rights,
licences, concessions and privileges of all kinds and movable and immovable
properties of all descriptions and either to retain the same or dispose of or
otherwise deal with them or turn them into account as may seem expedient.'
(b)
In sub-clause 2
(i) Omit the words and
expression 'the granting and issuing of letters of credit, travelers cheques
and circular notes' appearing after the words and expression 'whether
transferable, negotiable or not.'
(ii) Omit the words and expression 'the buying and selling of foreign
exchange including foreign bank notes' appearing after the words and expression
'dealing in bullion and specie.'
(iii) Omit the words and expression 'money and' appearing after the
words and expression 'the collecting and transmitting of' and before the word
'security.'
(c) In sub-clause 3 for the
words and expression 'other than' appearing after the words and expression 'the
carrying on of agency business of any description' and before the words and
expression 'the business of managing agent' substitute the work 'including.'
(d) For the existing sub-clause 18, substitute
the following :
'To carry on
any other activities which may seem to the company capable of being
conveniently carried on in connection with any of the above or calculated
directly or indirectly to enhance the value of or render profitable any of the
company's property or rights; to do all or any of the above things either as
principals, agents, trustees, contractors or otherwise, and either alone or in
conjunction with others and either by or through agents, sub-contractors,
trustees or otherwise to do all such things as are incidental or conducive to
the attainment of the above objects.'
(e) In sub-clause 19
(i) After the words and
expression, 'and it is hereby declared that the word "company" in
this clause' add the words and expression 'when applied otherwise than to this
company.'
(ii) For the words and expression 'the territories of His Exalted
Highness the Nizam' appearing after the words and expression 'whether domiciled
in' and before the words 'elsewhere' substitute the word '
The second
resolution reads thus :
"Resolved
that the memorandum of association of the company be and is hereby altered by
substituting the word 'company' for the word 'bank' wherever it occurs in the
memorandum."
It is for
these two special resolutions of the company that the petitioner company wants
the confirmation of this court. Notice of this petition was affixed on the
notice board and on the premises of the company and was directed to be issued
to the Registrar, Joint Stock Companies, with a further direction that a copy
of the same be published in the Deccan Chronicle and the Andhra Janata. In
paragraph 10 of the petition, the petitioner company has stated that the
creditors of the company three in number, viz., Mrs. Kamalakumari Tayal, Indera
Kumari Jai Narayan and Mrs. Shanta Kumari Gupta, have signified their assent to
the proposed changes. In sub-clause (2), the petitioner company has given the
reasons and circumstances which led the company to pass the resolutions to
alter the memorandum of association. The reasons and circumstances mentioned are :
(a) Though the company worked as
a successful banking concern for over 12 years, it had to discontinue the
business of banking, much against its will, owing to the refusal of the Reserve
Bank of
(b) The company had already
incorporated in its memorandum even at the time of incorporation other lines of
business and had experience in these lines though its principal business was
banking;
(c) The
financial position of the company is satisfactory and its management competent;
(d) All the members, directors, creditors and prominent customers were
eager that the company should continue to function and engage in other lines of
business with such modifications, and amplifications as may be found necessary;
(e) The
Central Government agreed to consider according its sanction to the functioning
of the company under the name of "The Commercial and Industrial Finance
Ltd." after the sanction of the court was obtained for the alteration of
the memorandum.
In sub-clause
(f), the petitioner company has also stated that the proposed future plans of
the company are in full conformity with and a continuation of the existing
objects. The Registrar, Joint Stock Companies, through his letter no. 614 dated
11th March, 1958, has intimated this court that he does not propose to oppose
the petition. One N. S. Belurgikar alleging himself to be a creditor of the
company has objected to the said resolutions being confirmed by this court. In
paragraphs 1 and 2 of the first affidavit dated April 10, 1958, filed on his
behalf, he has stated that the petitioner company with whom he was serving as a
clerk has to pay his salary amounting to Rs. 95 and Rs. 615 due to him towards
provident fund. In other words, through this affidavit he claims that the
petitioner company has to pay him Rs. 710. By the second affidavit filed on his
behalf Shri N. S. Belurgikar claims a sum of Rs. 1806-10-6 as due from the
petitioner company. The petitioner company while admitting that shri N.S.
Belurgikar was in its service till 27th September, 1955, as a clerk has denied
that any amount was payable to him.
Under
sub-clause (3) of section 17, it is necessary that this court must be satisfied
before confirming the proposed alteration that sufficient notice has been given
to every holder of the debentures of the company and to every person or class
of persons whose interests are affected by the alteration. As stated earlier,
in para. 10 of the affidavit, the petitioner company has stated that the assent
of the three creditors has been obtained on the proposed alteration. In other
words, the petitioner company does not admit that there is any other creditor.
In paragraph 13 there is a mention that there are no
debenture holders; nor has any debenture holder come forward to oppose this
petition. The objector who alleges himself to be the creditor also has not
stated that there is any debenture-holder. Therefore, the only person that
objects is Shri N. S. Belurgikar. The petitioner company denies that any amount
is due to him or that he is a creditor. It is stated before me that this very
matter is before the Industrial Tribunal and until that matter is decided, it
cannot be said that the objector is entitled to any amount. It is strenuously
urged on behalf of the petitioner company that the objector has to locus standi
under section 17(2) of the Companies Act to object to the confirmation of the
said resolutions. On behalf of the objector, it is contended that he was in the
service of the company and the company in a previous writ proceeding has
admitted that Rs. 315 was due and payable to the objector and that alone, he
urges, is sufficient to give him locus standi to object to the proposed
resolutions being confirmed. It is further urged on behalf of the petitioner
company that even if it is assumed that the respondent is a creditor of the
petitioner company, he cannot object to the proposed amendment of the
memorandum of association as he is only interested in his claim and if this
court is satisfied that his claim has been secured he cannot raise any
objection. In this connection, the learned counsel stated before me that if the
court requires, the petitioner company was prepared to give security to the
extent of the amount claimed by the objector. Shri N. Narasimha Iyengar,
learned counsel for the petitioner, relying on section 45 of the Banking
Companies Act, 1949, contends that the petitioner company is not entitled to
move this court under section 17(2) of the Companies Act, unless the proposed
resolution is certified by the Reserve Bank. In other words, it is contended
that section 45 of the Banking Companies Act controls section 17(2) of the
Companies Act. Shri Shastri, learned counsel for the petitioner, on the other
hand contends that section 45 of the Banking Companies Act does not control
section 17(2). He further contends that section 45 only applies to a compromise
or arrangement and as the said resolutions passed by the shareholders do not come
under any of those two heads there is no question of the applicability of
section 45 of the said Act. I agree with the contention of the learned counsel
for the objector, Shri N. Narasimha Iyengar, that section 45 of the Banking
Companies Act controls section 17(2) of the Companies Act. But I am doubtful
whether the resolutions passed by the shareholders would amount to a compromise
or arrangement. It is only in the case of a compromise or arrangement, that it
has to be certified by the Reserve Bank under section 45 of the Banking
Companies Act. Even assuming that the said resolutions amount to an
arrangement, it is not for the creditor to dictate or direct as to how the
petitioner company should conduct its business. It is, I may point out, a
matter which the shareholders of the company have to decide and when the
shareholders of the company after considering the pros and cons of the matter
have agreed that the proposed amendment should be made in the memorandum of
association, I do not see how the creditor can object to it. The creditor is
only concerned with his money, and when the petitioner company is ready to give
security for the said amount there is no reason why I should not confirm the
said resolutions. If the petitioner company furnishes security to the extent of
Rs. 1,800 within a fortnight, to the satisfaction of the Registrar, High Court,
being the amount claimed by the objector, the two special resolutions of the
company unanimously passed at an extraordinary general meeting held on 9th November,
1957, are confirmed, and the petitioner company is permitted to make the
necessary alteration in the memorandum of association.
[1974] 44 COMP. CAS. 477 (ORISSA)
HIGH COURT OF ORISSA
Samantaraj
Films (P.) Ltd., In re
B. K. PATRA, J.
COMPANY
ACT CASE NO. 11 OF 1971
DECEMBER 4, 1973
Bijan Ray for the
petitioner.
Patra, J.—This is an application under section 17 of
the Companies Act, 1956 (hereinafter referred to as "the Act"), by
Samantaraj Films, Private Ltd. (hereinafter referred to as "the
company"), registered on the 28th January, 1969, under the Act as a
company limited by shares, for confirming the alterations of its memorandum of
association. The registered office of the company is situated at Rajabagicha,
"3-B
(26) To give any donations or grant for any religious,
educational, charitable or any other social purposes or for the benefit of
humanity or section thereof".
The special
resolution was filed with the Registrar of Companies in accordance with section
192 of the Act. The Registrar pointed out that to be effective the necessary
amendment of the memorandum of association should be made in accordance with
section 17 of the Act. It is, therefore, prayed that the alterations in the
memorandum of association sought to be effected by the special resolution set
out above be confirmed.
Notice of
this petition was duly published in the Orissa Gazette, in the Samaj and the
Hindustan Standard dated June 23, 1972, May 18, 1972, and 1st June, 1972,
respectively. There has been no opposition to the petition. Notice of this petition
was also served on the Registrar of Companies, Orissa, who has intimated in his
letter No. STA/517/72-623 dated June 21, 1972, that he
does not oppose the petition.
The
circumstances and conditions under which the court will confirm any proposed
alteration in the memorandum of association of a company are dealt with
elaborately by me in Straw Products Ltd. v. Registrar of Companies and it is unnecessary to re-state the
principles here. If the alteration to be made in the memorandum of association
is within the ambit of the company's power under section 17(1) of the Act and
does not prejudice any of the interests which the court is required to
safeguard by section 17(3), the court has no power under section 17(2) to
refuse to confirm the alteration. It is true that any alteration in the
memorandum of association should be to achieve one or more of the purposes in
clauses (a) to (g) of sub-section (1) of section 17 of the Act. Whether the
alterations now sought to be made would achieve one or other of the purposes
referred to above is essentially a business proposition and when the
shareholders of the company are of opinion that by effecting the alteration proposed
any of the objectives above mentioned would be achieved that opinion is
entitled to a great weight. It is noteworthy that in the present case in spite
of due publication of the application nobody has come forward to oppose the
alteration. There is inherently nothing wrong in giving donation or grants from
out of the profits of the company for any religious, educational, charitable or
any other social purpose or for the benefit of humanity. When
donation to political parties from out of the funds of the company is
considered unobjectionable as has been held in In re Indian Iron and Steel Co.
Ltd.
and In re Natesar Spinning & Weaving Mills P. Ltd.
I see no reason why the alteration proposed in this case should not be
confirmed.
In the result, I would allow this
application and confirm the alterations proposed by the company in its special
resolution dated 10th December, 1971, quoted above. The company shall bear its
own costs of this application.
[1968] 38 COMP. CAS. 313 (BOM)
High Court of
Indo-Pharma
Pharmaceutical Works Pvt. Ltd., In Re
VIMADALAL, J.
SEPTEMBER 12, 1967
Nadar A. Mody for the Petitioner.
Mr.
Mody has relied on Jayantilal Ranchchoddas Koticha v. Tata Iron and Steel Co.
Ltd. in support of this petition. Confirmation of the alteration
of the objects specified in the memorandum is a discretionary order, as Chagla
C.J. has observed in the said decision itself, even if the conditions laid down
in section 17 of the Companies Act are satisfied. That discretion is, no doubt,
a judicial discretion, but it has to be exercised on the facts of each case,
and the exercise of it is not a matter that can be governed by judicial
decisions. Though it is primarily for the company to decide what is for its
good and whether the alteration sought to be effected will enable it to carry
on its business more efficiently within the terms of section 17(1) (a), the
court may, in exercising its discretion, have regard to considerations of
business morality or national interests. In my opinion, however, those
considerations should not prevent me from sanctioning the alteration of the
objects in the present case, which is a case
of a private company in the nature of a small family concern or a quasi
partnership.
Having regard to that fact, I make the petition
absolute in terms of prayer (a).
[1961] 31 COMP. CAS. 287 (
v.
Registrar of
Companies
LAHIRI, CJ.
AND BOSE, J
ORIGINAL ORDER NO. 267 OF 1959
SEPTEMBER 7, 1960
Bose, J. - This is an appeal from an order of P.B.
MUKHARJI, J., dated June 15,1959, dismissing an
application for confirmation of certain alterations in the objects clauses of
the memorandum of association of a company known as Mahaluxmi Bank Ltd.
The appellant
company was incorporated under the Indian Companies Act in 1910 as a company
limited by shares to carry on, inter alia, the business of banking. On February
27,1950 by an order made by this court a scheme of
arrangement between the company and its creditors was sanctioned and by the
said order the company was prohibited from receiving further deposits or to
function as a bank until further orders from the Reserve Bank of
“And it is further
ordered that the said company shall not be entitled to receive further deposits
or to function as a bank until the Reserve Bank of
By a letter
dated August 20,1953, the company applied to the
Reserve Bank of
(1) pass
a resolution declaring in unequivocal terms its intentions to cease carrying on
the business of banking;
(2) alter the memorandum of
association so as to delete therefrom such clauses as enable it to transact the
business of banking; and
(3) change its
name so as to conform to section 7 of the Banking Companies Act, 1949.
In pursuance
of these directions of the Reserve Bank of India the company convened two
separate meetings of the shareholders and creditors on June 28,1954, and June 29,1954 respectively to consider the
question of conversion of the company into a non-banking company and at both
these meetings it was unanimously resolved that the name of the company be
changed to Mahaluxmi Loan and Trading Company Ltd. and the objects clauses in
the memorandum of association be altered suitably. Thereafter by a special
resolution of the company passed at an extraordinary general meeting of the
company held on August 14,1954, it was resolved that
the objects of the company be altered by abandoning the objects clauses
relating to banking and to expend the scope of its objects with a view to carry
on other non-banking business which under existing situation may conveniently
and advantageously be taken up and carried on with its existing non banking
business. On September 7,1954, the company made an
application to this court for confirmation of the alteration of its objects as
passed by the special resolution dated August 14,1954, and upon presentation of
such application directions were given for proper advertisements and for
service of notice on the Reserve Bank of
“1. That the objects clauses in the memorandum of association of
the company be and are hereby altered and/or modified as follows:
A. Sub-clauses (b), (g),(h),(k),(m)
and (o) of clause 3 be deleted.
B. The following be added in clause 3 as
sub-clause (b),(c)(d) and (e) :
(b)To
borrow or to take deposit of money on interest or otherwise and either with or
without security from any person or persons, local authorities, Government and
Defence Loan and to deposit or lend any such money or other moneys of the
company either with or without security or otherwise as the company either with
or without security or otherwise as the company deem expedient. To raise money
by issuing debentures charged upon all or any of the company’s property both
present and future and to purchase redeem or pay off any such securities.
(c) To carry on the business of lending or advancing of money either
with or without security and to discount, buy sell deal in bills of exchange,
hundis, promissory notes, shares of joint stock companies and other
transferable instruments. To buy sell or otherwise deal in billions, jewels,
Government promissory notes, Municipal and Port Trust debentures, War Bonds,
Defence Certificates, Post Office Cash Certificates and like securities.”
It is not
necessary to set out the other sub-clauses of clause B.
“D. The word
‘bank’ be deleted and the word ‘company’ be inserted in its place wherever it
occurs in clause 3 except in the further line of sub- clause (c) of clause 3
and the word ‘banking’ in sub-clause (1) be deleted and in its place the word
‘similar’ be inserted. The word ‘other’ in the fourth line of sub-clause (c) be deleted.
E. That the
name of the company be changed to Mahaluxmi Loan and Trading Co. Ltd.’”
On March 25,1955, the company applied to the Central Government for
approval of the change of the company’s name as Mahaluxmi Loan and Trading Co.
Ltd. This step was obviously taken in view of the provisions of section 11(4)
of the Indian Companies Act, 1913, which provides that “any company may by
special resolution and subject to the approval of the Central Government
signified in writing change its name”, and which corresponds to section 21 of
the Indian Companies Act of 1956. The Central Government by its letter dated
December 13,1958 suggested that sub-clauses 3(b), and 3(c) of the objects
clauses should be suitably altered as to eschew the business of banking and to
apply thereafter for change of its name. The relevant portion of the letter
dated December 13,1958 may be set out here under :
“From
Shri R.K. Ganguly, I.A. & A.S.,
Under-Secretary to the Government of
To M/s. Mahaluxmi Bank Ltd., 135,
Subject : -
Change of name under section 21 of the Companies Act, 1956.
