Sections 69 to 116
SHARES
& DEBENTURES
Share [Section 82, read with Section 2(46)]
[1967]
37 COMP. CAS. 240 (
V.
Commissioner Of
Income-tax, Central, Culcutta. 5.
C
N LAIK AND
FEBRUARY
5, 1965
JUDGMENT
DATTA, J. - This reference relates to the application
of the provisions for rebate contained in Paragraph D of the Part II of the
Finance Act,1956.
On 30th
December, 1954, the assessee-company passed several resolution relating to the
capital structure of the company including a resolution relating to the issue
of fully paid-up bonus shares.
The
assessee-company in its return for the assessment year 1956- 57 corresponding
to the accounting year 1955 claimed a rebate on account of the issue of bonus
shares and the increase in the paid- capital consequent upon the issue of bonus
shares. The Income-tax Officer held that the rebate on the face value of the bonus
shares is to be reduced in the year when these shares are issued by the company
to its shareholders. In the accounting year 1955 only a resolution for increase
of capital by issue of new shares was passed. The passing of the resolution in
the accounting year did not tantamount to the issue of bonus shares to the
shareholders. He further held that clause (b) of the said resolution makes it
patent that the shares were not issued in the accounting year ended 31st
December, 1955, and, accordingly, he disallowed the rebates claimed.
The
assessee-company thereupon filed an appeal before the Appellate Assistant
Commissioner of Income-tax, Range (II), Central,Culcutta.
The Appellate
Assistant Commissioner observed:
“ In my
judgment therefore the Income-tax Officer was fully justified in coming to the
conclusion that these shares had been issued in the previous year under
consideration and not preceding the accounting period ending 31st December,
1954. He was of the opinion that in view of the definition of paid-up capital
as "paid-up capital (other than capital entitled to dividend at a fixed
rate) of the company as on the 1st day of the previous year relating to the
assessment for the year ending on 31st March,1957", and in the light of
the facts set forth above, I think that the bonus shares of the face value of
Rs.50,000 should be included in the paid- up capital of the appellant within
the meaning of this term in the Indian Finance Act,1956. The appellant's
contention on this point is therefore accepted. The Income-tax Officer will
please amend his computation of taxes accordingly. "
Thereupon both
the Commissioner of Income-tax and the assessee took up the matter to the
Tribunal for each of them lost on one ground before the Appellate Assistant
Commissioner. The Income-tax Tribunal, however, held that, in neither case, the
assessee was entitled to the rebate.
Thereupon the
assessee made an application to the Commissioner of Income-tax for referring
the matter to the Income-tax Tribunal. Thereupon the Tribunal referred the
following questions for our opinion:
" (1) Whether, on the
fact and in the circumstances of the case, the bonus shares of the face value
of Rs.50,07,500 should be included in the paid-up capital of the assessee within
the meaning of that term in pursuance of sub-section(1) of the Explanation to
Paragraph D of Part II of the Finance Act,1956, for the relevant assessment
year?
(2) Whether, on the facts
and in the circumstances of the case, the bonus shares in question can be said
to have been issued within the meaning of the second proviso to Paragraph D of
Part II of the Finance Act, 1956, to the shareholders by the assessee during
the accounting year ended 31st December, 1955, relevant for the assessment year
1956-57? ".
Thereafter
this matter came before us for hearing.
The second
question may be considered first, for it raises the primary controversy between
the parties.
The relevant
provisions of the second proviso to Paragraph D of Part II of the Finance Act
of 1956 are as follows:
"Provide
further that -
(i) the amount
of the rebate under clause(i) or clause (ii), as the case may be, of the
preceding proviso shall be reduced by the sum, if any, equal to the amount or
the aggregate of the amounts, as the case may be computed as
hereunder:-..........
(b) on the
amount representing the face per rupee value of any bonus shares or the amount
per rupee". of any bonus issued to its shareholders during the previous
year with a view to increasing the paid-up capital, except to the extent to
which such bonus shares or bonus have been issued out of premiums received in
cash on the issue of its shares............
It is now
necessary to consider the meaning and scope of the words " issued to the
shareholders" before considering the meaning and effect of the words
" bonus shares issued to the shareholders".
The phrase
" share issued to the shareholders " comprises of three components.
The word
"share" has more than one meaning in common parlance.
The Indian
Companies Act defines shares: "share" means under section 2(16)
"share in the share capital of the company and includes stock except when
a distinction between stock and shares is expressed or implied".
Therefore the
statutory meaning of share covers the phases of the share, share when it is a
part of the share capital still remaining unexploited by the company, share
when it is exploited by the company finding a shareholder and lastly when the
share is converted into stock. The first phase arises because under the company
law "Every company limited by shares" has nominal or authorised or
registered share capital. This capital is one of the essential features in the
company's constitution. It is to be mentioned in the memorandum of association
and the capital so mentioned is to be divided into shares of a fixed amount.