Sirs,
In
continuation of this Department letter of even number dated the 31st July,
1958, I am directed to stay that it is observed that the objects clauses of
your revised memorandum, particularly sub-clauses 3(b) and 3(c), permit the
company to carry on the business of banking as defined in section 5(1)(b) of the Banking Companies Act, 1949. I am, therefore, to
advise you to have the provisions of the said subclasses suitably altered so as
to eschew the business of banking and thereafter apply afresh to this
Department for change of name under section 21 of the Companies Act, 1956. A
certified copy of the order of the court under section 17(2) of the Act
confirming the alterations should be forwarded to this Department along with
the fresh application.
I may add that
with a view to eschewing the business of banking the company will be required
either to delete the provisions in its memorandum authorising it to accept
deposits from the public or those relating to the lending or advancing of money
to the public.
Yours
faithfully,
Sd/. R.K.
Ganguly,
Under-Secretary to the Government of
It appears
that for the purpose of carrying out these directions contained in the letter
the company passed a special resolution at an extraordinary general meeting of
the company held on March 26,1959, and the resolution
was as follows :
“Resolved that
the words ‘or to take deposit of money’ be deleted and the words ‘for the
business of the company’ be inserted after the words ‘to borrow’ and the words
‘and Defence Loan and to deposit or lend and such money or other moneys of the
company either with or without security or otherwise as the company deem
expedient’ after the word ‘Government’ in clause 3(b) of the memorandum of
association of the company be deleted.”
Resolved
further that clause 3(c) be deleted and the following be inserted in its place :
“To lend money
to such person or persons or firms and at such terms as may seem expedient and
in particular to customers or to other persons having dealings with the company
and to guarantee performance of contracts of members and/or persons having
dealings with the company.”
The result was
that the alterations,therefore, read as follows :
“3(b) To borrow on interest or otherwise and either with or without
security from any person or persons, local authorities, Government
. To raise money by issuing debentures charged upon all or any of the
company’s property both present and future and to purchase, redeem or pay off
any such securities.”
3 (c) As stated above.
After this an
application was made to this court for sanction of the special resolution
effecting the said alterations. The court directed certain advertisements to
issue and also directed service of the usual notices as required by section 17
of the Indian Companies Act, 1956. The Registrar of Joint Stock Companies filed
an affidavit-in opposition and at the hearing opposed the application but no
creditor or shareholder of the company opposed the application. P.B. MUKHERJEI,
J., before whom the application was heard, gave effect to the contentions
raised by the Registrar and dismissed, the application. In dismissing the
application the learned judge made, inter alia, the following observations in
his judgment:
“At the outset
it must be said that it is a curious application. If the object is ‘to lend
money to such person or persons or firms and at such term as may seem
expedient’, then it may amount to some kind of a banking
in disguise. It is quite true that under the Banking Companies Act, banking is
defined to mean the acceptance, ‘for the purpose of landing or investment of
deposits of money from the public, repayable on demand or otherwise, and
withdrawable by cheque, draft, order or otherwise.’
With a little clever manipulation, the petitioner might go on doing the banking
business under the proposed amendment although by allowing such amendment it
will put on the garb of a non-banking company.”
It has been
argued that these observations of the learned judge are due to a misconception
of the true nature and character of a banking business. Reliance is placed by
the learned counsel for the appellant company on the definition of the word
“banking” as given in section 5(1)(b) of the Banking
Companies Act,1949, which is as follows :
“ ‘Banking’ means
the accepting, for the purpose of lending or investment, of deposits of money
from the public, repayable on demand or otherwise, and withdraw able by cheque,
draft, order or otherwise.”
Now this
definition makes it clear that receiving many on deposit from customers and
honoring their cheques is the essential characteristic of banking. The money
deposited by the customers can be utilised by the banker for lending it or for
investing it but the bank also undertakes the obligation to repay the deposit
on demand or otherwise and the mode by which the withdrawal of the deposit can
be effected is by the issue of cheques, drafts, orders or otherwise, that is,
by like methods.
In Hart’s Law
of Banking, a banker or bank is defined as one who, in the ordinary course of
his business, receives money which he pays by honoring the cheques of persons
from or on whose account he receives it. Sir John Pages (see Pages, fifth
edition, page 5 - Rep.) in his book on Banking has pointed out that “no person
or body, corporate or otherwise, can be a banker who does not (1) take deposit
accounts, (2) take current accounts, (3) issue and pay cheques, and (4) collect
cheques crossed and uncrossed for his customers.” Sheldon in his book on the
Practice and Law of Banking (seventh edition, at page 183) formulates the
following definition of a “banker”.
“A person
cannot claim to be carrying on the business of banking unless he receives money
or instruments representing money on current account, honour cheques drawn
thereon, and collects the process of cheques which his customers place into his
hands for collection.”
In the case of
Botomgate Industrial Co-operative Society, In re, SMITH, J., defines the
business of “bankers” thus :
“The principal
part of the business of a banker is receiving money on deposit, allowing the
same to be drawn against as and when the depositor desires, and paying interest
on the amounts standing on deposit.”
Then section
6(1) of the Banking Companies Act, 1949, provides that in addition to the
business of banking, a banking company may engage in nay one or more of the
different kinds of business specified in the various sub-clauses of sub-section
(1) of section 6. This indicates that the main or real business of a banking
company is as stated in section 5(1)(b) of the Act,
but banking companies usually carry on and are permitted to carry on other
kinds of business which are ancillary or incidental to the main business.
Sub-section (2) of section 6 lays down that no banking
company shall engage in any form of business other than those referred to in
sub- section (1). So the banking company is expressly prohibited from carrying
on any kind of incidental or allied business other than those enumerated in
sub-clauses (a) to (o) of sub-section (1) of section 6 of the Act. Thus it is
abundantly clear that the essence of banking is the relationship which is
brought into existence at the time of the deposit; that is the core of banking.
It is true that the business of banking covers every possible phase or
combination of deposit, custody, investment loan exchange issue and
transmission of money, creation and transfer of credit and other kindred
activities but if the essential characteristic of banking, namely, the power to
receive deposits from the public which are repayable in the manner indicated in
section 5(1)(b) of the Banking Companies Act is absent and merely the power of
granting loans is retained and exercised, that in my view does not make the
company a banking company. Lending of money may be one phase of a banking
business but it is not the main phase or the distinguishing phase. In the case of
Bank of Commerce Ltd. v. Kunja Behari Kar it was argued before the Federal
Court that the Bengal Money-lenders’ Act, 1940, was a legislation which feel
within the item of banking in entries Nos. 33 and 38 of List 1 of Schedule VII
of the Government of India Act, 1935, inasmuch as lending money to customers or
advancing money on promissory notes is a principal part of the banking business
and the case of Tennatn v. Union Bank of Canada was referred to, but the
Federal Court did not accept the contention. It was pointed out that money-
lending by a bank qua bank might make such money-lending part of a banking
business but not otherwise (per SPEND, C.J., at page 389).
Moreover, when
the principal clauses of the memorandum relating to the carrying on of the banking
business have already been deleted by an order of this court dated January 25,1955, and this order has become conclusive upon
registration under section 18(1) of the Indian Companies Act, one finds it
difficult to follow how the petitioner company can transact banking business or
function as a bank by clever manipulation or in disguise. If the bank does any
transaction of banking, such act would be ultra vires the company and illegal.
Reference may be made in this connection to the case of Birkbeck Permanent
Benefit Building Society, In re. In this case a building society was formed
under the Building Societies Act,1936, in the year
1851 and it was never registered under the Building Societies Act,1936, in the
year 1851 and it was never registered under the Building Societies Act, 1874.
Its shares were divided into two classes - A and B shares. Rule 35 empowered
its directors to borrow to an unlimited extent and rule 97 provided for the
formation of a management and contingent fund and that the expenses of
management, interest and bonus on A shares and any losses that might be
incurred by the society should be defrayed out of that fund and the deficiency
(if any) should be borne by the holders of B shares only in certain
proportions. From its inception the society, in addition to the ordinary
business of a building society received money on deposit from its shareholders
and the public generally, and this branch of its business grew into a large
concern, known as the Birkbeck Bank, which carried on the business of banking
in all its branches. It was held that rule 35 was not ultra vires, for that the
power to borrow must be construed as limited to borrowing for the proper
objects of the society but that the banking business was ultra vires and that
the depositors and no legal right to recover their money. At page 196, NEVILLE,
J., made the following observations :
“Upon the
slender legal foundation of this borrowing power, however, was reared the huge
structure of the Birkbeck bank, and the question arises as to whether the
carrying on of this bank was an object of the building society within the
statute 6 & 7 Will. 4 and its rules. I have to
consider whether the business of a bank if one of the objects of a building
society, and I think there can be only one answer to that question - that it is
not. It is said that the business of a bank is to borrow money from its
customers, so that a society having an unlimited power to borrow, accompanied
by a power to invest surplus funds, has all the powers necessary for carrying
on a banking business. It appears to me, however, that borrowing and investing
are but two branches of a banking business, and that a building society
conducting a banking business in all its branches, including the discounting of
bills, is conducting a business quite foreign to the business of a building
society. Here the borrowing was on a scale altogether in excess of the
requirement of the society and for that reason alone ultra vires of the
directors.”
FLETCHER
MOULTON, L.J., at page 210 in dealing with this aspect of the matter observed;
“It is evident
that a business of this kind was ultra vires of the society. It made it
something other than a benefit building society, that is to say, other than
that which it was permitted to be by the ‘Act under which it was formed. It was
pressed upon us in the very able argument of Mr. Bucfkmaster on be4half of the
appellants that inasmuch as there was power of borrowing, each acceptance of a
deposit was prima facie within the powers of the society and that it was not
for the lender to see that the money was not misapplied. I agree with the view
that this would be the case if isolated loans were taken by a society with
power to borrow, but in my opinion the acts of the society had brought it
entirely beyond that stage, and for good or evil it must be taken to have been
carrying on business as a bank.”
BUCKLEY, L.J.,
at page 228 observed:
“I find it
plainly established that the business of banking as an independent and
substantial business, not merely ancillary to or in aid of the building society
business, was carried on by this society. Such business of banking was ultra
vires. It was not authorised by any rule, unless it is rule 35, and if that
rule was one which made the society a bank, then, in the words of GIFFARD,
L.J., IN Lying v. Reed 1 (1869) L.R. 5 Ch App. 4. the
rule was repugnant to the Act, for it made the society a thing different from
that which is specified in the Act and meant by the Act.”
For all these
reasons the conclusion is inevitable that this ground on which the learned
judge has refused the application cannot be sustained.
The next point
urged is that the petitioner company has failed to implement the scheme of
arrangement which was sanctioned by this court under section 153 of the Indian
Companies Act on February 27, 1960, and it is now trying to get rid of the
scheme and the controlling provision of the Banking Companies Act by this
process of abandoning the banking business and so the application should be
refused. The facts relating to this question have been dealt with in paragraphs
3, 4 and 5 of the affidavit-in-opposition which has been affirmed by the
Registrar of Companies and it is pointed out that there is no prospect of the
company’s fulfilling the scheme and the entire attempt to convert itself into a
non-banking company is to avoids implementation of the scheme of arrangement.
Certain facts are also set out in the affidavit to establish that the company
is financially insolvent and is not in a position to carry on any business and
any confirmation of the alterations would be clearly against the interest of
the depositors inasmuch as they will lose the benefit which they would
otherwise have under the Banking Companies Act. Now although this attitude is
taken up by the Reserve Bank of India and the Registrar of Jong Stock Companies
in their affidavit-in-opposition, it appears that BACHAWAT ,
J., had made an order confirming the alteration of some of the very substantial
clauses dealing with the banking business of the company in spite of the
opposition put forward by the Registrar of Joint Stock Companies on more or
less similar lines in which the application has been opposed before us. The
order of BACHAWAT, J., may be said to have shorn the company of its true banking
character and upon the filing of a certified copy of the order with the
Registrar, the alteration has become conclusive. It may be noted that even the
name of the company was altered by the order of the learned judge though,
perhaps, ineffectively. So, now to refuse a change of the name and the
alterations asked for, and to expose the company under the provisions of
sections 46(4) of the Banking companies Act to penal consequences of
contravention of section 7 of the Banking companies Act will be unfair and
unreasonable. It is clear from the provisions of sections 12 13 and 14 of the
Indian Companies Act, 1913, which correspond substantially to section 17 of the
Companies Act, 1956, that if the alteration proposed is on of the several thing
enumerated in clauses (a), (b),(c), (d), (e) and (g) of section 12 of the Act
of 1913, or section 17 of the Act of 1956 the court has jurisdiction to confirm
the alteration either wholly or in part. But this exercise of the power as
conferred by these sections is, as has been pointed out by the English courts,
fenced round by safeguards which were calculated to protect the interest of
creditors, the interest of shareholders and the interest of the public. The
creditors are protected by express provision in the section itself. Their
consent has to be procured and their claim have to be
satisfied in certain events which are mentioned in the section itself. The
public and the shareholders individually and collectively are protected by the
necessary publicity of the proceedings and by the discretion which is entrusted
to the court (see Jewish colonial Trust Ltd., In re). So, in determining
whether the discretionary power of the court ought to be exercised in favour of
the confirmation of the alteration and if so, in what manner, it is necessary
to consider the facts of the case and the background on which the alteration is
asked for. It is clear that the company has not implemented the scheme of
arrangement and having regard to the long period that has elapsed since the
sanction of the scheme, it is possible that the company may not be able in
future to implement the scheme but it is to be noted that the creditors and the
shareholders have all agreed to the alteration. they passed an unarimous
resolution in respect of the alteration which had alredy been sanctioned by
BACHAWAT, J., and the shareholders have also passed an unanimous
resoloution in respect of the
alterations, the sanction of which is now sought to be obtained from the court.
It is also clear from the records that due advertisements have been issued and
due publicity has been given to the proceeding, and notices, have been served
on persons on whom they are required to be served under the relevant section. the Registrar had failed to induce BACHAWAT, J., to refuse
the sanction although he had opposed on practically the same lines as before
us. The principal clauses in the memorandum concerning the banking activities
have been deleted already by the order of BACHAWAT, J. The company cannot
function as a banking company under the powers which at present exist in the
memorandum. In these circumstances, to give effect to the objection of the
Reserve Bank of
Another point
has been raised by Mr. sen to be effect that after the
introduction of section 49C in the Banking Companies Act by the Amending Act
No. XXXIII of 1959 the application for confirmation out of which this appeal
arises has become not maintainable in the absence of the necessary certificate
of the Reserve Bank of
“Notwithstanding
anything contained in the Companies Act 1956, (I of 1956), no application for
the confirmation of the alteration of the memorandum of a banking company shall
be maintainable unless the Reserve Bank certifies that there is no objection to
such alteration.”
It is argued
that this is a section which relates to procedure are and simple, and as no one
can have a vested right in procedure this section is attracted to the
application for confirmation which is before us and unless the company succeed
in producting before the court the necessary certificate from the Reserve Bank
to the effect that the Reserve bank has no objection to the alteration, this
court cannot grant this application for confirmation. It is to be noted that
under section 17 of the companies Act, 1956, the petitioner company had the
right to present a petition for confirmation of an alteration provided the
conditions laid down in that section had been
fulfilled. What section 49C has done is to put an additional bar on the
presentation or maintainability of the petition by providing that a certificate
is to be obtained from the Reserve Bank stating that it has no objection to the
proposed alteration. this has undoubtedly the effect
of affecting the right of the petitioner company as it existed under section 17
of the companies Act of 1956. The right to present a petition under section 17
of the companies Act appears to us to be a substantive right and not a mere
right in procedure. Our attention was drawn to a decision of the Supreme Court
in Anant Gopal Sheorely v. State of
In our view,
therefore, this appeal should be allowed and the judgment and order of P.B.
MUKHARJI, J., should be set aside and there will be an order in terms of prayer
(a) of the petition.
The petitioner
company will get its taxed costs of the application of the trial court and of
the appeal before us out of the assets of the company.
Certified for
two counsel.
LAHIRI,
C.J.--I agree.
Appeal
allowed.
[1941] 11 COMP.
CAS. 127 (CA)
COURT OF APPEAL
v.
Frank
F. Scott (
SCOTT, L.J., CLAUSON, L.J., LUXMOORE, L.J.
MAY
21, 22, AND JUNE 27, 1940
Spens,
K.C. and Maurice Berkeley, for the Appellant.
Barman, K.C. and
Winterbotham, for the Respondents.
Luxmoore, L.J.,—delivering the judgment of the Court,
stated the facts and continued: The action was heard by Bennett, J., and was
dismissed, the learned Judge making a declaration on the counterclaim in
accordance with the contention of the defendants on construction. He also
considered the question whether, had he decided otherwise as to the
construction of the articles, he could have made an order for rectification,
and he held that the Court had no jurisdiction so to do, even assuming that the
articles of association were not in accordance with the proved intention of the
two personal defendants and the late Frank Stanley Scott at the time when the
articles were signed by them. Bennett, J., ordered the plaintiff to pay the
defendants their costs of the action and one quarter of their costs of the
counterclaim. The plaintiff appeals to this Court from the order of Bennett,
J., and the defendants have given notice of cross-appeal from his decision on
the question of rectification in the event of this Court being of a contrary
opinion to that expressed by him on the question of construction.
It is necessary, therefore,
to determine first whether the judgment of Bennett, J., on the question of
construction is correct. There is no dispute of fact. All that is necessary to
be stated with regard to the first question is that the company was
incorporated on October 12, 1926, as a private company under the Companies
Acts, 1908 to 1917. Its share capital was, and is, £10,500, divided into 10,200
preference shares of £1 each, and 300 ordinary shares of £1 each. The rights
attached to the preference shares are set out in the memorandum of association.
Nothing turns on these rights, and there is no need to refer to them. The
company was formed to take over the business of shipping butchers carried on in
partnership in
Frank Stanley Scott died on
September 10, 1937, and under the terms of his will the plaintiff, who was his
widow and sole executrix, became entitled to the 3,400 preference shares and
the 100 ordinary shares of the company which were standing in the name of Frank
Stanley Scott at his death. In due course the plaintiff claimed to be placed on
the company's register of members in respect, of the 3,400 preference shares
and the 100 ordinary shares. Her right to be registered in respect of the
preference shares has never been questioned but, as already stated the two
personal defendants claimed that under the articles of association the
plaintiff is bound to offer to them the 100 ordinary shares, and that they had
the right to acquire them at par, although we understand that an offer to pay a
price considerably in advance of the par nominal value of the 100 ordinary
shares in question was made. The correctness or otherwise of this claim depends
solely upon the true construction of the company's articles of association.
[His Lordship then examined the company's articles in order to deal with the
question of construction and continuing said:] We are satisfied that the
plaintiff is entitled to a declaration that upon the true construction of the
articles of association of the company and in the events that have happened the
plaintiff is now entitled to the 100 ordinary shares of which Frank Stanley
Scott was the registered holder at his death.
The next question which
falls to be considered is whether the defendants are entitled to have the
articles of association rectified in the manner claimed by them. Bennett, J.,
said he was prepared to hold that the articles of association as registered
were not in accordance with the intention of the three brothers who were the
only signatories of the memorandum and articles of association, and down to the
date of Frank Stanley Scott's death the only shareholders therein. Bennett, J.,
however, held that the Court has no jurisdiction to rectify articles of
association of a company although they do not accord with what is proved to
have been the concurrent intention of all the signatories therein at the moment
of signature. We are in complete agreement with this decision. It seems to us
that there is no room in the case of a company incorporated under the
appropriate statute or statutes for the application to either the memorandum or
articles of association of the principles upon which a Court of equity permits
rectification of documents whether inter partes or not. The memorandum and
articles of association of any company which it is proposed to incorporate must
be signed by the requisite number of persons who desire its incoporation and
must comply with the statutory requirements in respect of registration. In the
present case the material statute is the 1908 Act. These requirements are: (1)
the delivery to the Registrar of Companies for that part of the
It is not without
significance that during the whole of the long period that it has been
competent to incorporate joint stock companies under general statutes there is
only one case in which the question has been raised whether the memorandum or
articles of such a company can be rectified by the Court (see Evans v. Chapman). This case
came before Joyce, J., on a motion in an action to rectify the articles of
association. It was apparently admitted on the motion that the mistake sought
to be rectified was solely due to a clerical error. The nature of the
interlocutory relief sought is not stated in the report. Joyce, J., said (86
L.T., at p. 382): "I do not see my way to make the order asked for. No
doubt a blunder was made in drafting the articles, but that can be rectified
under the provisions of Section 50 of the Companies Act, 1862, and is the
proper way of doing it" (that is, by passing a special resolution to alter
the articles). "With reference to the jurisdiction to rectify such a
document counsel has not had much time or opportunity to look into the
authorities on the subject; but on the materials before me and as at present
advised, I am of opinion that the general jurisdiction of the Court to rectify
instruments has no application to a document of this kind, which has only a
statutory effect, and can only be rectified by statutory authority".
As all parties to the action
appear to have supported the claim to rectification it is probable that the
suggestion made by the Judge to proceed by special resolution was followed, for
the action does not appear to have gone to trial on the question of
rectification. For these reasons, as well as for those relied upon by Bennett,
J., we think the claim to rectify the articles must be rejected. It was urged
during the argument by counsel for the defendants that considerable hardship
might result unless a power to rectify existed, and to support this view he
postulated a hypothetical case in which the articles of a company provided by
mistake that the preference shares should carry a fixed dividend of 70 per
cent., instead of 7 per cent., the "o" having been inserted owing to
a clerial error, and the shareholders who controlled more than one-fourth of
the voting power opposed the passing of any special resolution to put the
mistake right. It was argued that in such a case the hardship on the ordinary
shareholders must be capable of remedy by rectification. We think the short
answer to such a case is that the proper remedy would be to petition the Court
for an order for the compulsory winding up of the company, on the ground that
it was in the circumstances just and equitable so to do. We respectfully agree
with the refusal of Bennett, J., to make any order for rectification.
There remains the question:
can the plaintiff insist on having her name registered as the holder of the
ordinary shares standing in her husband's name at his death? It is true that
the option conferred by clause 22 of Table A of 1908 is not available, but the
Court of Appeal has already held in the case of Frank F. Scott (Liverpool)
Ltd., In re (unreported) that a person entitled to the ordinary shares
registered in the name of a deceased member was entitled by necessary
implication to be found in its articles of association to be so registered,
notwithstanding the express exclusion of clause 22 of Table A and the absence
therein of any clause conferring in express terms the like option. It seems to
us on general principles that where, as in the present case, an executrix has
the legal right to the shares of which the deceased testator was the registered
holder she is, in the absence of any power of veto conferred on the company by
its articles of association, entitled to have her name entered on the register
if she so desires as ancillary to her legal title to the shares in question. (See Buchan's Case, Howard v. Wheatley, per Turner,
L.J.)
It follows that, in our
opinion, the plaintiff is entitled to an order rectifying the company's
register of members by inserting the plaintiff's name therein as the holder of
the 100 ordinary shares which are still standing in the name of her late
husband.
In the result the
plaintiff's appeal must be allowed, and the defendants' cross-appeal dismissed.
The personal defendants must pay the plaintiff's costs of both appeals. The
order of the learned Judge dismissing the action must be discharged and the
appropriate relief given in accordance with this judgment. With regard to the
counterclaim the order of Bennett, J., must be discharged and the counterclaim
dismissed. The plaintiff is entitled to an order that the whole of her costs of
the action and of the counterclaim in the Court below be paid by the personal
defendants.
[1999] 97 COMP. CAS. 500 (MAD)
v.
Register of Companies
A RAMAMURTHY J.
CRL O.P. NOS. 1114, 1119, 1120, 1121, AND 2220 OF 1999.
APRIL 30, 1999
C.
Sundaram, G.R. Rajagopal and S.R. Raghunathan for the Petitioner.
M.T. Arunan for the Respondent.
A.
Ramamurthi J.—The
petitioners in E.O.C.C. No. 9 of 1997 on the file of the Additional Chief
Metropolitan Magistrate, Economic Offences, Egmore, have filed Crl. O.P. No.
1121 of 1999. The petitioners in E.O.C.C. No. 461 of 1998, the petitioners in
E.O.C.C. No. 455 of 1998, the petitioners in E.O.C.C. No. 301 of 1998 and the
petitioners in E.O.C.C. No. 167 of 1998 on the file of the same court have
preferred the Criminal Original Petitions Nos. 1114, 1119, 1120 and 2220 of
1999 respectively under section 482 of the Criminal Procedure Code for quashing
the proceedings pending against them.
The case in
brief for disposal of all the petitions is as follows :
The
petitioners in Crl. O.P. No. 1121 of 1999 are accused Nos. 2, 3, 4, 6 and 8 in
E.O.C.C. No. 9 of 1997. The respondent preferred a complaint against them under
section 207 of the Companies Act, 1956, on the allegation that one S.R. Gupta,
through a letter dated May 10, 1996, complained to the office of the Regional
Director, Department of Company Affairs, Madras, stating that the company had
declared dividend in the annual general body meeting held on September 19,
1995, and he has received the dividend warrant on April 15, 1996, after five
months. The company has become liable to pay the dividend to the shareholders
whose names appear in the register of members on the date of the declaration of
the dividend. The dividend warrants have to be despatched to the shareholders
within 42 days from the date of declaration. It is further stated that they had
not despatched the dividend warrants till April 25, 1996. The respondent issued
a show-cause notice on September 17, 1996. The complaint so far as the
petitioners are concerned is an abuse of the process of law and court. The
petitioners have not adopted delaying tactics and it is only due to financial
condition and for the reasons that the company has not received monies from its
debtors, the company could not make any payments of
the dividends within 42 days. The petitioners have despatched the entire
dividends on March 18, 1996. The company had also approached the High Court
under section 391 of the Companies Act for a scheme for (arrangement
?) unpaid dividend and the same was approved by the Company Law Board.
The
petitioners in Crl. O.P. No. 1114 of 1999 are accused Nos. 1 to 4 in C.C. No.
461 of 1998. The respondent preferred a complaint against them under section 17
read with section 291 of the Companies Act, on the allegation that the company
cannot carry on any activities which are not covered under the objects of its
memorandum of its association and that the company has carried on the business
of air taxi operations without necessary provisions with effect in the
memorandum of association. Section 17 of the Companies Act
deals with amendment of objects of a company. The petitioners have only
carried on the business of air taxi operations pursuant to its objects and the
petitioners have not committed any offence. In the complaint, it is alleged
that they have carried on the business of air taxi operations without necessary
provisions. Section 629A of the Companies Act stipulates that in case of
contravention under provisions of the Act for which, no specific punishment is
provided elsewhere in this Act, the company and every officer of the company
shall be punishable with fine which may extend upto Rs. 500 and where the
contravention is continuing with a further fine which may extend to Rs. 50 for
everyday. The complaint itself alleged that they came to know about the alleged
default only on February 24, 1998, whereas the respondent has specifically
stated that the show-cause notice was issued on April 17, 1997. They had
obtained due permission from the respondent before approaching the public for
funds for diversifying into this operation and the prospectus had been approved
by the respondent. Only subsequent to the due clearance by the respondent, the
petitioners had diversified into this activity.
The
petitioners in Crl. O.P. No. 1119 of 1999 are also accused in C.C. No. 455 of
1998. In this case also, the respondent preferred a complaint under section 207
of the Companies Act on the allegation that S. Siva subramanian, through a
letter dated August 2, 1996, complained to the office of the Regional Director,
Department of Company Affairs, Madras, stating that the company had declared
dividend in the annual general body meeting held on April 30, 1996, and he has
received the dividend warrant on August 28, 1996, after 119 days from the date
of declaration instead of receiving the same on or before June 10, 1996.
The
petitioners in Crl. O.P. No. 1120 of 1999 are accused Nos. 1 to 3 in E.O.C.C.
No. 301 of 1998. The respondent preferred a complaint under section 207 of the
Companies Act on the allegation that the dividend declared on the annual
general body meeting held on August 14, 1996, has not been received. Even in the
complaint, it is stated that the dividend warrants have to be despatched to the
shareholders within 42 days from the date of declaration. It is further stated
that they had not despatched the dividend warrant till September 26, 1996. The
respondent issued a show-cause notice on September 9, 1997.
The
petitioners in Crl. O.P. No. 2220 of 1999 are accused Nos. 1 to 3 in E.O.C.C.
No. 167 of 1998. The respondent preferred a complaint against them under
section 209A of the Companies Act. According to the prosecution, the company
has become liable to pay the dividend to the shareholders whose names appear in
the register of members on the date of declaration of dividend and the dividend
warrants have to be despatched to the shareholders within 42 days from the declaration.
The complainant came to know about the default on September 8, 1997. On October
17, 1997, the accused filed a compounding application for violation of section
205A but, for the violation of section 207, they have not given any
satisfactory reply. The complaint has been filed within the period of
limitation on the ground that the instruction to launch prosecution was
received only on September 8, 1997, from the Regional Director. On the other
hand, the Central Government has approved a scheme of arrangement and this
court had also sanctioned the scheme of arrangement. The petitioners have also
clarified that the non-payment of the dividend was due to inadvertence and was
not intentional
The
respondent filed separate counters, alleging that the petitioners have carried
out their air-taxi operations without suitably amending their articles of
association and memorandum of association. The said default was noticed on
February 24, 1998, and instruction to prosecute was given to the Registrar of
Companies. The prosecution has been launched within one year from the date of
instruction given to the Registrar of Companies and, as such, the complaint is
well within limitation. They have also filed petition for compounding admitting
their guilt and, as such, the present applications for quashing are not
maintainable. The provisions of section 207 of the Companies Act are mandatory.
Once a dividend is declared, it has to be paid within 42 days from the date of
declaration. The question is not whether the dividend warrants were despatched
before the issue of show-cause notice. The question is whether the dividend
warrants were despatched within 42 days from the date of declaration.
Heard learned
counsel for both sides.
Learned
counsel for the petitioners mainly contended that section 17 of the Companies
Act deals with alteration of the memorandum of association of companies and
this section does not provide any penalty. Section 291 of the Companies Act deals with general powers of the
board. The Registrar of Companies had knowledge of the business carried
on by the petitioners when the prospectus of the company was filed with the
Registrar of Companies and further the special resolution dated August 21,
1993, was filed with the Registrar of Companies and has approved the same. Mere
non-compliance with a provision of the Act such as the omission to apply to the
Central Government does not constitute offence punishable under section 629A of
the Act. No case can be made out against the petitioners. The complaint is also
barred by time. The prosecution has been launched after a period of three years
from the date when the offences are alleged to have been committed. The
dividend warrants were despatched before the show-cause notice was issued by
the company. No offence under section 207 has been committed.
Learned
counsel for the petitioners contended that the respondent, Registrar of
Companies preferred complaints under section 207 of the Companies Act on the allegation
that the dividend has not been paid within a period of 42 days from the date of
declaration. The Registrar of Companies also filed another case under section
17 read with section 291 of the Companies Act, alleging air-taxi operation is
not included in the memorandum or articles of association and without any
amendment as they have committed an offence which is punishable under section
629A of the Companies Act.
Learned
counsel further pointed out that for the offence under section 629A of the Companies
Act the punishment is only fine and as such, the complaint, if any, ought to
have been filed within a period of six months and if not the complaint would be
barred by time. So far as the offence punishable under section 207 of the Act,
since imprisonment is also there, the complaint ought to have been filed within
a period of one year and in the absence of the same, the complaint would be
barred by time. However, learned counsel for the respondent would contend that
only from the date of the knowledge, the period of limitation will commence
and, as such, all these complaints are well within time.
There are
five complaints filed by the Registrar of Companies against the petitioners.
Crl. O.P. No. 1114 of 1999 relates to a complaint under section 17 read with
section 291 of the Companies Act punishable under section 629A of the said Act.
In other cases, the complaints filed by the respondent under section 207 of the
Companies Act. Section 17 of the Act relates to special resolution and
confirmation by the Company Law Board required for alteration of memorandum.
Section 291 of the Act relates to the general powers of the board. Section 629A
of the Act relates to penalty "where no specific penalty is provided
elsewhere in the Act". According to this section, the company and every
officer of the company who is in default or such other person shall be
punishable with fine which may extend to five hundred rupees and where the
contravention is a continuing one, with a further fine which may extend to
fifty rupees for every day after the first during which the contravention
continues.
The
memorandum and articles of association have also been filed in the case. The
petitioners also relied upon the relevant clause under the memorandum of
association of the companies, which reads as under :
"To act
as carriers, transporters, tours, travel agents and shipping clearing and
forwarding agents."
Learned
counsel further pointed out that the prospectus have
been already registered with the respondent and special resolutions have also
been filed with the Registrar of Companies. Apart from that, an annual report
is sent to the Registrar every year disclosing the air-taxi operation carried
on by the said company. The aforesaid documents would only indicate that the
respondent is well aware of the business carried on by N.E.P.C. company. This being so, the present contention of the
respondent that they came to know about it only very late, cannot be believed.
It is admitted that even according to the complainant, the show-cause notice
was issued on April 17, 1997. As adverted to, the complaint ought to be filed
within a period of six months. But, however, the complaint has been filed only
on June 23, 1998. Prima facie it is clear that the complaint is barred by time
and on this ground, the complaint relating to C.C. No. 461 of 1998 is liable to
be quashed.