The capital is usually fixed at some round figures according to the
requirements of the company assessed by the promoters of the company.
Therefore, it seems to me that the first part of the definition of the word
"share" in the Companies Act refers to the share in this limited
sense when the share is still in the womb of the company or in the shell of the
company and has no shareholder.
The second
phase arises when it attracts section 28 of the Indian Companies Act.
section 28 of
the Indian Companies Act is as follows:
"(1) The shares or other
interests of any member in a company shall be movable property, transferable in
the manner provided by the articles of the company.
(2) Each share in a company having a share
capital shall be distinguished by its appropriate number."
Therefore, the
share when it becomes associated with a member becomes a movable property. It
is however not movable property whose transfer is solely regulated by the Sale
of Goods Act. Its transfer is also governed by the Companies Act and/or
articles of the company. Each share again bears a distinguishing number.
It may be
noticed that certificate of share is not the shares or a share. A certificate
under section 29 of the Indian Companies Act is " a certificate, under the
common seal of the company, specifying any shares or stock held by any member,
shall be prima facie evidence of the title of the member to the shares or stock
therein specified". Hence, a share certificate is not the share. It is
only a prima facie evidence of the title to the share. Therefore , it is
necessary to consider what is the character of a share.
Section 28
says it is a movable property. It is however not a tangible property for it is
not the share certificate. Therefore, it must consist of a bundle of rights and
obligations. The nature of a share has received judicial consideration. Romer
L.J. observed in In re Paulin 1 as follows:
" Share
is a right to receive a proportion of the profits of the company and it is
assessed on winding up and all other benefits to membership combine the
obligation to contribute to its liabilities, all measured by a certain sum of
money which is the nominal value of the share, and all subject to control by
the regulations of the company."
Therefore, a
share can be either in the first phase or stage or in the second phase or
stage. It remains either in its shell as a part of the capital or resides in a
shareholder. It cannot lie suspended in any intermediate phase or stage.
Hence it is
necessary to find out the modus operandi of the transit from one phase or stage
to another to appreciate the meaning of the word "issue", which
ordinarily means "sending out " or "putting out".
Section 30 of
the Companies Act furnishes the modus operandi or mechanism for the
transformation and ultimately the completion of the transit.
Cause(1) of
section 30 states that a subscriber to a memorandum becomes a member when his
name is entered in the register of members. Clause(2) of section 30 lays down
that every other person (those who are not covered by clause (1), who agrees to
be a member and whose name is entered in the register of members becomes a
member.
In the case of
subscribers to the memorandum, no agreement is necessary but an entry in the
register must be made before the subscriber becomes a member. In the other
class of case there must be at first an agreement which is regulated by the
Contract Act.
There must be
an offer, an acceptance and a communication of the acceptance under the
Contract Act to constitute a contract. Therefore, the same requisites are
necessary for a completion of the agreement to take shares. In the Companies
Act, the offer is made generally when an application for share is signed by the
applicant. It has been held however that an application by word of mouth is
equally effective. It is accepted when the board of directors allot the shares.
It is however not sufficient to constitute a contract then. It is only when an
allotment is communicated to the prospective shareholders that it becomes a
completed contract. The agreement is not sufficient to make the applicant a
member. There must be an entry in the register of members.
The entry in
the share register is a sine qua non in both cases.
Therefore,
though the subscription to the memorandum or an agreement to take a share may
keep the share in preparedness by fulfilling the preliminary requirements for
its exit and transit to the owner, it still remains in the womb or shell of the
company, though it may be then in an animated condition. The exit and transit,
however, takes place when the entry in the register is made. Hence, in my
opinion, issue of the share takes place when entry of the name of the subscriber
or the successful offeror is made in the register of members. It follows from
the foregoing observation that a share is issued when it finds an owner.
It is now
necessary to turn to the decisions in
It was held in
In
In
There is
practically only one Indian reported decision on the point which incidentally
considered the meaning of the word "issue" . This is the case of Sri
Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd. 10,
where the question was whether the sale or the re-allotment or the re-issue of
issued shares is an allotment of shares within the meaning of sub-section (1)
of section 75 of the Companies Act, 1956. There, Bachawat J. observed, inter
alia, that the allotment of shares precedes all issues. Allotment of share
means appropriation of unissued shares to a specified number of persons. Issue
of shares is something distinct from allotment and is some subsequent
(1) (1874) 9 Ch.
(2) (1876 1 Ex. D, 242.
(3) [1906] 2
(4) (1876) 4
(5) [1933] 1 K.B. 134 (
(6) (1878) 8
(7) [1897] 1
(8) (1899) 80 L.T. 347.
(9) [1904] 1 K.B. 263.