As adverted
to, the other complaints relate to under section 207 of the Companies Act.
Section 207 reads as follows :
"Penalty
for failure to distribute dividends within forty-two days.-Where a dividend has
been declared by a company but it has not been paid, or the warrant in respect
thereof has not been posted, within 42 days from the date of the declaration,
to any shareholder entitled to the payment of the dividend, every director of
the company ; its managing agent or secretaries and treasurers ; and where the
managing agent is a firm or body corporate, every partner in the firm and every
director of the body corporate ; and where the secretaries and treasurers are a
firm, every partner in the firm and where they are a body corporate, every
director thereof ; shall, if he is knowingly a party to the default, be
punishable with simple imprisonment for a term which may extend to seven days
and shall also be liable to fine."
So far as the
complaint in C.C. No. 455 of 1998 is concerned, according to the respondent,
there is delay of 119 days in payment of the dividend. The show-cause notice
was issued on October 15, 1996. However, the respondent would contend that they
came to know about this omission only on December 18, 1997. The complaint was
filed into the court on March 10, 1998. As adverted to, in view of section 468
of the Criminal Procedure Code, the complaint ought to be filed within a period
of one year. Considering the fact that the show-cause notice was issued as
early as October 15, 1996, and the complaint having been filed on March 10,
1998, prima facie it is clear that the complaint is barred by time. When once
the show-cause notice has been issued, it can be easily concluded that the
respondent is well aware of the delay caused by the said company in payment of
the dividend within 42 days after the declaration. Under the circumstance, so
far as the case, viz., C.C. No. 455 of 1998 is concerned, the complaint is also
barred by time.
C.C. No. 301
of 1998 also relates to the complaint under section 207 of the Act. So far as
this case is concerned, the show-cause notice was issued by the respondent on
September 9, 1997. A perusal of the complaint indicated that the respondent
came to know about the omission only on January 2, 1998. However it may, as the
show-cause notice was issued on September 9, 1997, and the complaint was filed
on August 20, 1998, it can be said that it is filed within the period allowed
under law. No doubt, learned counsel for the petitioners attempted to explain
that the delay had been caused due to financial constraints and there was also
framing of the scheme later approved by the Company Law Board. These are
matters to be considered only at the time of the trial and they are not matters
relevant to be considered for quashing the proceedings. Considering the fact
that this complaint is filed within the period allowed under law, I am of the
view that the proceedings cannot be quashed.
The complaint
in C.C. No. 9 of 1997 also relates to section 207 of the said Act. The dividend
has not been paid within 42 days after the declaration. The show-cause notice
was issued on September 17, 1996. Learned counsel for the petitioners contended
that the scheme was approved by the Company Law Board and furthermore, the
respondent came to know about this only on August 30, 1996. The complaint was
filed before the trial court on January 17, 1997. Considering the fact that as
the complaint has been filed within a period of one year from the issuance of
show-cause notice, it cannot be said that the complaint is barred by time. In
respect of other defences, it is open to the petitioners to agitate the same
before the trial court.
C.C. No. 167
of 1998 also relates to an offence under section 207 of the said Act. It is
seen from the complaint itself, the respondent came to know about the default
on September 8, 1997. However, para. 3 of the
complaint indicated that the inspection has been done and the same was
completed on January 20, 1997. Under the circumstances, even at the time of the
inspection itself, the respondent could have been well aware of the commission
of the offence by the said company. They have caused a delay of nearly eight
months intending the show-cause notice. The delay caused by the respondent
cannot be made use of to save their complaint. The complaint was filed in the
court on August 31, 1998. Taking into consideration the fact that even
according to the averments in the complaint, the respondent had completed the
inspection on January 20, 1997, naturally the complaint ought to have been
filed within a period of one year, but according to the complaint itself, it
was filed on August 31, 1998, and, as such, it is beyond the time.
Learned
counsel for the petitioners contended that when once the court comes to the
conclusion that there is prima facie material to infer that the claim is barred
by time, no useful purpose would be served in allowing the case to be
prosecuted. The respondent is not in a position to point out that the claim is
in time. Hence, I am of the view that the proceedings in C.C. No. 461 of 1998,
C.C. No. 455 of 1998 and C.C. No. 167 of 1998 are barred by time and, as such,
the proceedings are liable to be quashed. In respect of the other two cases,
viz., C.C. No. 9 of 1997 and C.C. No. 301 of 1998, the complaints have been
filed in time and, hence, the proceedings cannot be quashed. The other
contentions that there was financial constraint and the amount could not be
realised by the company and, as such, the delay has occurred, are matters to be
considered by the trial court. Similarly, the other contentions that the scheme
was approved by the Company Law Board and, as such, the delay has been caused,
are matters to be considered only by the trial court.
For the
reasons stated above, Crl. O. Ps. Nos. 1114, 1119 and 2220 of 1999 are allowed
and the proceedings in C.C. No. 461 of 1998, 455 of 1988 and 167 of 1998,
pending on the file of learned Additional Chief Metropolitan Magistrate,
Economic Offences, Egmore, Madras, are liable to be quashed and, accordingly
they are quashed. Crl. O. Ps. No. 1121 of 1999 and 1120 of 1999 are dismissed.
It is, however, open to the petitioners to agitate the very same points before the trial court and the trial court is
directed to consider the same and dispose of the case as expeditiously as
possible. Consequently, connected criminal miscellaneous petitions are closed.
[1968] 38 COMP. CAS. 487 (
HIGH COURT OF
Rank Film Distributors of India Ltd.
v.
A.K. MUKHERJEA AND S. K.
MUKHERJEA, JJ.
SEPTEMBER 21, 1967
Ranadeb Chaudhuri for the Appellant.
P.K. Sen and Chandan Banerjee for the Respondent.
S.K. Mukherjea. J.—This is an appeal against an order by which the learned judge
dismissed an application under section 17 of the Companies Act for confirmation
of alteration of the provisions of the memorandum of association of a company
by special resolutions so as to transfer the place of its registered office
from one State to another. The registered office of the company is situate at
It is stated in the petition that in arriving at the decision to
transfer its registered office from
(i) The head office of the company is situate in Bombay but the registered office of the compay is situate in Calcutta and it is essential that this anomaly should be removed by transferring the registered office of the company from Calcutta to Bombay to enable the company to carry on its business more economically and more efficiently from administrative point of view.
(ii)The registered offices of most of the foreign film companies are situate in Bombay and, therefore, it is considered essential that the company's registered office should also be situate at Bombay. It will assist the company to compete in its business with other foreign film companies if the registered office of the company is situate there.
(iii)There is better scope at
(iv)It is in the interest of the
shareholders of the company that the registered office of the company be
removed to
Notice of the application was served on the Registrar of Joint
Stock Companies and as directed by the learned judge, also on the State of
It appears that the learned judge refused to accede to the prayer of the company because, in his opinion, the petition was lacking in sufficient particulars in support of its case that the transfer of the registered office will be beneficial to the company and its shareholders. The learned judge observed that a bare averment putting in the relevant provisions of the statute is not enough. We respectfully agree. The petition however does not merely repeat the provisions of the statute. In paragraph 8 of the petition reasons have been given in sufficient details as to why in the opinion of the shareholders which is expressed in the shape of special resolutions, the transfer of the registered office will enure to the benefit of the company. The reasons appear to be cogent and have the merit of sound commercial sense to recommend them. The learned judge found that material particulars are lacking because it is not indicated what has happened since 1962 when the head office of the company was removed to Bombay by reason of which the decision to transfer the registered office to Bombay has been taken ; because the petition does not disclose why it is easier to make contacts with foreign visitors in the film industry if the registered office is transferred to Bombay when the purposes may well be served by the head office ; and because the petition does not indicate why it will be in the interest of the shareholders to transfer the registered office to Bombay.
The head office of the company was transferred to
No doubt the company has not indicated why trade contacts cannot
be made through the head office at
It is true that no separate reasons have been given as to why the transfer of the registered office will be in the interest of the shareholders. If the transfer is in the interest of the company, it is ipso facto also in the interest of the shareholders.
We do not agree that each and every reason advanced for transfer of the registered office has to be justified by evidence. In the nature of things, the evidence which the company will be required to adduce will be of its prospective business operations and future conduct of its affairs in relation to the present. The evidence will be, therefore, necessarily vague and problematic and may well verge on speculation. And yet, the company, its shareholders and directors may bona fide in exercise of their judgment, after mature deliberation have decided on the course proposed in the special resolutions. Nevertheless, the evidence that can be given is of little assistance to the court.
In In re. Jewish Colonial Trust Limited , it was held that the principles which have been laid down for the guidance of the court in dealing with applications for confirmation of reduction of capital apply to applications for confirmation of alteration of the memorandum of association. In Ex Parte Westburn Sugar Refineries Limited , in an application for sanction of reduction of capital, the company stated in the petition that the capital to be returned was in excess of its needs but did not state by how much it was surplus. The company was threatened with nationalisation. The first court dismissed the application because it was against public policy to aid a company threatened with nationalisation to part with its assets and also on the ground that the company had failed to show by how much its capital was surplus to its requirements. On appeal, the House of Lords, in reversing the order of dismissal, held that the possibility that the industry in which the company was engaged might be nationalised as the result of future legislation was not a ground on which the court should refuse to confirm the reduction.
As for the other ground, Lord Radcliffe said :
"I pass, therefore, to the second, and, indeed, the main reason which weighed with the learned judge. In his view it was essential for the appellant company, which showed by its petition that the ground of the proposed reduction was that the share capital to be returned was in excess of its wants, to demonstrate to the court by how much its capital was in fact surplus, and, since the evidence presented to the court was deficient in this respect, a material fact had not been made out.........The conclusion itself is based on a misunderstanding. I cannot find any good reason why the court should be concerned to know what is the extent by which the company's capital is surplus to its requirements. If by that phrase, itself susceptible of ambiguity, is meant the extent by which the whole of the company's assets, at the best contemporary valuation that can be placed on them, exceeds what is required for the future conduct of its business, the precise information on this would do nothing to aid the task of the court, for it would throw no light on the sole point which is here in question, viz., how much of the paid up share capital is to be returned as being surplus? Nor do I think that evidence of this real kind is usually required in cases of this sort. In truth this, which is the question, answers itself by the company's own resolution...... How much of the paid up share capital the company can dispense with for the future is a domestic matter which the shareholders and their managers must decide among themselves. If the amount which they have decided on works no injustice to creditors or to shareholders, I see no purpose which can be served by the court's insisting on a precise figure of the company's wants or the striking of an exact balance between that figure and the total available resources in hand".
In our opinion, the principles expressed in the judgment of Lord Radcliffe apply with equal force to an application for confirmation of alteration of memorandum of association.
The learned trial judge directed notice of the application to be served on the State. Before us, the State opposed confirmation of the alteration on the ground that the transfer of the registered office of the company will affect the general economy of the State and, in particular, its revenue. Latterly, a great deal has been said with regard to the right of the State to appear in an application under section 17 of the Companies Act and the grounds on which the State may oppose the application. In In re Mackinnon Mackenzie and Company Limited , A. N. Ray J. held that the State cannot, as a matter of right, be heard in an application under section 17. In several decisions of the Orissa High Court, to which we shall presently advert, it was held that the prospect of loss of revenue to the State is a material consideration. A.N. Ray J. was of opinion that no hard and fast rule can be laid down that under no circumstances it is open to the State to contend in these applications that there may be loss of revenue. In In re Standard General Assurance Company Limited B.C. Mitra J. expressed the view that if the company has an existing liability to the State, no doubt, the State becomes the creditor of the company and therefore would be entitled to oppose the alteration, if its interest as a creditor is likely to be affected by the alteration, but the statute does not confer upon the State as a prospective creditor, the right to oppose the proposed alteration.
Section 17(3)(a) of the Companies Act enjoins that before confirming the alteration, the court must be satisfied that sufficient notice has been given to every holder of the debentures of the company, and to every other person or a class of persons whose interests will, in the opinion of the court, be affected by the alteration. It is, however, to be noticed that although sub-section (4) specifically requires that notice of the petition must be served on the Registrar, no specific provision has been been made for notice to the State. If it were the intention of the legislature to serve notice on the State, it is difficult to see why no specific provision was made in that behalf. Be that as it may, it can hardly be disputed that the language of section 17(3)(a) is sufficiently wide to enable the court to direct notice to be served on the State if the court is of opinion that the interests of the State will be affected by the order to be made in the application.
If notice is served on the State under section 17(3), the question arises whether the State can object to the transfer of the registered office on the ground that the reasons which have prompted the shareholders to pass the resolution are not valid or that those reasons have not been substantiated by the materials disclosed in the petition. In the absence of statutory provisions, it is not for the State to exercise control over the conduct of affairs of a company. Under the statute, it is for the members of the company and not for the State to decide whether the registered office of the company should be transferred from one State to another in the interest of the company for the reasons specified in section 17. The shareholders have expressed their decision by special resolutions in favour of the transfer. It is for the court to confirm or not to confirm the alteration. If the State has no voice under the statute in the conduct and management of the company's affairs, it is difficult to see how the State can contend that the reasons which have impelled the shareholders after domestic deliberation to decide on transfer of the registered office, are not tenable. In our opinion, the State has no such right. To permit the State to contend that the proposed transfer of the registered office will not enable the company to carry on its business more efficiently or economically, contrary to the opinion of the shareholders expressed in the special resolutions, will be to enable the State to have a voice in an aspect of the management of affairs of the company which is not warranted by statute.
It was then
contended that the economy of the State will be adversely affected if the
registered office is shifted elsewhere. The State is benefited by the opportunities
of employment, a company affords. In most cases, the registered office employs
a comparatively small number of people. The bulk of a company's employees are
engaged in industrial undertakings, in trade or in general administration. If a company desires to
transfer its business activities from one State to another there is nothing in
law to prevent it from doing so. If the court refuses to sanction the transfer
of the registered office by dismissing the application for confirmation of the
alteration, the company may yet leave the husk of a registered office to
function in the State and transfer its entire business activities elsewhere.
There are many foreign companies which have their registered offices abroad but
whose business activities are entirely confined to
On behalf of the State, it was urged that the
revenue of the State in income-tax and sales tax is likely to suffer. In our
opinion, this is a misconception. In the scheme of the State Sales Tax Act,
sales tax is payable to a State on sale of goods which are within that State ; under the Central Sales Tax Act, it is payable to
the State from where the movement of goods in the course of inter-State trade
and commerce commences. Sales tax payable on the sale of a company's products
or on goods purchased by the company does not depend on where the registered
office of the company is situate or where the contract
of sale is made. Transfer of the registered office of a company is, therefore,
irrelevant for the purpose of sales tax realised by the State.
As for income-tax, the share of a State out of
the proceeds of income-tax does not appear to vary with the income-tax realised
in the State. Article 270(1) of the Constitution provides that taxes on income
other than agricultural income shall be levied and collected by the Government
of India and distributed between the
In the view we have taken of the matter, the consideration that by transfer of the registered office, the economy and revenue of the State will suffer, appears to be unreal or at the most, speculative, and is, therefore, in our opinion, not a relevant consideration in the present application. In any event, the loss of revenue in one State will be accompanied by increase in revenue in the other. We agree with the views expressed by A.N. Ray J., that, in the administration of justice, the interest of a particular State ought not to be thought of in a sectional manner and what has to be considered, is the interest of the country as a whole. Incidentally, if notice is to be given to the State where the registered office of the company is situate on the ground that its economy and revenue might suffer by transfer of the registered office, there is no reason why notice should not be given to the State where the registered office of the company is to be transferred. If the area of business operations of a company were to depend on the location of its registered office, the State to which the registered office is sought to be transferred, might very well contend that there is enough of that particular type of business in which the company is engaged and the transfer will not be in the interest of the State. The Union of India may also like to have a say in the matter. It may contend that in the interest of a just and proper economic development of different regions which is its declared policy, the transfer is or is not desirable. In that event, an application under section 17 for confirmation of the transfer of the registered office from one State to another will bring the different States and the Centre into the arena with rival economic contentions. We do not think that is a situation contemplated by section 17 of the Companies Act.
In Orient Paper Mills Ltd. it was held
by the Orissa High Court that where by a change of registered office of a
company situate within a certain State, that State would suffer a substantial
reduction of income from income-tax and sales tax, the court would take that
fact into account and would refuse to confirm the resolution seeking to
transfer the registered office of the company. The decision in Orient Paper
Mills was approved by a Division Bench of the Orissa High Court in Bonai
Industrial Company Limited v. State of
In the Orient Paper Mills case the learned
judge accepted the contention on behalf of the State that the State of
The other contention which was raised successfully on behalf of the State was that if contracts of sale were made by the registered office which was proposed to be transferred to Calcutta and contracts of sale were entered into at Calcutta, the liability to pay sales tax might arise at Calcutta and the State of West Bengal might realise the sales tax. Under the sales tax laws then in force, sales tax was not necessarily payable to the State where the contract of sale was made or where the registered office of the company was situate. Reliance was placed on a passage in Halsbury's Laws of England, 3rd edition, volume 6, at page 113, where it is said: " The residence of a company is of great importance in revenue law, and the place of incorporation is not conclusive on this question. In general, residence depends upon the place where the central management and control of the company is located. It follows that if such central control is divided, the company may have more than one residence. The locality of the shares of a company is that of the register of shares. The head office of the company is not, however, necessarily the registered office of the company, but is the place where the substantial business of the company is carried on and its negotiations conducted". The passage, in our opinion, is no authority for the proposition that a company is necessarily assessable at the place where its registered office is situate. As we have already said, there is nothing in the Income-tax Act of 1922 or of 1961 under which a company is to be assessed at the place of its registered office.
In these circumstances, we are unable to agree that the transfer of the registered office of the company by itself, affects the revenue of the State or even if it does, the prospect of loss of revenue is a relevant factor to be taken into consideration, in the facts and circumstances of the present case.
It is only fair to point out that the company in its petition has
stated that the removal of the registered office will not involve retrenchment
or dismissal of any employee of the company nor will it cause any loss of
revenue to the State of
It has been argued that as an application for confirmation of
alterations in a memorandum of association is in pari materia with an
application for confirmation for reduction of share capital, in making an order
under section 17, the interests of the public have to be taken into
consideration. The State represents the public and therefore the State is
entitled to be heard and the interests of the State have to be safeguarded. In
this connection, reliance has been placed on the decision in
"In the present case creditors are not concerned
at all. The reduction does not involve the diminution of any liabilities in
respect of unpaid capital or the payment to any shareholder of any paid-up
capital. The only questions therefore, to be considered are these: (1) Ought the court to refuse its sanction to the reduction out
of regard to the interests of those members of the public who may be induced to
take shares in the company? and (2) is the reduction
fair and equitable as between the different classes of shareholders?"
On the strength of these observations, it has been contended that in an application for confirmation of the alterations in a memorandum, the interests of the public have to be taken into consideration. Lord Macnaghten however made it clear what he meant by interests of the public when he said that the interests which have to be protected are of those members of the public who might be induced to take shares in the company. There is nothing in the judgment from which it appears that His Lordship intended that the revenue interests of the State or the economic interests of the State have to be considered in sanctioning a reduction of share capital. In In re Westburn Sugar Refinery Limited , Lord Radcliffe said: "What is in question is a reduction of capital by repaying some paid-up share capital. If the transaction is itself competent, the court should only refuse its confirmation if what is proposed to be done is somehow unfair or inequitable, and the considerations of what is unfair and inequitable cannot well extend beyond consideration of the interests of creditors, shareholders and the general public, by which term is, I think, meant persons who may in the future have dealing with the company and may be minded to invest in its securities".
In Mahaluxmi Bank Limited v. Registrar of Companies a Division Bench of this court expressed the view that the public and the shareholders individually and collectively are protected by the necessary publicity of the proceedings and by the discretion which is entrusted to the court.
In In re Mackinnon Mackenzie and Company Ltd. A. N. Ray J. understood those observations of Lord Macnaghten in the sense in which we have understood them and we respectfully agree with the views expressed by the learned judge on that aspect of the matter. We, therefore, hold that if the interest of the public has to be taken into consideration in an application under section 17, the interest contemplated is not revenue interest or the interest of the general economy of the State.
In the view we have taken, the appeal succeeds. The order of the learned judge is set aside. The alteration of the memorandum of association sought to be effected by the special resolutions set out in paragraph 7 of the petition and passed at the extraordinary general meeting of the company held on the 8th day of June, 1966, is hereby confirmed in terms of prayer (1) of the petition. The appellant will pay the costs of the Registrar of Joint Stock Companies which we assess at 30 gold Mohurs. Certified for two counsel so far as the appellant is concerned. Save as aforesaid there will be no order as to costs.
A.K. Mukherjea J.—I agree.
[1980] 50
COMP. CAS. 555 (
HIGH COURT OF
v.
Southern
Steel Ltd.
SALIL K. ROY CHOWDHURY, J.
COMPANY
PETITION NO. 506 OF 1976
OCTOBER 30, 1979
R.C. Nag, R.K. Lala, Sudipta Sarkar and A.K. Bose for the Petitioner.
S.B. Mukherjee and U.B. Mukherjee for the Respondent.
Salil K.
Roy Chowdhury J.—This is
another application under ss. 397, 398, 402, 403, etc., of the Companies Act, 1956,
in the series of litigations between Mohan Lal Mittal group and his opposing
group. These applications are the outcome of family disputes as all the
companies concerned in these applications are under the control and management
of the Mittal family as the directors are either the members of the Mittal
family or their relatives or nominees or stooges. They reveal a general pattern
of running parallel management, one group trying to oust the other group from
the companies in which the majority shares belong to the respondents. The
present application is by Mohan Lal Mittal, the eldest brother of the Mittal
family, and his sons as petitioners and the respondents are Indra Sen Mittal
and the group of brothers and persons supporting him and the other directors of
the company who are merely relatives, friends or stooges of the Mittal family.
The petitioners allege in para. 8 of the petition that they themselves along
with another son of Mohan Lal Mittal, Sri Laxmi Niwas Mittal, hold 1/10th of
the issued and subscribed capital of the respondent-company, Southern Steel
Ltd., and, therefore, they are qualified under s. 399 of the Companies Act,
1956.
The
allegations which are the basis of the present application under ss. 397 and
398 of the Companies Act, 1956, are that the meeting fixed to be held on the
14th of May, 1976, could not be attended to by the petitioners and was not held
due to want of quorum. It is alleged that the said meeting was adjourned till
16th of May, 1976, and was held without any notice to the petitioners that the
meeting was fixed on the 16th of May, 1976, and the alleged meeting on the 16th
of May, 1976, was held at
The respondent duly answered the said allegations
alleging that the petitioners have no right to ask for postponement of the
meeting to be held on the 14th of May, 1976. The said meeting was attended by
respondent No. 3, Indra Sen Mittal, and respondent No. 5, R.K. Mittal, but it
was adjourned due to lack of quorum till 16th of May, 1976, and the adjourned
board meeting was duly and lawfully held on the 16th of May, 1976. It was
further submitted by the respondents that no notice is required to be given for
any adjourned meeting either under the Companies Act or under the articles of
association of the company. The respondents denied the validity and legality of
the purported notice to convene a meeting of the board alleged to be held on
the 31st of May, 1976, issued by the alleged secretary, V.S. Modi. Respondent
No. 5, R.K. Mittal, also denied that any paper and document has been taken away
by him as alleged. The respondents, in my view, rightly submitted that the
company being financed by the Andhra Pradesh State Financial Corporation was
committed to shift its registered office from Calcutta to Hyderabad where
admittedly the company's factory is situate and the main business is conducted
and as the said Andhra Pradesh State Financial Corporation was insisting upon
the said transfer, the resolution was passed accordingly on the 16th of May,
1976. It is further alleged by the respondents that according to the resolution
of the said adjourned meeting dated the 16th of May, 1976, the accounts in
respect of the establishment at Calcutta was to be sent to Hyderabad. It is
also denied by the respondents that the accounts at
It appears from the facts of the case that on the
14th of January, 1976, the respondent-company was incorporated as a public
limited company having its registered office at No. 2, Brabourne Road,
Calcutta, and the main business of the company has been to manufacture and/or
get cold rolled, narrow strips and strapings from skelp and factory of the
company was situated at Hyderabad. It also appears that the respondent-company
is a public limited company and the shares are quoted in the stock exchange. On
the 3rd of May, 1976, by a notice, respondent No. 5, R.K. Mittal, as a director
called a meeting of the board of directors of the company at
Mr. R.C. Nag, appearing with Mr. R.K. Lala, Mr.
Sudipta Sarkar and Mr. A.K. Bose, for the petitioners, mainly challenged the
validity of the meeting held on the 16th of May, 1976, and also the correctness
of the said minutes of the meeting which is alleged to be subsequently
disclosed to the petitioners.
I have already set out the charges made by the
petitioners and the answers thereto by the respondents and, in my view, there
is no ground whatsoever substantiated by the petitioners which can constitute
an oppression or mismanagement within the meaning of s. 397 or s. 398 of the
Companies Act, 1956. Mr. Nag's submission is that the respondents have
suppressed the fact that the court in 1970 refused to transfer the registered
office of the company to Andhra Pradesh which is a material suppression and which
should be held to be an oppression and misleading the
court. In my view, such comment is not justified as we are in 1979 and the
situation in 1970 and in 1979 can never be the same and, on the other hand, it
cannot but be admitted that it is entirely different and the application for
transfer of the registered office which is now to be made before the Company
Law Board may be granted as admittedly the factory and main business of the
company are in Andhra Pradesh. It is only that all the companies belonged to
the Mittal group and, therefore, originally the registered offices of the
companies were situated in
Mr. S.B.
Mukherjee, appearing with Mrs. U.B. Mukherjee, quite rightly submitted that
after the arbitration between the members of the Mittal family proved abortive,
the series of applications were started by the said Mohan Lal Mittal and the
respondents have also made applications to prevent the said Mohan Lal Mittal
from doing mischief or acts detrimental to the companies belonging to the
Mittal group. It is the said Mohan Lal Mittal who has used the secretary, Mr.
Modi, for the purpose of convening the alleged meeting on the 31st of May,
1976, and pass some sort of resolutions, and
practically tried to run a parallel management of the company at
In that view
of the matter, the application is dismissed with costs. The Special Officer,
Mr. C.R. Dutt, Barrister-at-Law, will stand discharged. If any arrears of
remuneration is due to be paid to him it is to be paid
out of the funds of the company. The remuneration of the Special Officer is
fixed at 100 gms.
The Special Officer and all parties to act on a signed copy of the
minutes.
[1967] 37 COMP. CAS. 516 (
Mackinnon Mackenzie & Co (P.) Ltd., In re
A N RAY, J.
COMPANY PETITION NO. 58 OF 1966
NOVEMBER
30, 1966
JUDGMENT
This is an
application for an order that the alteration of the memorandum of association
of the company, to wit, Mackinnon Mackenzie & Co Private Limited, sought to
be effected by the special resolution set out in paragraph 6 of the petition
and passed at the general meeting of the company held on 2nd November, 1965, be
confirmed.
The
petitioner, Mackinnon Mackenzie & Co Private, Limited was incorporated on
30th March, 1951, under the provisions of the Indian Companies Act, 1913 as a
public limited company. The company became a private limited company on and
from 27th March, 1956 and the name of the company was changed to Mackinnon
Mackenzie and Company Private Limited as from 16th June, 1961. The
registered office of the company is situate at 16,
The capital of
the company was Rs. 4 crores divided into one lakh 6 percent. Cumulative
taxable preference shares of Rs. 100 each and three lakhs ordinary shares of
Rs.100 each. The issued and subscribed capital of the company is Rs 1,00,00,000.
The objects
for which the company was formed are various as have been set out in paragraph
4 of the petition.
By a special
resolution of the company duly passed in accordance with section 189 of the
Companies Act, 1956, at a general meeting held on 2nd November, 1965, at the
registered office of the company after due notices as provided in the Act, it
was unanimously resolved as follows; That the memorandum of association of the
company be altered by the deletion of clause 2 there from and by the substitution
of the following clause in the place thereof:
" The
registered office of the company will be situate in the State of
It is alleged
in the petition that the directors and shareholders of the company considered
that it was necessary and desirable that, having regard to the business
activities of the company, the registered office of the company should be
transferred from Calcutta to Bombay and that such alteration would enable the
company to carry on its business more efficiently and more economically. At the
time of the incorporation of the company, the company was the managing agent of
the British India Steam Navigation Company Limited and the major part of the
business of the company used to be carried on at
The other
allegations in the petition are that the transfer of the registered office from
Calcutta to Bombay would bring about economy in the management of the affairs
of the company and that it would be administratively more convenient that the
secretarial work involved should be undertaken by the Bombay office
particularly as the chairman of the board of directors and the secretary of the
company are residents of Bombay. It is alleged in the petition that, since the
last great war, the company lost Indian coastal trade
and further lost the Calcutta/Burma, Calcutta/Malaya passenger trades because
of immigration restriction in
It is also
alleged in the petition that with the termination of the company’s managing
agency of the British India Company, the company lost a great deal of its work
in London and work was transferred from Calcutta to Bombay because the senior
staff who had to handle such work had already been posted at Bombay. Apart from
one director and one shipping manager being at
It is also
alleged that the major asset of the company is the office building of the
company at Ballard Estate in
The company is
a wholly owned subsidiary of the British India Steam Navigation Company Limited
which is the beneficial owner of the entire share capital. It holds 99,999
shares in its own name and one share in the name of its nominee, the Asiatic
Steam Navigation Company Limited. Both the said companies considered that the
transfer of the registered office from
The paid-up
capital is Rs. 1,00,00,000 and the assets of the
company are Rs. 1,83,83,878. The liabilities of the company are Rs. 93,90,127. The excess of assets over liabilities is Rs. 89,93,751.
The
application was contested by the State of
Under section
17 of the Companies Act a company may, by special resolution, alter the
provisions of its memorandum so as to change the place of its registered office
from one State to another. In the present case there is a resolution. The
positive grounds in support of the proposed change can be broadly stated to be,
first, that the head office is at Bombay since about the year 1964, secondly,
the control of the company is at Bombay, thirdly, it would be advantageous to
have the registered office at Bombay, fourthly, the volume of business is
larger at Bombay because of coastal restrictions and difficulties of trade with
Burma and Malaya, fifthly, the number of calls of ships is larger at Bombay,
sixthly, the number of employees is Larger at Bombay, seventhly, the senior
staff is at Bombay, and eightly, there is the estate of the company at Bombay
and the market value thereof is Rs. 50,00,000 whereas the Calcutta leasehold
interest of the company will expire in 3 years' time.
The main
contentions on behalf of the State of West Bengal and the Registrar of
Companies are that there will be loss of revenue to the State of West Bengal,
secondly, that the petition does not show that any economy will be made by the
proposed transfer of the registered office to Bombay and, thirdly, the
resolutions are not validly passed and the notice in respect of the resolution
suffers from the vice of lack of material particulars.
One of the
questions canvassed in the present application is whether the State has any
locus standi. In section 17 of the Companies Act it is stated that a company
may, be special resolution, alter the provisions of its memorandum so as to
change the place of its registered office from one State to another and in the
various sub-sections thereof it is stated that alteration shall not take effect
until, and except in so far as, it is confirmed by the court on petition, and before
confirming the alteration, the court must be satisfied that sufficient notice
has been given to every holder of the debentures of the company, and to every
other person or class of persons whose interest will, in the opinion of the
court, be affected by the alternation. The contention on behalf of the
petitioner is that the State is not a person contemplated in section 17 of the
Companies Act. It should be stated here that sub-section (4) of section 17 of
the Companies Act specially mentions notice of the petition on the Registrar.
The State is not mentioned separately and it is contended on behalf of the
petitioner that the State is not a class of persons contemplated in section 17.
It the present
case notice was given to the State. The State appeared pursuant to the notice.
Counsel on behalf of the State contended, firstly, that inasmuch as notice was
given to the State and, secondly, the court directed such notice and there has
been no appeal preferred from that order, the State is entitled to appear and,
finally, since the State appeared, the State could be heard as
an amicus curiae. Counsel on behalf of the State also contended that
sub-section (3) of section 17 of the Companies Act enacted that before
confirming the alternation the court must be satisfied that sufficient notice
has been given to every holder of the debentures of the company and to every
other person or class of persons whose interest will, in the opinion of the
court, be affected by the alteration and therefore the court had power to give
notice to the State because the State represents the interest of the public. In
aid of that contention counsel for the State relied on the observations of Eve.