(10) [1963] 33 Comp. Cas. 862 (S.C.).
act
whereby the title of the allottee becomes complete. His Lordship left the
matter at that stage . This question was broached in the case of Nanalal Zaver
v. Bombay Life Assurance Co. 1 in connection with the interpretation
of section 105C of the Indian Companies Act. There is, however, no clear
expression of opinion.
In
my opinion, on a reference to the authorities, it seems to me that on the whole
they support my view. It is now necessary to ascertain the meaning of the word
"to " in the relative phrase. It seems to me that the word "to
" connotes a movement with a direction or destination. The next mentioned
word in the phrase is "shareholders".
In
company law a member is a shareholder and a shareholder is a member: see
Palmer's Company Law (Topham, 18th Edition, page 88).
A
person may become a member or shareholder in any of the following ways:
" (1) By
subscribing the memorandum of association, before its registration (which is in
essence section 30, clause (1), of the Companies Act).
(2) By
agreeing with the company to take a share or shares, and being placed on the
register of members (which is in substance section 30,clause (2), of the
Companies Act)
(3) by
taking a transfer of a share or shares, and being placed on the register of
members (which is in substance section 34 of the Companies Act).
(4) By
registration on succession to a deceased or bankrupt member (which is
equivalent to section 35).
(5) By
allowing his name to be on the register of members or otherwise holding himself
out or allowing himself to be held out as a member (which follows from the ordinary
principle of estoppel)."
Hence
the word " to shareholders" do not have the destination at large but
circumscribe the destination to shareholders. This destination, that is,
shareholder, can be reached only when an existing shareholder becomes the owner
or holder of the share and not otherwise.
Therefore,
the words " share issued to shareholders " signify that the share in
the shell or womb of the company has found an owner in an existing shareholder,
for, once it issues out, it cannot remain in the air but it becomes attached to
a purchaser or owner.
Therefore,
having regard to the words "issued to the shareholders" in the phrase
"shares issued to the shareholders", it is clear that the share is
used in the narrowest sense, that is to say , when it is in the womb or shell
of the company and is divorced from a shareholder. It follows that when a share
is issued to the shareholder, it bears an extensive meaning indicating
that
the share has reached its destination, an existing shareholder who may have
partly or fully paid up share or shares in the company.
It
is now necessary to turn to the provisions of the Indian Companies Act which
loomed largely in the submission made before us as also another provision which
may have been incidentally mentioned in the course of the argument. In all
these provisions the word " issue" occurs.
Section
50 of the Indian Companies Act provides, inter alia, as follows:
(1)
A company limited by shares, if so authorised by its articles, may after the
conditions of its memorandum as follows (that is to say), it may -
(a)
increase its share capital by the issue of new shares of such amount as it
thinks expedient."
Therefore,
the object of section 50 is to issue new shares for increasing the share
capital, "when the authorised capital of a company has been fully issued,
and further capital is needed for development or other purposes." Thus,
section 50 enables the company to create shares for increasing the authorised
capital of the company. Hence the effect of a resolution under section 50 is
the increase in the share capital simpliciter. The shares so created are still
in the possession of the company or in the womb or shall of the company and
capable of being exploited by the company. The company can and is now in readiness
to raise capital by issuing the shares to the shareholders which means that at
this stage there is no addition to the capital of the company in terms of money
which is ordinarily the object of increasing the share capital or, in other
words, the shares are yet without shareholders or owners.
(1) [1950] 20 Comp. Cas. 179; [1950]
S.C.R. 391.
The
word "issue" also occurs in regulation 46 (42?) in Table A of the
Indian Companies Act, 1913. Regulation 46 is not applicable when there is
direction to the company in the resolution sanctioning the increase of capital.
Regulation 46 comes into play, when there is no direction to the contrary or
where there is a direction in conformity with regulation 46.
Be
that as it may, regulation 46 can come into operation only when there is an
increase of share capital by the issue of new shares, that is to say, when a
resolution had been passed under section 50 of the Indian Companies Act,1913.
It is, in other words, a consequential and subsequent stage after the increase of
share capital by the issue of new shares. It consists of several steps which
culminate in the passing out of the newly created shares from the domain of the
company to the existing shareholders and, if they are unwilling, to outsiders
or even to other shareholders who had received their usual proportion of share
of the increased share capital.
The
word "issue" has again been used in section 105C, which was
introduced in the Indian Companies Act, 1913, in order that the increase of
share capital may not be a device to increase the voting powers of the
directors, for, under regulation 46, they were not compelled to issue newly
created shares to the existing shareholders in the same proportion as their
holding was before new shares were created. It makes it incumbent upon the
company and/or its directors to offer the newly created shares in proportion to
their existing shareholdings. Hence it is very similar to the provision
contained in the regulation. It is however debatable whether, unlike regulation
46, section 105C not only covers cases of newly created shares under section 50
but also covers the issue of the unissued share capital where the entire share
capital had not been issued or, in other words, there are reserve shares in the
company which may be utilised in raising the capital. This point, however,
requires no determination for answering the proposed question before us. The
word " issue " in this regulation comprises several steps which
culminate in the issue of the shares to the shareholders. In other words, it
results in the ownership of the shares by the existing shareholders and, in
case of refusal by them, by others.
Hence,
there is a gulf of difference between the meaning of "issue" in
section 50 and section 105C and regulation 46. In the case of section 50 there
is an increase of the share capital of the company. The shares are created by
increasing the authorised capital. The shares so created, however, are not, by
virtue of the relative resolutions, passed out to the shareholders or sent out
by the company. In other words, the ownership of the shares when a resolution
is passed under section 50 is yet at large. It is only when shares are issued
to the shareholders in terms of section 105C that the new issue finds its
owners either in the existing shareholders or elsewhere. Hence, section 50 is
only an enabling section authorising the company or its directors to raise
increased capital by the disposal of the shares. Section 50 by itself does not
lead to the disposal of the shares. This can be only done under section 105C
when shares are actually transferred to the shareholders or in case of their
refusal to others.
It
is now necessary to consider whether the meaning of the word "issued to
the shareholders" undergoes a change in the phrase " bonus share
issued to shareholders". The word " bonus shares " means
"special dividend ". A dividend is ordinarily paid in cash direct to
the shareholders. A shareholder may again be compelled to allow the
undistributed profit to be appropriated towards the consideration money for the
issue of new or additional shares to him, the existing shareholder. Hence,
bonus share is a special type of share.
The
resolution for the capitalisation of the undistributed profits, a resolution
for the issue of new shares and a resolution for the appropriation of the
undistributed profits pro rata for payment in full of the shares may suggest
that not only is there a creation of shares but there is also the change in the
location of the shares and/or transfer of the shares to the shareholders.
In
the other words, these steps or acts may suggest that there is a complete
creation of capital coupled with the issue of shares to the shareholders.
The
move to issue bonus shares presupposes a large undistributed capitalised
profits. Hence bonus shares are created by the company often by passing
resolutions for issue of new shares, capitalisation of the undivided profits,
the appropriation of the undivided profits for pro rata payment in full of the
new shares. At this stage when the resolutions are passed there are however
only expressions of the will of the company, for the company can express its
will only through a meeting duly convened; there is no expression of the will
of the individual shareholder and at any rate for those who are not present in
the meeting personally or by proxy, there is no allotment of shares followed by
the issue of a letter of allotment and there is no registration of the newly
created bonus shares. Hence in reality there is no actual issue of the shares.
It
may be noticed that the words "issued to the shareholders" do not
mean issue of share certificates which are only conclusive evidence of the
ownership of the shares. Therefore, what is material is not the transfer of the
share certificates. The words "bonus shares issued to the
shareholders" suggest movement of shares to the shareholders, something
passing from the company, to the shareholders or giving of something to the shareholders.
What is giving is only the rights and obligations of a shareholder and not the
share certificate which is only a piece of evidence. In that sense there is
only a notional transfer of the rights and no physical transfer in the ordinary
acceptance of the word.
In
this view of the matter there seems to be no difference between the issue of
shares to the shareholders and the issue of bonus shares to the shareholders.
This
brings us to the consideration of the resolution and the surrounding facts in
this case.
It
may be noticed at the outset in this case, the resolution for capitalisation of
the undivided capital, the issue of new shares and the resolution for the
appropriation of the undistributed profits were all passed by the company.
In
England, as will appear from Palmer's Company Precedents, 18th Edition, Form
No.490, at Page 874, that a similar resolution like that of clause (a) in the
instant case for capitalisation of the undivided profits is passed by the
company. In
In
other words, in
Hence,
at the stage when a resolution is passed by the company for capitalisation in
English law, there is no issue of shares by the company whatever meaning may be
ascribed to the word "issue", though there is an increase of share
capital by the issue of new shares. In India, as it appears from the resolutions
in the present case, the company passes a composite resolution which not only
includes the resolutions usually passed by the company in England but also the
resolutions which are passed by the directors of the company pursuant to such
authority given in the resolution by the company. This passing of the composite
resolution in
Clause
(a) of the agreement may be considered in the first place.
The
words "be capitalised and distributed, the said capital be applied"
and the words "that the holders thereof will not participate in any
dividend in respect of any period ending on or before 31st December, 1954,
" clearly indicate that the capitalisation did not take place then and
there and likewise the application of the capital did not take place then and
there by virtue of the resolution. The words "will not participate in any
dividend in respect of any period ending on or before 31st December, 1954,
"likewise clearly point to the fact that the capitalisation and
application was to take place after 31st December, 1954, that is to say, after
the accounting year ending with 31st December, 1954. In other words, it is significant
to note that the words are not "hereby capitalised or applied" and
that the shareholders will participate in the dividend from 31st December,
1954. It is left to the future for completion of these acts.
Clause
(b) may now be examined.