J. in the case of Jewish Colonial Trust Limited [1908] 2
In Jewish Colonial Trust case [1908] 2
The other
decision on which counsel for the State relied is Ex parte Westburn Sugar
Refineries Limited [1951] 1 AII E.R. 881, 588. Counsel for the State contended
that the decision in Westburn Sugar Refineries Limited [1951] 1 AII E.R. 881,
588. was also am authority for the proposition that the
court before confirming a resolution safeguarded the interest of the public and
the interest of the public predicated that the State would be heard to expound
such interest and protect such interest. Westburn Sugar
Refiners Limited case [1951] 1 AII E.R. 881, 588. also
related to an application for reduction of share capital. Counsel for the State
relied on the observations of Lord Reid, which are as follows
:
"What
then is the duty of the court in considering a matter of this kind ? In the first place, the interests of creditors must
be safeguarded, but here that has been done. Secondly, the interest of
shareholders may have to be considered, but in this case there has been no
opposition by any shareholder at any time and it is difficult to see how there
could be any prejudice to any single shareholder. Thirdly, there is the public
interest to consider. That this is a relevant consideration was clearly
recognised by Lord Macnaghten in
Extracting
these observations from the decisions in Westburn Sugar Refineries Limited case
[1951] 1 AII E.R. 881. Jewish Colonial Trust Limited case
[1908] 2
The observations of Lord Radcliffe in Westburn Sugar Refineries Limited
[1951] 1 AII E.R. 881. indicate as to what the interest of the public means :
"What is
in question is a reduction of capital by repaying some paid-up share capital.
If the transaction is itself competent, the court should only refuse its
confirmation if what is proposed to be done is somehow unfair or inequitable,
and the consideration of what is unfair and inequitable connot well extend
beyond consideration of the interests of creditors, shareholders and the
general public, by which term is, I think, meant persons who may in the future
have dealings with the company or may be minded to invest in its
securities."
These
observations show beyond any doubt that the interest of the public in regard to
reduction of capital referred to such persons as in future would have dealings
with the company or the shareholders. Those are not the rights that the State
appears for in the present case.
In view of the
fact that there is notice to the State in the present case, the State is
indisputably bound to be heard. That right cannot be denied. The question as to
what extent the State will be entitled to prefer its objections is quite a
different aspect. In so far as the provisions of section 17 of the Companies
Act are concerned with regard to notice being given to every holder of the
debentures of the company and to every other person or class of persons whose
interests will, in the opinion of the court, be affected by the alteration, it
was contended by counsel for the State that every other person whose interest
would in the opinion of the court be affected would include the State. It would
not be proper to lay down any hard and fast rule as to when and under what
circumstances it will be in the opinion of the court desirable to give notice
to any particular person including the State. I am told by counsel for the
parties that in an application for change of office from one State to another
it is the practice of the court to issue notice to the State to find out as to
whether any revenues are due and owning to the State. That is understandable as
to whether the State is being deprived of its legitimate dues and if so the
court will protect the interest of such creditors. I am unable to accept any
abstract and inflexible proposition that the State has a right of its own to be
heard. It is only because the State has been given notice that the State is
being heard in the present application. Section 17 does not speak that the
State as an entity is entitled to notice or to be heard. Counsel for the petitioner
did not also contend that the State could not be heard in the present
application and that was because notice had already been directed by the court
to the State.
The next
question is that if the State is entitled to be heard in the present application
in view of notice having been directed to the State, to what extent will the
State be entitled to object and what would be the character of objections. In
other words, will there by any restriction on the matters that the State can agitate ? This question became important because the State
put in the forefront the contention that any change of office from
Reference was
made by counsel for the State to the decisions in Orient Paper Mills Limited v.
State [1958] 28 Comp. Cas. 523 ;
A.I.R. 1957 Orissa 232. and the decision in In re
Orissa Chemicals and Distilleries Private Limited [1962] 32 Comp. Cas. 497. in
support of the contention that the loss of revenue was a matter which should be
considered by the court. In the case of Orient Paper Mills Limited [1958] 28
Comp. cas. 523 ; A.I.R. 1957
Orissa 232. the registered office of the company was
originally situated in West Bengal and then it was changed to Orissa and
thereafter an application was made for change of the office from Orissa to
The contention
on behalf of the petitioner that the State has not given particulars of loss of
revenue must be upheld in the facts and circumstances of this case because
there is no suggestion as to what loss in revenue will be. As far as the
concept of
In the case of
Oriental Paper Mills Limited v. State [1958] 28 Comp. Cas.
523 the objections on behalf of the State of
As to whether
the loss of revenue of a State is a relevant consideration in an application
under section 17 of the Companies Act, counsel for the petitioner relied on the
observation of the House of Lords in the case of Westburn Sugar Refineries
Limited [1951] 1 AII E.R. 881. Westburn Sugar Refineries Limited case [1951] 1
AII E. R. 881 was with regard to reduction of capital. The provisions regarding
reduction of capital in the English Companies Act, 1948,
are to be found in section 68. It is stated there that the court, if satisfied
with reference to every creditor of the company who is entitled to object to
the reduction, that either his consent to the reduction has been obtained or
his debt or claim has been discharged or has determined, or has been secured,
may make an order confirming the reduction on such terms and conditions as it
thinks fit. It is also enacted in the English Companies Act that where the
court makes an order of reduction of capital, the court may make an order
directing that the company shall add to its name the words "and
reduced" and make an order requiring the company to publish the reasons
for reduction. In Western Sugar Refineries case [1951] 1 AII
E.R. 881. one of the contentions was that the
company was threatened with nationalisation and the court should not aid the
company threatened with nationalisation to "eviscerate" itself by
parting with valuable assets. In dealing with the contentions Lord Radcliffe
said that the contingency of nationalisation did not have any relevance. to the
public policy which the courts of justice should support and if the reduction
was objectionable on other grounds it would not become the more acceptable
because it might have been proposed in view of a pending measure of
nationalisation and conversely the threat of nationalisation could not render
improper what was otherwise unobjectionable counsel for the petitioner
extracted the observation of Lord Radcliffe in Westburn Sugar Refineries case
[1951] 1 AII E.R. 881 and contended that if the case of nationalisation was not
of relevance in an application for reduction of capital, any loss of revenue to
one State would not be of any relevance because in the totality of revenue for
the Republic of India there was no loss, and sectional interest and parochial
considerations should not enter the arena of administration of justice.
The other
contention of counsel for the petitioner was that the jurisdiction of the court
was attracted whenever a company passed a resolution to the effect that the
company sought to change its office and the jurisdiction of the court was not
dependent upon any condition that there might be possibility of loss of revenue
of income-tax. Reliance was placed on the decision of the House of Lords on
It is
necessary at this stage to refer to the provisions of section 17 of the
Companies Act and examine the rival contentions as to whether clauses (a) to
(g) of sub-section (1) of section17 of the Companies Act are applicable or
referable to the case of a company changing the place of its registered office
from one State to another. In sub-section (1) of section 17 it is stated that a
company may by special resolution alter the provisions of its memorandum so as
to change the place of its registered office from one State to another or with
respect to the objects of the company so far as may be required to enable it-
(a) to carry on business more economically or efficiently, (b) to attain its
main purpose by new or improved means, (c) to enlarge or change the local area
of its operation, (d) to carry on some business which under the existing circumstances
may conveniently or advantageously be combined with the business of the
company, (e) to restrict or abandon any of the objects specified in the
memorandum, (f) to sell or dispose of the whole, or in part, of the
undertaking, or of any of the undertakings, of the company, or (g) to
amalgamate with any other company or body of persons. Firstly, it appears that
the case of change of registered office and the case of alteration of objects
are dealt with separately as two different limbs of sub-section (I) of section
17 of the Companies Act. Secondly, it appears that clauses (f) and (g) in
sub-section (1) of section 17 which refer to sale or disposition of the
undertaking or amalgamation with any other company cannot apply to a case of
change of registered office from one State to another. Again, what appears
under clause (c), namely, enlarging or changing the local area of its
operation, is against the scope and content of section 17 of the Act that a
company can change the place and registered office from one State to another to
enlarge the local area of its operation. Further, what appears in clause (e),
namely, to restrict or abandon any of the objects specified in the memorandum,
cannot apply to the case of change of registered office. Counsel for the State
and counsel for the Registrar did not contend that clauses (a) to (g) of
sub-section (1) of section 17 really could have application to change of
registered office from one State to another but they both contended that the
principles embodied under clauses (a) to (g) as far as possible should be
applied to test the cases of change of registered office. Counsel for the State
referred to the unreported decision dated 19th July, 1965, In the Matter of indian Aluminium Company Limited Comp. Pet. No. 225 of 1962,
decided on 19-7-65. where the court did not allow the
change of office from West Bengal to the State of
The cases of
alteration of objects of the company have usually been decided with regard to
two broad principles. Firstly, it is a matter which primarily concerns its
members and creditors and if these classes of people including the
debenture-holders do not object, alteration of objects is permissible.
Secondly, if it is not shown to the court that there is any objection to the
case of alteration of object, it is also permissible to alter the objects. In the case of Parent Tyre Company Ltd. [1923] 2
The right of a
State as such to appear in applications under section 17 of the Companies Act
does not follow from the provisions of the section. I am opinion that there is
no statutory right of the State as a state to intervene in applications under
section 17 of the Companies Act with regard to change of registered office. If
notice has been directed by the court to the State, the State appears pursuant
to the notice. If notice is given to secure whether revenues have been paid or
not, the court in exercising its discretion sees that a company before removing
its office from one State to another does not leave liabilities to the State
undischarged. The court in making an order can impose terms to secure discharge
of such liabilities. It is true that the decisions of the Orissa High Court
have considered the contentions advanced by the State as to the possibility of
loss of revenue and have held such matters to be relevant in the consideration
of change of office. In my opinion, no hard and fast rule can be laid down that
under no circumstance it is open to the State to contend that there may be loss
of revenue. Suppose a large number of companies desire to change their
registered office from one State to another , it may
be open to the State to contend the possibility of disturbance in the economy
of the State. In the ultimate analysis, the question of revenue, if it falls
for consideration, is to be considered on the basis of the integrity of the
In the present
case, as far as the shareholders are concerned, they are only two in number and
they have signified their consent and their interests are protected. With
regard to the contention on behalf of the State as to the possibility of loss
of revenue, I am of opinion that the facts and circumstances of the present
case do not indicate any materials on which it can be said that there is any
loss of revenue, secondly, if there is any possibility of loss of revenue to
one State there is corresponding likelihood of gain of revenue to another
State, thirdly, justice demands that in considering applications under section
17 for change of registered office from one State to another, the matter should
be looked at from the point of view of the Republic of India as a whole and not
for advancement of local or sectional interest. Fourthly, the question of
income-tax raises the discussion as to where the income- tax is being assessed.
On behalf of the company it is said that if the head and control of the company
is at
With regard to
the grounds for change of registered office, it was contended on behalf of the
State of
Counsel for
the petitioner rightly contended that the economy that was to be achieved would
be a matter for the future and it was not possible to give details of the
working of the company in the future. In the case of Taldua
Rubber Company Limited [1946] 2 AII E. R. 763. the
object of the rubber company were in wide terms. The company for several years
carried on business of a rubber estate. The company sold the rubber estate.
There was an application for winding up of the company on the ground that the
substratum had gone. It was held that on a true construction of the memorandum
it was impossible to conclude that the company had been formed solely to work
the rubber estate and therefore the sale of the rubber estate did not result in
a destruction of the substratum. Reference was made in Taldua Rubber Company
Case [1946] 1 AII E.R. 435. to the observations of
Lord Greene M.R. in In re Kitson and Company Limited [1951] 1 AII E.R. 881. where a question arose as to whether there was a real and
bona fide intention to reembark in the engineering business. Lord Green said
that it might be supposed that at the time of sale of the Kitson business so
far as the board was concerned they thought that there was no change and that
it was not desirable for the company even to start again into engineering.
Supposing afterwards the directors changed their mind and they saw a profitable
opportunity of using the company's money again in the engineering business.
Lord Greene said that such intention had nothing to do with the question
whether the substratum of the company had gone or not. Relying on those
observations Wynn-Parry J. said in Taldua Rubber Co.'s case [1946] 1 AII E.R.
435.
"Those
observations (meaning thereby the observations of Lord Greene M.R.) are binding
on me, and with respect, I agree with every word of them. They seem to me to
apply to this case with full force and effect. Apart from authority, it appears
to me that the common sense of the matter demands that the existence or
non-existence of a concrete scheme at the time the petition comes before the
court should be regarded as a wholly irrelevant matter,
otherwise it would be impossible for the court to draw any safe line in any
particular case. Where is the court to draw the line ?
What period is to be allowed to elapse ? What is to be
regarded as satisfactory evidence of the intention of the company to go forward
into some new ventures ? The court clearly is not
called on to adjudge the merits or demerits of any scheme, and this fact
appears to me to make the consideration by the court of the existence or non-
existence of a particular scheme all the less fruitful.”
Again in the
case of Westburn Sugar Refineries Limited [1951] 1 AII E. R. 881 to which
reference has already been made, Lord Radcliffe said in regard to cases of
reduction of capital that if it had to be considered whether the company's
capital were surplus to its requirement and if by that phrase it was meant that
the company's assets exceeded what was required for the future conduct of its
business, precise information on that aspect would do nothing to aid the task
of the court and evidence of that kind was considered by Lord Radcliffe not to
answer cases for reduction of capital because in truth the real question was
answered by the company's own resolution. In other words, it has to be found
out as to whether the economy and sufficiency that the company proposes to have
has received adequate domestic deliberation that the statute enjoins. The
statute contemplates a resolution. The statute does not contemplate workings of
the future to be demonstrated in a court of law. Further, with regard to
economy and efficiency the shareholders and members by their business wisdom
and domestic decision as embodied in the resolution thought of change of
office. The formalities of the statute are complied with. The shareholders and
creditors are all protected.
It was
contended on behalf of the State that the provisions contained in sections 53,
143, 144, 163, 209, 223 and 303 of the Companies Act indicated that if there
was a registered office returns had to be filed and if there was a branch
office books and accounts had also to be maintained and therefore no economy
could be ensured. Counsel on behalf of the Registrar contended that sections
51, 146, 166 and 220 of the Companies Act indicated the registered office was
for service of documents of the company and for holding annual general meeting
and there was provision with regard to preparation of balance-sheet and
reliance was placed on the decision in Arya Insurance Company Limited, In re
[1937] 7 Comp. Cas. 130. In that case an application was made that the
Registrar of Joint Stock Companies be directed that the registered office be
recorded as being in the town of
The domestic
decision of the shareholders or business wisdom of shareholders as embodied in
the resolution is to be confirmed by the court and counsel for the State relied
on the decisions in Bhutoria Brothers 1 (1) [ 1958] 28 Comp. Cas. 122. and
Indian Iron Company [1957] 27 Comp. Cas. 361. respectively, in support of the contention that traders'
interest is not only concern. These decisions do not hold that the traders'
interest is only concern but the court in exercising discretion will consider
the business wisdom of the shareholders. Counsel for the State contended
relying on the authority of the decision in Tata's case [1964] 34 Comp. Cas. 458 (S.C.) that if the company was not entitled to
fundamental rights it would not be a normal part of the affairs of the company
to move about from one place to another. Counsel for the State referred to the
statement of law in Halsbury's Laws of England, volume 2, paragraph 481, at
page 218, that the court will order the removal of a minor only when the court
was satisfied..... it was therefore contended that the
court should not allow a company to go out of its jurisdiction. The case of a
minor or the case of a person leaving jurisdiction of the court does not in my
opinion apply to the case of change of registered office from one State to
another. I have already indicated that a company has the right under the
Companies Act to change its registered office and this statutory right need not
be subjected to the test of fundamental rights or to any restriction of
movement.
As far as the
movement of a company is concerned, the English Act makes it a part of the
statute that the company cannot leave its registered office in
It was
contended on behalf of the State that there was no valid resolution and there
was no valid notice. It was said that under article 87 two persons present in
person being holders of ordinary shares and entitled to vote shall be a quorum
for the general meeting and the two persons who represented the shareholders
were themselves not shareholders and therefore they did not fulfil this
character of holders of ordinary shares to be entitled to vote. The contention
on behalf of the state that under article 87 of the company only shareholders
can appear raises the question of construction of the articles. Section 187 of
the Companies Act indicates that a body corporate may, if it is a member of a
company, by resolution of its board of directors 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. Further, sub-section (2) of
section 187 of the Companies Act enacts that a person 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 that body could exercise if it were an individual member,
creditor or holder of debentures of the company. The
corresponding provision in the English Companies Act in section 139. The
section in the English Act is in similar language and the right of a person to
vote as a representative of a company under the English section is said to depend
upon whether he had been validly appointed and a representative appointed under
the section is held to be a "member personally present" for the
purpose of being counted towards a quorum. The authority for that proposition
is the decision in In Re Kelantan Coconut Estate. [1920] W.N.