The
words "the directors be and hereby are directed to issue" clearly
indicate that the issue had not taken place even at that stage when clause (b)
was passed. The words "the said 5,07,500 new ordinary shares of Rs.10 each
credited as fully paid up amongst the persons whose names are registered as
such in the books of the company as on the 1st day of January, 1955,
"again clearly point to the fact that the distribution and crediting of
the amounts amongst the existing shareholders did not take place before the 31st
December, 1954, but was directed to take place as on the 1st day of January,
1955. The words "provided that no allotment of shares issued as aforesaid
shall be made to non-resident shareholders till the approval of the Reserve
bank of
Clause
(c) of the resolution may be considered next.
The
words "that the directors be authorised to affix the company's seal on
duplicate endorsements of such agreement as and when the same shall have been
signed on behalf of the members holding ordinary shares in the company on 1st
January, 1955, by some person to be appointed by the directors in that behalf
which the directors be and hereby are authorised to do "clearly indicate
that the agreement providing for the allotment of the same new ordinary shares
and satisfaction of the same capital bonus was to come into existence not in
the accounting year ending with 31st December, 1954, but on a future date in
the subsequent accounting year.
It
may be incidentally noticed here that the word "hereby" is used more
than once in this clause in contradistinction to such phrase “as and when the
same shall have been signed." The word "hereby" has been used in
order to signify that certain things have been done and completed. It is
significant that the word "hereby" is absent in clause (a) of the
resolution.
Clause
(c) again strengthens the conclusion that the shares were not issued to the
shareholders even when the draft agreement was duly entered into.
The
agreement dated the 31st January, 1955, even when it was executed, did not
result in the issue of bonus shares to the shareholders as will appear,, inter
alia, from the following contents thereof :
"Now
therefore it is agreed as follows :-
(1) The
company shall allot to each of the persons named in the schedule the number of
new ordinary shares of Rs.10 each set opposite to his or her name in the second
column of the same schedule....
(2) The
said shares shall be numbered 500751 to 993813 (both inclusive) and shall be
credited as fully paid up.
(3)
The said shares so credited shall
be accepted in full satisfaction of the said capitalised sum."
It
is now necessary to turn to the actual accounting position. In the
balance-sheet the sum of Rs.5,00,750 which was sought to be capitalised and
thereafter distributed amongst the shareholders with a view to apply the same
in payment in full for Rs.5,00,750 ordinary shares of Rs.10 each was shown as
the balance on the 31st December, 1954, under the heading "General
Reserve". This indicates clearly that the sum of Rs.50,07,500 was still in
the accounting year considered as a part of the reserve and still remaining
part of the undivided profits and consequently not capitalised. If further
appears from the statement of facts that the shares were not issued to the
shareholders till some time in 1955.
Therefore,
on a consideration of the resolution and the subsequent facts, it is clear that
the bonus shares were not issued to the shareholders in the relevant accounting
year which is the calendar year 1955 corresponding to the assessment year
1956-57.
In
the result, question No.2, which has been dealt with first, must be answered
against the assessee.
It
is now necessary to deal with question No.1
The
relative provision of sub-section (1) of the Explanation of Paragraph D of Part
II of the Finance Act, 1956, is as follows :
"The
expression 'paid up capital' means the paid up capital (other than capital
entitled to a dividend at a fixed rate) of the company, as on the first day of
the previous year relevant to the assessment for the year ending on the 31st
day of March, 1957, increased by any premiums received in cash by the company
on the issue of its shares standing to the credit of the shares premium account
as on the first day of the previous year aforesaid."
The
facts before us make it abundantly clear that the undivided profits were
capitalised and distributed in June, 1955. The undistributed capital remained
in the books undistributed and as a part of the reserve until the middle of
June. This capitalised sum was thereupon distributed to the shareholders by
appropriation against the face value of the newly issued shares to the existing
shareholders. Hence the paid up capital of the company was not increased until
June, 1955, that is to say, neither in 1954 nor on the first day of the year
1955. Hence on these grounds the assessee cannot get any rebate under the
relative provision of the Finance Act.
There
is another possible approach to the problem. The resolution marked as clause
(a) and the agreement between the company and its shareholders through one of
its representatives clearly indicate that the bonus shareholders will be
entitled to dividends as from 1st January, 1955. In these circumstances, it may
be contended that unless the paid up capital is deemed to be paid up capital as
from the 1st January, 1955, the company was not competent to declare a dividend
on the shares with effect from the 1st January 1955. Hence the paid up capital
must be deemed to have been increased as from 1st January, 1955, though in fact
the paid up capital was increased in the books of the company from June, 1955.
In the relative provision, however, there is no provision for taking into
account the deemed paid up capital. It is referable only to paid up capital
which means in its ordinary significance capital actually paid up. Hence on
this ground also the assessee is not entitled to the rebate.