274. Further, counsel for the petitioner referred to the provisions
contained in Order 33 of the Code. Order 33 of the Code relates to suit by
paupers. In the decision in Perumal Koundan v. Tirumanrayapuram Jananukoola
hanasekhara Sanka Nidhi A.I.R. 1958 Mad. 362 the question arose as to whether a
company could take recourse to the provisions contained in Order 33 of the Code
of Civil Procedure. It was held that the word "person" in Order 33
would have the same meanings as in the General Clauses Act unless there is
something repugnant in the subject or context and includes any company or
association or body of individuals. To my mind it appears that the provisions
in the Companies Act indicate that the person authorised by the Board to appear
at a meeting of the company is a person entitled to exercise the same rights
and powers including the right to vote on behalf of the body corporate.
The other
contention on behalf of the State was that the notice did not contain all the materials
and therefore did not comply with section 173 of the Companies Act in
particular. It was said that allegations contained in the petition by way of
amendment are not to be found in the notice and therefore the notice did not
contain all material facts. In the case of Parashuram Detaram Shamdasani v.
Tata Industrial Bank Limited A.I.R 1928 P.C. 180, the Judicial Committee said
that a shareholder who by his conduct shows that he knew the real effect of
work to be transacted at the meeting could not complain of the notice on the
ground of insufficiency. Counsel for the petitioner in the present case
contended that the shareholders have not complained and on the contrary the
shareholders have consented to the course of action. The Judicial Committee in the
same case further said : "Elaborate notice in a
circular might sometimes be detrimental to the interest of the company."
Counsel for the petitioner also relied on the Bench decision in East India
Commercial Company (Private) Limited, v. Raymon ngineering Works Limited A.I.R.
1666 Cal. 232 where it was held that material facts were to be given and not
particulars. In the present case the material facts were given and if all the
details of particulars were not set out, there would be no vice in the notice.
The observations in the case of In re Dorman Long and Company [1934] Ch. 635
are also apposite in the present case. It was said at page 665 of the report
that in a case of great complexity all details would not be stated because a
lengthy circular would sometimes defeat its own object. It is always a question
of fact in each case as to whether notice has properly been given and in the
present case I am of opinion that all the material facts have been given.
It was
contended by counsel for the State that in view of the fact that this was a
foreign company and the shareholders were foreigners, it would not be the
question of convenience or inconvenience of shareholders if the registered
office remained at
[1974] 44
COMP. CAS. 465 (
v.
F.S. Wadia
J.L. NAIN, J.
COMPANY
PETITION NO. 179 OF 1972
NOVEMBER 9, 1972
A.B. Divan with V.V. Tulzapurkar
for the petitioner.
J.I. Mehta for opposing
shareholders.
Nain, J.—This is a petition for confirmation
of a special resolution dated June 29, 1972, passed by Zuari Agro Chemicals
Ltd. (hereinafter referred to as "the company"), altering its
memorandum of association by transferring the registered office of the company
from the State of Maharashtra to the Union Territory of Goa, Daman and Diu. The
petition is opposed by one F.S. Wadia and five other shareholders of the
company owning in all 4,525 shares of the value of Rs. 10 each.
The company was incorporated on May 12, 1967, with
its registered office in
On March 29, 1972, the company gave notice to its
shareholders that the fifth annual general meeting of the company would be held
in
At the annual general meeting held in
Thereafter, the company has filed the present
petition for confirmation of the resolution dated July 12, 1972. Mr. F.S. Wadia
has made an affidavit dated October 23, 1972, in reply to the petition in which
he has-contended that the resolution was not in the interests of the company.
He states that the number of shareholders in Greater Bombay was 12,725 and,
that there were 847 shareholders more in the rest of Maharashtra as against
there being 418 shareholders in
It is not in
dispute that about 68 per cent, of the shares in the company are held by persons resident abroad and about 32 per cent, of the shares
are held by persons resident in
Mr. J.I.
Mehta, on behalf of the opposing shareholders, invited my attention to the
provisions of section 17(6) of the Companies Act which states that the court
shall in exercising its powers under section 17 have regard to the rights and interests
of the members of the company and of every class of them as well as the rights
and interests of the creditors of the company and every class of them. He
argued that the court should have regard to the rights of the class of
shareholders in
Mr. Mehta drew my attention to a judgment of the
Orissa High Court in the case of Orient Paper Mills Ltd. v. State,
where the State Government was allowed to oppose an application for confirming
a resolution shifting the registered office out of the State on the ground that
under section 12(3) of the Indian Companies Act, 1913, equivalent to section
17(3)(a), it was provided that before confirming the alteration the court must
be satisfied that sufficient notice had been given to "every other person
or class of persons whose interests will in the opinion of the court be
affected by the alteration". The court held that in that case the State
Government was affected by the alteration and if a notice is required to be
given to it by law it was entitled to be heard. I have no quarrel with this
proposition. In this case, however, the opposition is by shareholders and this
case appears to me to have no relevance.
On behalf of the company my attention has been drawn
to the case, In re Mackinnon Mackenzie
& Co. Private Ltd.
The company was seeking to shift its registered office from
In my opinion, in considering a petition for
confirming the resolutions of alteration of memorandum of association of the
company shifting the registered office of the company, the court has to see
whether all the formalities of the statute have been complied with. These
formalities contain certain safeguards and protection for persons affected. If
these formalities have been carried out, the court will next look to the
interests of absent shareholders and creditors and consider objections, if any,
taken by the shareholders, creditors, Registrar of Companies and other persons
affected by the shifting of the registered office. In so doing, the court is
not concerned to consider the wisdom or desirability of the proposed alteration
It is not the function of the court to substitute its
own wisdom or judgment in the place of the collective wisdom or judgment of the
company expressed in a special resolution. These matters must be left to the
domestic decision of the shareholders.
Applying these principles to the present case, I find
that a vast majority in value of the shareholders have decided that the
registered office of the company be shifted to
It was argued on behalf of the opposing shareholders
that in case I decided to grant the petition, I should order that for some time
informal meetings of the shareholders should be held in
In the result, I grant the petition in
terms of paragraph 13(1) The Registrar of Companies has not opposed the
petition. He will, however be entitled to costs quantified at Rs. 300 from the
company. I make no order as to costs with regard to the opposing shareholders.
[1958] 28 COMP. CAS. 523 (ORI.)
v.
The State
P. V. B. RAO, J.
AUGUST 16, 1956
RAO, J.-These two cases are heard analogously as
they involve similar questions of facts and common questions of law and are
disposed of by this single judgment.
Company Act
Case No. 6 of 1955 is an application by the Orient Paper Mills Ltd., a limited
liability company having its registered office at Brajrajnagar in the district
of Sambalpur in the State of Orissa, under section 12 of the Indian Companies
Act, 1913, for confirming a special resolution of the company passed at an
extraordinary general meeting on 26th August, 1955.
Company Act
Case No. 7 of 1955 is an application by the Hindustan Cellulose and Paper Mills
Ltd., a limited liability company having its registered office at Brajrajnagar
in the district of Sambalpur in the State of Orissa, under section 12 of the
Indian Companies Act, 1913, for confirming a special resolution duly passed at
an extraordinary general meeting of the company held on 26th August, 1955.
Both the
special resolutions were to the effect that the registered office of the
company be changed from the State of
Both the
companies were incorporated on 25th July, 1936, under the Indian Companies Act,
1913, as companies limited by shares. Clause (2) of the memorandum of
association of the companies provides that the registered offices of the
companies would be situated in the State of
The objects of
the Orient Paper Mills Ltd, are to carry on the business of manufacturer of
pulp, paper, boards and other articles and the business of buyers sellers,
dealers, exporters of any goods or merchandise whatsoever and to transact all
manufacturing or treating and preparing processes and mercantile business and
to purchase and vend raw materials and manufacturing articles.
The objects of
the Hindustan Cellulose and Paper Mills Ltd., inter alia, are to carry on the
business of manufacturers of and dealers in papers of all kinds and article
made from paper or pulp (mechanical or wood) and materials used in manufacture
or treatment of paper including card boards, card board boxes, straw boards,
leather boards, mill boards, paste boards, pulp boards.
The nominal
capital of the Orient Paper Mills Ltd. is Rs. 4,00,000 (rupees four crores)
divided into 20,00,000 ordinary shares of Rs. 10 each and 2,00,000 preference
share of Rs. 100 each, out of which 14,8,250 ordinary shares and 1,29,889
preference shares have been fully paid up.
The nominal
capital of the Hindusthan Cellulose and Paper Mills Ltd. is Rs. 10,00,00,000
divided into 60,00,000 ordinary shares of Rs. 10 each and 4,00,000 preference
shares of Rs. 100 each out of which issued and paid up capital amounts to Rs.
10,00,000.
By special
resolutions of the companies duly passed at extra-ordinary general meetings of
the companies on 26th August, 1955, it was resolved as follows
:
“Resolved that
the registered office of the company be transferred from the State of Orissa to
the State of West Bengal and that the words `West Bengal’ be substituted for
the word `Orissa’ in clause No. 2 of the memorandum of association of the
company.”
The office of
the managing agents of the Orient Paper Mills Ltd. and the central departments
of various companies under their managing agency being situated at Calcutta, in
the State of West Bengal and necessary staff for such work being kept there,
the petitioner in Company Act case No. 6 of 1955 alleges that the management
finds it more convenient and economical to have the registered office of the
company in the State of West Bengal. In the case of other company, as it is a
subsidiary company of the Orient Paper Mills Ltd., it is alleged that it is
convenient to transfer the registered office of that company also to
For the
above-said reasons, a special resolution of the shareholders of each company
was passed unanimously to effect the said alteration of the location of the
registered office in the memorandum of association of the company.
The Orient
Paper Mills Ltd. has an outstanding debenture loan to the extent of Rs. 1,00,00,000. The company has only general creditors in the
ordinary course of dealings who are paid from time to
time in the usual course of business. It is alleged that the transfer of the
registered office of the company will not affect the rights and interests of
the creditors in any way and that the company has ample working capital and its
assets are more than sufficient to pay all its debts and to make good the whole
of its paid up capital and that no one will be prejudiced by the change of the
registered office of the company from the State of Orissa to the State of West
Bengal.
The Hindusthan
Cellulose and Paper Mills Ltd., has no debenture creditors. It is alleged that
it has only general creditors, in the ordinary course of dealings who are paid
from time to time in the usual course of business and the transfer of the
registered office of the company will not affect the right or interest of the
creditors in any way and that it has ample working capital and its assets are
more than sufficient to pay all its debts and to make good the whole of its
paid up capital. Due publication of the applications was made in the Eastern
Times and the Matrubhumi.
The learned
Advocate-General appeared and filed an objection in both the matters on behalf
of the State of
The objections
of the State are to the effect that the alteration made by the special
resolution which are to be confirmed with regard to the registered offices of
the companies affects the interests of the State Government as well as the
people of the State; that the interest of the labour employed in the factory
would suffer if the registered office is at Calcutta; that issues relating to
payment of bonus and the administration of the Employees’ Providend Fund Act
and Scheme cannot be properly administered as the worker-members will not be in
a position to check and see their account, which will be in the registered
office, that if the registered office is transferred to Calcutta, vacancies in
the office cannot be filled up by appointing the citizens of the State that
many difficulties would arise in case of labour disputes if the registered
office is at Calcutta and the Government would not be in a position to deal
with the situation that may arise; that the alteration sought to be confirmed
would greatly affect the revenue of the State of Orissa with reference to
various taxes, namely, income-tax sales-tax etc.: that the proposed alteration
is not bona fide and made in good faith; that the alteration is aimed at
evading the operation of the impending legislation regarding sales-tax and the
provisions of the new Companies Act; and that the alteration resolved upon is
not for the benefit of the company. The state also alleges that the change of
the registered offices would entail serious practical difficulties in working
out the provisions of the Orissa River Pollution Prevention Act, 1953, and of
the Factories Act, 1948; and that immediate action contemplated by those Acts
can not be take if the registered office is to be at Calcutta.
An objection
was also received from the one Shri Lalit Kumar Pati, pleader , Sambalpur,
alleging that the proposed shifting will work as a handicap to the people who
want to approach the registered office directly either for appointment, or
ventilating their grievances; that it will put the employees of the company at
a great disadvantage in seeking redress of their grievances regarding wages,
bonus, leave and other legitimate facilities and amenities; and that the
proposed alteration of the registered offices is a move for depriving the
children of the soil of Orissa of their rightful claims for services and
employment, etc., and is an injustice to the people Orissa.
Publication of
the notice of these applications was ordered to be made on 18th November, 1955.
the learned Advocate- General appeared for the State
on 16th March, 1956. Publication of the notice of these applications was made
in two issues on 24th November, 1955. On 6th April, 1956, I ordered notice of
this application to be taken to the Registrar of the Joint Stock Companies,
Orissa. The Registrar of the Joint Stock Companies was served on 10th April,
1956. But he did not choose to appear and place before the court any material
to enable it to come to a decision whether to confirm the special resolution or
not.
On 13th July,
1956, these petitions were heard in part and I directed the petitioners to
produce before me certified copies of the applications made by the petitioners
in 1947 to change the registered offices from Calcutta to Orissa as also the
orders of the High Court of Calcutta on those application and a statement
showing the income-tax paid by the companies to the Central Government each
year. The learned Advocate-General also was asked by me to produce if there is
any material with the Government as to the reasons why the companies changed
the registered offices from
The learned
counsel for the petitioners, Mr. A.C.Mitra, contends that the proposed
alterations of the registered offices was unanimously resolved upon by special
resolutions of the companies duly passed at an extraordinary general meeting
held on 26th August, 1955; that the extraordinary general meeting held on 26th
August, 1955, that the offices of the managing agents of the companies are
always situated at Calcutta in the State of West Bengal in consequence of which
it is more convenient and economical to have the registered offices of the
companies at Calcutta and that the matter having been unanimously approved by
the shareholders should be confirmed by this court. He also contends that about
7,09,000 ordinary shares of the nominal value of Rs. 70,90,000 are held by shareholders
in West Bengal whereas in Orissa there are only about 6,000 shareholders
holding shares of the nominal value of Rs. 60,000 and that about 7,53,000
shares of the nominal value of Rs. 75,32,500 are held in other shares. His
contention is that as the majority of the shareholders are in West Bengal, and
as by a unanimous special resolution it was agreed to transfer the registered
offices to
“Before
confirming the alteration, the court must be satisfied (a) that sufficient
notice has been given to every holder of debentures of the company and, to any
persons or class of persons whose interests will, in the opinion of the court,
be affected by the alteration.”
This
sub-section (a) of the clause 3 requires notice to any persons or class of
persons whose interest will, in the opinion of the court, be affected by the
alteration. The expressions “any persons” or “class of persons” in this clause
are very general and are applicable not only the creditors or debenture-holders
of a company but also to every person whose interests maybe affected. Section
14 only requires that before exercising its discretion under sections 12 and
13, the court shall have regard the rights and interests of the members of the
company or of any class of them, as well as to the rights and interests of the
creditors. This provision, in my opinion, does not in any way letter the power
of the court to take into consideration the objections of any person or class
of persons if their interests are affected by the alteration. Section 14 only
requires that the court shall have regard to the rights and interest also of
the members. This is only an additional factor to be taken into consideration.
This does not mean that the right and interests of the members of the company
or of any class of them is the paramount guide in exercising the discretion to
confirm or not to confirm the special resolution changing the registered office
of the company. The expression “shall have regard to”
has been interpreted by the Judicial Committee of the Privy Council in the case
of Ryots of Garbandho v. Zamindar of Parlakimedi. In construing sub-section (2)
of section 168 of the Madras Estate Land Act:-”In setting rents under this
section, the Collector shall presume, until the contrary is proved that the
existing rent or rate of rent is fair and equitable and shall have regard to
the provisions of this Act for determining the rates of rent payable by a
ryot,”-the Judicial Committee held that the expression “shall have regard” has
no more definite or technical meaning than that of ordinary usage, and only
requires that the provisions must be taken into consideration and not that the
settlement of rent should be in accordance with those provisions. Consequently
I am of opinion that section 14 requires only that the interests of the
creditors shall be taken into consideration and not that the interests of the
shareholders should be given effect to and is the only paramount consideration.
On the other hand, in my opinion, clauses (2) and (3) of section 12 are more
imperative that section 14 of the Indian Companies Act of 1913.
Under the
English Company law, the registered office of the company is unalterable when
once it is fixed in the memorandum of association and the company is
registered. In paragraph 274 of Halsbury’s laws of
“Every company
must have a registered office as from the day on which it begins to carry on
business or the fourteenth day after its incorporation, whichever is the
earlier.