Hence,
on either view of the matter, this question again must be answered against the
assessee.
In
the result, the reference is dismissed with costs.
LAIK,
J. - In this reference, the assessee claimed a rebate in the accounting year
1955 for the issue of the bonus shares and the increase in the paid up capital,
consequent upon such issue. The respondent, on the other hand, supported the
view of the Appellate Tribunal and contended, for reasons which will appear in
the sequel, that the two questions, namely, (1) whether the bonus shares should
be included in the paid up capital of the assessee within the meaning of
sub-section (1) of the Explanation to Paragraph D of Part II of the Finance
Act, 1956, and (2) whether the bonus shares can be said to have been issued
within the meaning of the second proviso to the said paragraph to the
shareholders by the assessee during the accounting year ended 31st December,
1955, should be answered against the assessee.
The
rival contentions raise questions of general importance on the company law
which is elaborately discussed by my learned brother. The relevant legislative
history of the subject, however, is short and the answers to the questions
entirely depend on the meaning of the expression "issue of bonus shares to
the shareholders", i.e., at what point of time such shares are taken to be
issued on the facts of this case.
To
appropriate the various English decisions (most of which again are dealt with
by my learned brother) and to make them applicable to the Indian Companies Act,
it is better to remember at the outset that the word "issue" is a
word of flexible meaning. It was found in the English Companies Act of 1867
(section 25 repealed) which had given rise to some difficulty. Section 25 was
mitigated by section 1 of the English Act of 1898. Both the said sections of
the said two Acts were repealed by the Act of 1900, which again, in its turn,
is subsequently repealed. Section 52 of the English Act of 1948 now provides
for a penalty in such cases.
In
this country, prior to 1936, there was no check on the directors' powers to
issue blocks of shares, either to themselves or to their nominees, within the
authorised limit, unless such powers are circumscribed by the articles of
association. The managing agents, who usually dominated the board of directors,
could, to secure their own position, induce the board to issue shares to the
managing agents or their nominees. To check one of such mischiefs of the
managing agency system, section 105 C was introduced in the Indian Companies
Act, 1913, in the year 1936. This section is raised and discussed before us,
though the Tribunal does not refer to the same.
Antecedent
to this period, regarding increase of capital, regulations 26 to 28 were there
in Table A of the Act of 1882. In the Act of 1913, under the heading
"alteration of capital", regulations 41 to 43 appear in Table A. The
question of issue of new shares by the directors was dealt with by article 42
of the articles of association in the Schedule to the Act of 1913. It might be
taken note of that regulation 42 and section 105 C do not cover the same.
Section
105C, which has no counter part in the English Act, was interpreted by the
Supreme Court in the case of Nanalal Zaver v. Bombay Life Assurance Co. Ltd.
[(1950) 20 Comp.Cas.179,184,197 ; (1950) S.C.R. 391.]. Kania C.J. held, inter
alia, at page 396 of the authorised reports, that the directors are obliged :
"....to
offer the shares issued to the shareholders on the register of the company and
not to any one else...."
Mahajan
J. held, at page 412, that the directors : "....were under no obligation
to Singhanias, who had not yet even been entered as shareholders on the
registered of shareholders".
They
are "complete strangers to the company", says Das J., at page 417
[(1950) 20 Comp.Cas.179,193,213; (1950)S.C.R.391.].
Mahajan
J. freely used the expression "issue", "offer",
"allotment" and "sale" in his judgment. At page 406, he
held [(1950) 20 Comp.Case.179,193,213; (1950)S.C.R.391] :
"It
was not disputed that the directors in the present case had not sold these
shares to any one and that these have remained unissued."
At
page 407, it was further held that at the stage when section 105C comes into
operation, if, out of the shares offered, some cannot be taken up by the
shareholders :
"....the
only result is that those shares remain unoffered and thus unissued....the
shares have to be offered to the existing shareholders...."
Lastly,
S.R.Das J. (as Lordhsip then was) held at page 433 :
"It
is true that 272-4/5 shares remain in hand. At best, although issued, they have
not been offered to any one."
"Clause
8 (of the directors' resolution)", continues Das J., "on a true
construction of the resolution as a whole", covers only those shares which
have been actually issued but have not been applied for. In point of fact the
directors have not yet allotted any of these 272-4/5 shares."
According
to hi, "there has been no contravention of the provisions of section
105C."
Therefore,
this much is clear that the shareholders must have to be on the registered of
shareholders so that the shares might be issued to them.
The
Supreme Court, again, in the case of Mathalone v. Bombay Life Assurance Co.
[(1954) 24 Comp.Cas. 1; (1954)S.C.R. 117], observed at page 129 of the reports
:
"The
English Law can furnish no guidance for its solution as there is no provision
corresponding to section 105-C in the English Companies Act."
In
refuting Mr.Patnik's argument that the receiver could not acquire the newly
issued shares in his name, it was held at page 143 :
".....privilege
was conferred by section 105C only on a person whose name was on the register
of members."
In
dealing with the question as to whether the re-issue of forfeited shares is
"allotment" within the meaning of section 75(1) of the Companies Act,
1956, corresponding to section 104(1) of the Companies Act of 1913, Sarkar J.,
delivering the judgment on behalf of the Supreme Court, held in the case of Sri
Gopal Jalan & Co. v. Calcutta Stock Exchange [(1963) 33 Comp.Cas.862 (S.C.)],
that a "re-issue of forfeited shares is not an allotment of shares."
The word "allotment" has not been defined in the Companies Act either
in our country or in
"in
company law, allotment means the appropriation out of the previously
unappropriated capital of a company, of a certain number of shares to a person.
Till such allotment, the shares do not exist as such."
"By
the amendment of 1935, the meaning of the word "allotment" in section
105(1) was not altered. This decision does not go against the contention of the
revenue.
Some
of the decisions cited by Mr.Meyer are sought to be distinguished by the
learned counsel, Mr.S.Choudhry, viz., that the decision in Oswald's case
[(1933) 1 K.B. 134] is a case on the Stamp Act and that it is based on a
particular section of the Finance Act of a particular year. The decision in
Mowatt's case [(1886) 34 Ch.D.58] is a case of debenture and not of shares
(debenture holders were strangers to the company and there must have been
delivery in the very nature of debenture). The decision in Clarke's case
[(1878) 8 Ch.D.635] is a case of a new company. The decision of Bachawat J. (as
his Lordship then was) in the case of Sri Gopal Jalan [(1963) 33 Comp.Cas.862(S.C.]
is in another context and is contrary to the Supreme Court decision of Nanalal
Zaver v. Bombay Life Assurance Co. [(1950) 20 Comp.Cas.179 (S.C.)]. Further,
the decision in Bush's case [(1874) 9 Ch.App.554] was not accepted by Mr.
Buckley, James L.J. being a party to the decision in
Prolonged
and learned arguments were advanced by the learned counsel on both sides, but
in my view this reference can be disposed of ultimately by referring to the
facts arising in question No.1, in the background of the legislative history
stated above.
We
have really to find out the "paid-up" capital, and not merely,
capital on 1st January, 1955. We shall have also to interpret the resolution
dated 30th December, 1954, and the agreement dated 31st January, 1955, referred
to by my learned brother. The resolution uses the expression "shall
allot". In my view, it is not, effective on the date of resolution. It
could have been rescinded the next day. The agreement is prospective. As a
matter of fact, there is no transfer from the general reserve to the capital
before late June, 1955. It never became paid up capital until June in view of
the recognised distinction between issued capital and paid up capital.
Different
views have no doubt been taken as to when the issue to the shareholders takes
place. It is said to be issued when the transaction is complete and again, not
until before the registration of the contract. It is also said to be issued
when the allottee has become complete master of the shares, and further when
the certificates are actually issued and also when the shareholders are put in
complete possession of the shares. In my judgment it is not necessary to
combine all those tests because the conclusions is one more of fact that of law
on a consideration of all the circumstances in a given case.
Though
the expression, "issue" appears in section 50 of the Companies Act,
in the Finance Act of 1956 the expression is "issue to the
shareholders". In my view, it is not tautology. It is not a case of issue
of shares to the word at large. The difference between issue and allotment is
not a matter of mere form but really of substance. Actual issue cannot be
complete only on resolution to allot shares.
Resolution
is not necessarily the issue of them. It is not a mechanical act.
Non-participation of dividend is a factor to be kept in view, as the
shareholders only are entitled to participate in dividend. Consent of the
Reserve Bank again is necessary. Clause (b) in the agreement in the instant
case modifies clause (a) and the shareholders were not on the register on the
relevant date.
In my judgment, therefore, the assessee is not entitled to rebate and both the questions should be answered against the assessee. I respectfully agree with the order including the order for costs proposed by my learned brother. Questions answered accordingly.
[1957] 27 COMP. CAS. 175 (MAD.)
HIGH COURT OF
v.
BALAKRISHNA AYYAR, J.
O.P. No. 104 of 1956
OCTOBER 25, 1956
BALAKRISHNA AYYAR, J.
- The petitioners, two in number, hold between them 100 ordinary shares in
Parry and Co. Ltd. This company handles numerous lines of business and one such
line is that of being managing agents to other companies. Parry and Co. Ltd.
are the managing agents of the East India Distellries and Sugar Factories Ltd.