The position
of the office, namely, whether it is in
The situation
of the registered office fixes the domicile of the company, and in important as
regards the court which has the jurisdiction to wind up the company”
Though under
section 12 of the Indian Companies Act of 1913 the memorandum of association
maybe altered with regard to its registered office by a special resolution to be
confirmed by a court, yet it is clear from the unalterable nature of a
registered office in England that the registered office of a company in India
should not be altered and the alteration should not be confirmed as and when
the company passes a special resolution. A company is a corporation in law and
a company is a different entity in law from that of its shareholders. The
interests of the company may also be different from the interests of the
shareholders in certain respects. It cannot be prejudicated that the interests
of the shareholders are identical with the interests of the company.
Mr. Mitra, the
learned counsel for the petitioners also contends that the objections based
upon the loss of income- tax or sales tax is not at all relevant for purposes
of this enquiry. He concedes that the company pays a large amount of income-tax
to the Central Government as also sales tax, but contends that this should not
be taken into consideration in coming to a conclusion whether the special
resolution of the company should be confirmed or not.
He also
contends that the difficulties of the employees and the labour, in case the
registered office is changed to
At the time of
the incorporation of the companies, the registered offices were at Calcutta,
but in 1947 the companies filed application before the High Court of Calcutta
to confirm the special resolution passed by the shareholders at a general
meeting of the companies held on 9th May, 1947, to alter registered offices of
the companies to the Provinces of Orissa and these were confirmed by the
Calcutta High Court.
The learned
counsel for the petitioners pointed out to me that the confirmations of these
special resolutions altering the registered offices of the companies from West
Bengal to Orissa were ordered in chambers and that confirmation is only a formally.
It may be that in that particular case the order was made in chamber according
to the rules and practice prevailing in the Calcutta High Court, but that fact
does not in any way lead me to come to the conclusion that I should not take
into consideration any of the objections before confirming the resolutions.
I asked the
learned Advocate-General to place before me any material which is in possession
of the State of Orissa to show why the petitioners changed their registered
offices of the companies from West Bengal to Orissa, in 1947, but the learned
Advocate-General did not place before me any such material. In the petitions
filed by the petitioners in the Calcutta High Court, it was clearly stated that
the Mills of the companies are situated in Orissa and that the companies had to
manage a large staff a that place and the management consequently, finds it
more convenient to have the registered offices of the companies in Orissa.
If it was more
convenient to have the registered offices of the companies in Orissa on account
of their mills being situate in Orissa and a large staff was maintained at that
place, in 1947, I cannot understand how now it could be more convenient to have
the registered offices at Calcutta in West Bengal when the mills still continue
to be in Orissa and the companies maintain a large staff at that place. The
reason for the company changing its registered office from West Bengal to
Orissa in 1947 might be , though there is absolutely
no specific evidence to that effect, as suggested by the learned
Advocate-General, to obtain certain permits and concessions for bamboos which
are so very necessary for a paper mill, the main objects of the companies being
to carry on the business of manufacturer of pulp. paper,
boards, etc. The learned Advocate-General on this ground, urges that the
alteration of the memorandum of articles of the association by transferring the
registered offices from Orissa to
In Halsbury’s
Laws of England, Third Edition, Vol.6, at page 272, it is observed: “Any
alteration must be made bona fide for the benefit of the company as a whole”,
meaning thereby the corporation as a general body. In Allen v. Gold Reefs of
West Africa Ltd., LINDLEY M.R. observed as follows:
“The power
thus conferred on companies to alter the regulations contained in their
articles is limited only by the provisions contained in the statute and the
conditions contained in the company’s memorandum of association. Wide, however,
as the language of section 50 (of the Companies Act, 1862) is, the power
conferred by it must, like all other powers, be exercised subject to those
general principles of law and equity which are applicable to all powers
conferred on majorities and enabling them to bind minorities. it must be exercised, not only in the manner required by
law, but also bona fide for the benefit of the company as a while, and it must
not be exceeded.”
Lord Wrenbury
in his book on the Companies Act, Ninth Edition, page 25, says:
“Possibly the
limitation on the power of altering the articles may turn out to be that the
alteration must not be such as to sacrifice the interests of the minority to
those of a majority without any reasonable prospect of advantage to the company
as a whole.”
Consequently,
in my opinion, the court can confirm the special resolution altering the
registered office only if it is satisfied that the said special resolution was
first bona fide and next was in the interests of the company.
As has been
already stated, the petitioners by special resolutions and after confirmation
by the Calcutta High Court got the registered offices of the companies changed
from
In the present
application, for changing against the registered offices of the companies form
Orissa to West Bengal, the reasons assigned in affidavit are that the office of
the managing agents of the companies and the central departments of various
companies under their managing agency are situated at Calcutta in the State of
West Bengal and necessary staff for such work is kept there and the management
consequently finds it more convenient and economical to have the registered
offices of the companies in the State of West Bengal.
When a change
of the registered offices was effected in 1947 from West Bengal to Orissa on
the ground that it would be more convenient to carry on the business of the
companies if the registered offices are changed to Orissa, I cannot understand
how a retransfer of the registered offices of the companies to West Bengal
again on the same ground without stating any other additional reasons would be
a bona fide one. There is some force, therefore, in the suggestion of the
learned Advocate-General that the said special resolution passed on 26th
August, 1955, for transfer of the registered offices of the companies to
Calcutta are not passed in good faith are not bona fide. The proposed
alteration of the registered offices from Orissa to
The next
contention of the learned Advocate-General is that the State of
From that it
can be seen that the total income-tax paid on income by the Orient Paper Mills
Ltd. is Rs. 31,09,393 for the year 1955-56 and Rs.
3,59,487 for the year 1954-55. The Hindusthan Cellulose and Paper Mills Ltd.
paid a total tax on income in the year 1955-56 of Rs. 66,428 and in 1954-55 of
Rs. 65,872. It may also be noted that for the year 1954- 55 this company paid
an income-tax of Rs. 2,89,969 and in 1952-53 a tax of Rs. 3,78,324. No doubt,
the income-tax is a central revenue, but a large
portion of the income-tax realised b the Central Government is paid to the
respective States in proportion to the tax realised from the State concerned.
If the
income-tax on these companies is levied at the place where the registered
offices of the companies re situate and if the registered offices of the
companies, according to the special resolutions, are to be changed to West
Bengal, that income-tax paid by the companies would be credited to he State of
West Bengal and the said tax would not be taken into account by the Union
Government as the tax received from the State of Orissa, though the paper mills
of the company are situate in Orissa. The State of
Next, the
learned Advocate-General contends that a considerable amount of sales tax would
be realised if the registered officers of the companies are situate in Orissa.
Though the learned Advocate-General had not furnished any figures as to what is
the amount of sales tax collected by the State from these two petitioners each
yet there is no denying the fact that sales tax collected would be of a
considerable amount. Generally, the contracts for purchase or sale are entered
into with the companies at the registered offices and if the registered offices
are to be situated at
The next
objection of the learned Advocate-General is with regard to serious practical
difficulties in working out the provisions of the Orissa River Pollution
prevention Act, 1953, and of the Factories Act, 1948, as also the Industrial
Disputes Act, if the registered offices of the companies are transferred to
There is also
the counter affidavit of one Shri Lalit Kumar Pati in which he raised that the
proposed shifting will work as a handicap to such people of Orissa who want to
approach the registered office directly either for appointment or ventilating
their grievance, if any, that it will also put the employees in general of the
company at a great disadvantage in seeking redress of their grievances
regarding wages, bonus, leave and other legitimate facilities and amendities;
that it will minimise the importance of the State of Orissa; and that the
proposed alteration is a move for depriving the children of the soil of Orissa
of their rightful claims for services and employment etc., which, though they
may appear trivial, have some force which can be taken into consideration by a
court before confirming the special resolution of the companies for a change of
the registered office to West Bengal.
Orissa is
still an undeveloped State though it continue vast
natural resources and has not yet developed as West Bengal,
The Indian
Constitution is of a federal type. Each unit of the federation has exclusive
fields of State activity and is entitled to develop its State in its own way.
The interests of the State are to be taken into account and are of considerable
importance in confirming special resolutions of the companies if they have
adverse effect on the interests of the State concerned.
To summarise,
my findings are as follows:
(1) that the State of Orissa or
any other person is competent to raise objection under section 12 of the Indian
Companies Act of 1913, to change of the registered office and confirmation of
the special resolution to that effect;
(2) that
the court can consider these objections in confirming or not the special
resolutions of the companies and can, if the objections are justified, refuse
to confirm the special resolutions;
(3) that
the proposed alteration creates many practical difficulties in the
administration of the various Acts concerning industrial disputes, and
factories and labour;
(4) that
the proposed alteration affects the revenue of the State of
(5) that
the proposed change of the registered office of the companies is not bona fide
and is not resolved upon if good faith and is not for the benefit of the
companies.
As observed
above, in my opinion, the special resolutions of the two companies passed on
26th August, 1955, are not bona fide and would create many practical
difficulties.
In the result,
therefore, I would refuse to confirm the special resolutions and dismiss the
applications with costs. A consolidated hearing fee for both the applications
is fixed at Rs. 250.
Petition
dismissed.
[1937] 7 COMP. CAS. 130
(
Aryya Insurance Co. Ltd., In re
MCNAIR, J.
DECEMBER 9, 1935
S.C.
Bose, A. Sen and R. Choudhuri, for applicant.
S.M. Bose, Standing Counsel, N.C. Chatterjee and J. Moitra, for opposite party.
McNair, J.—This is an application by the
Aryya Insurance Co., Ltd., that the register of the Registrar, Joint Stock
Companies,
"The
registered office of the company will be situated in the town of
At a meeting
held on 14th July 1935 in the town of
"The company shall not alter the conditions contained in its memorandum except in the cases and in the mode and to the extent for which express provision is made in this Act."
The decision of the question before me depends largely on whether the alteration which purports to have been made is or is not a condition within the meaning of S. 10. Both sides rely on the case in Ashbury v. Waston. At. p. 380 of the report Lord Esher, Master of the Rolls, said:
"It is admitted that the resolutions made an alteration in a condition contained in the memorandum of association, but it is said that the alteration was not as to any of the matters mentioned in S. 8 (which corresponds to S. 6, Companies Act) and that therefore it was not alteration of a condition in the memorandum of association within the meaning of the statute, and it was argued that the meaning of S. 12 is only that those conditions in the memorandum of association as required by S. 8 could not be altered and that other conditions in the memorandum of association could be altered if altered with the assent of every shareholder of the company."
No question arises here with regard to the assent of the shareholders, but a similar argument has been put forward on the relevant sections of the Companies Act which correspond closely to the terms of the English Act. At p. 381 of the report Lord Esher says:
"Now anything which is laid down as a rule in the memorandum of association must, I think, be taken to be one of the conditions on which the company is established. The S. 12 says that no alteration shall be made by any company. Therefore it seems difficult to me to imagine a case in which any stipulation in the memorandum of association can be altered even by the whole company save such as is expressly mentioned in S. 12."
Reliance is placed on these words of Lord Esher in support of the contention that anything inserted in the memorandum of the company becomes a condition and as such unalterable except under the provisions of the Companies Act. S, 12 of the Indian Act is the section which empowers a company to alter its memorandum and provides, if I may so call them, the exceptions to the rule laid down in S. 10. S. 12 provides that subject to the provisions of this Act a company may alter the provisions of its memorandum so as to change the place of the registered office from one Province to another, or with respect to the objects of the company so far as may be required for certain purposes which are set out in the clauses immediately following. In respect of his contention, Mr. S. C. Bose, for the petitioner, has referred me to p. 28, 14th Edn. of Palmer's Company Law. The learned author is there dealing with the conditions and provisions generally inserted in the memorandum of association. He refers to the main provisions required by the English Act to be stated in the memorandum, and continues:
"...but
occasionally additional provisions are inserted, clauses, for example, defining
the rights attached, as above mentioned, to different classes of shares, rights
as regards dividend, voting, and participation in assets on a winding up and
various other matters. There is nothing illegal in the insertion in the
memorandum of such additional provisions, but it must be borne in mind that, if
inserted without qualification, they become conditions continued in the
company's memorandum within the meaning of S. 4 of the Act of 1929, and the
rule is that such a condition cannot be altered, except under a scheme of
arrangement sanctioned by the Court, and that nothing can be done in
contravention thereof, a conclusion of law which may prove embarrassing to the
company.”
In support of that statement the learned author refers to the case in Ashbury v. Watson. It is noticeable that S. 6, specifically provides that the memorandum must state the province in which the registered office of the company is to be situate, but there is no specific provision as to the town where the registered office may be located. The reason no doubt is because the various provinces have their separate rules and it is essential that the public should know the particular province and the rules under which the company will be governed. There can be no doubt that had the province been changed that would have been permissible provided that the provisions of S. 12 of the Act had been complied with. It is contended by the learned standing counsel, who opposes this application, that there is no prohibition with regard to the alteration of the town where the registered office is situated. It is true, he argues, that a clause setting out the location of the registered office has been inserted in the memorandum of association, but it does not thereby become an essential condition. It is merely a provision with regard to management. He relies on the judgment of Fry L. J. in the same case in dealing with S. 12 of the English Companies Act of 1882, which corresponds with S. 10 of the Indian Companies Act. Fry, L.J. says:
"Now that section, it must be borne in mind, does not refer to necessary conditions or to essential conditions, and S. 8, though it specifies certain conditions, does not say that no other conditions shall be in the memorandum of association. I am not prepared to say that there might not be inserted in the memorandum of association details with regard to the management of the company which would not be conditions within the meaning of S. 12; but I think that that section does not apply to all conditions in the memorandum of association which may fairly by described as essential parts of the constitution of the company and upon which it was established."
At the
conclusion of his judgment Fry, L.J. says:
"By essential condition I mean that which in fact is part of the essence of the constitution of the company."
It is contended by the learned standing counsel that the insertion of the name of the registered office is a detail with regard to the management of the company, which is not a condition within the meaning of S. 10 of the Indian Act, and he relies on S. 72 of the Act, which is the first section in part 4. Part 4 of the Act is headed " Management and Administration." S. 72 provides:
"Every company shall have a registered office to which all communications and notices may be addressed."
It is contended that the registered office is therefore definitely considered by the Act itself as appertaining to the management and administration of the company. This argument is also supported by a paragraph in the 14th Edn. of Palmer's Company Law:
"The company's memorandum of association states (says the learned author) as we have seen, in what part of the United Kingdom the office of the proposed company is to be situate. This, once declared, becomes an unalterable condition of the company's constitution, which nothing short of an Act of Parliament can change. But though confined to that part of the United Kingdom, England, Scotland, or Ireland, which it has chosen by its memorandum, the company may, subject to that limitation, fix its office anywhere it likes within the chosen area and change it from time to time provided it gives notice of each change to the Registrar."
Similarly, in this country, the company's memorandum must state the province in which the office of the proposed company must be situate, but once that province has been declared there appears to me to be no valid reason why the company should not fix its office anywhere it likes within that province, and change it from time to time, on giving notice. It is stated that the reason why the town was mentioned here, instead of the province, was because at the time that this company was incorporated the Act of 1882 was in force under which it was not the province which had to be specified but the place in which the registered office of the company would be situated. In my view the insertion of the place-name in the memorandum of association of the company does not make it an unalterable condition of the company's constitution and provided the alteration of the place name has been made in the manner provided by the Act such alteration is valid and binding on the company.
The other question which has been raised is as to the power of this Court to interfere. The petitioner contends, relying on S. 3, Companies Act, that the High Court is the Court which alone has power under the Companies Act, but it is noteworthy that that section provides that the Local Government may empower any District Court to exercise all or any of the jurisdiction by this Act conferred upon the Court (that is to say, the High Court), and it seems clear that all that S. 3 is referring to is the exercise of the jurisdiction conferred by this Act with reference more particularly to such as the winding up of Companies. Those are matters which are essentially within the jurisdiction of the High Court and cannot be dealt with by the District Courts unless they have been specially empowered to do so by the Local Government.
It is admitted that there is no specific section of the Companies Act which deals with the question now before this Court. There is no section, that is to say, which entitles this Court to direct the Registrar to rectify his Register and it is contended by the learned standing counsel that S. 45, Specific Relief Act is inapplicable, because there is another remedy which has already been followed, namely, to bring a suit for determination of question. There is in fact a suit already on the file at Silchar for a declaration that the removal of the registered office is illegal. In my view, the jurisdiction conferred on this court in Company matters is the jurisdiction to deal with matters provided for by the Act and it is very doubtful whether an application to rectify the register for which no provision is made in the Act can properly be brought before the Judge who is dealing with company matters. In View however of my finding on the other point this question need not be decided. The application will be dismissed with costs certified for counsel.