On 18th October, 1955, the East India Distellries wrote to the directors of
Parry and Co. Ltd. Offering to purchase from its ordinary shareholders the
entire issued ordinary share capital of Parry and Co. on certain terms. The
particulars of these are set out in annexure "A" to the counter filed
by the deputy managing director of the East India Distilleries. Here it is
enough to say that the offer was to allot one fully paid share of $ 1 each in
East India Distilleries for every five ordinary shares of Rs. 2 each in Parry
and Co. Ltd. Alternatively for each ordinary share of Rs.2 in Parry and Co.Ltd.
the East India Distilleries offered to pay Rs. 5-8-0 in cash. this offer,
however, was subject to one proviso and it was that in the case of individuals
holdings in excess of 1,00,000 ordinary shares the price paid would be only Rs.
4-8-0 per share. The shareholders of parry and
On
22nd October, 1955, the chairman of the board of directors of Parry and Co.
Ltd. communicated copies of the letter that had been received from the East
India Distilleries to all its ordinary shareholders. A covering letter was also
sent recommending the acceptance of the offer. On 28th January, 1956, the
chairman of the board of directors of Parry and Co. Ltd. sent to its ordinary
shareholders, at the request of the East India Distilleries a copy of the
report and accounts of the East India Distilleries for the year ended 10th
September, 1955.
On
27th February, 1956, the East India Distilleries gave notice to the petitioners
that up to 24th February, 1956, the offer had been approved by the holders of
not less than three-fourths in value of the ordinary shares of Parry and Co.
Ltd. and that in consequence the East India Distilleries in pursuance of
section 153B of the Indian Companies Act, 1913, desired to acquire the ordinary
shares held by the petitioners in Parry and Co. Ltd. In that letter the East
India Distilleries also told the petitioners that unless upon an application
made to the court by them on or before the 27th March, 1956, the court thought
fit to order otherwise, the East India Distilleries would be entitled and bound
to acquire the shares held by the petitioners.
The
petitioners who do not want to part with their shares have taken out the
present application for an order that "the first respondent is not bound
or entitled to purchase the shares that the petitioners held" in Parry and
Co. Ltd. Alternatively they want an order that the petitioners are not bound to
sell the shares.
Mr.
Balakrishna Aiyar, the learned advocate for the petitioners, first raised the
contention that section 153B of the Indian Companies Act, 1913, which the East
India Distelleries claims entitled it to acquire the shares which the
petitioners hold in Parry and Co. Ltd., is ultra vires the Constitution. This
is how he put his argument. Under article 19(I)(f) all citizens have the right
to acquire, hold and dispose of the property as they think fit. The only
limitation which the Constitution imposes on this right is that contained in
article 19(5) which runs as follows :
"Nothing
in sub-clauses (d), (e) and (f) of the said clause shall affect the operation
of any existing law in so far as it imposes, or prevents the State from making
any law imposing, reasonable restrictions on the exercise of any rights
conferred by the said sub- clauses either in the interest of the general public
or for the protection of the interests of any Scheduled Tribe."
The
Scheduled Tribes do not come into the present controversy. The property of the
petitioners is now sought to be taken away under section 153B of the Indian
Companies Act. Unless it can be shown that the section is in the interests of
the public and further that the restriction it imposes is a reasonable one it
must be struck down. He remarked that section 153B of the Companies Act does
not say that the claim or contract which involves the transfer of the shares of
one company to another must be for the public benefit. As it stands, that
section confers on a third person the right to acquire the property of the
petitioners regardless of their will so long as the prescribed majority of
shareholders agree to that course. The rights of the petitioners are placed at
the mercy of a majority without regard to the question whether the proposition
on which they express their opinion is for the public good or not. Such a
provision, he said, is bad.
It
seems to me that this reasoning of Mr. Balakrishna Aiyar proceeds on a
misconception of the origin, nature and legal incidents of the property we call
a share. A share is undoubtedly movable property, but it is not movable
property in the same way in which a bolt of cloth or bag of wheat is movable
property. Such commodities are not brought into existence by any legislative
enactment ; in fact, no legislative enactment by itself can call them into
being. In origin and in nature they are independent of legislative volition,
and, in normal times there would be no special legislative rules governing
their acquisition, transfer or disposal. But a share in a company belongs to a
totally different category of property. It is incorporeal in its nature, and it
consists merely of a bundle of rights and obligations. Everyone of these rights
and obligations is created by the statute or under statutory instruments or
powers which also define their extent, scope, boundaries and incidents. If the
holder of a share is entitled to participate in the dividends or to vote at an
election of directors or to participate in the meetings of the company it is
because the statute enables him to do so. If he can transfer a share and along
with it the rights attached to the share to some one else it is because the
statute confers on him the requisite power. Now, the statute which enables him
to do all this also specifies the limits within which he can do it. It
prescribes the conditions requisite for the exercise of that power, and it
seems to me that no person can claim a right created by a statute and conferred
on him by a statute and at the same time insist that he should be able to
exercise that right free from and untrammeled by the limitations and conditions
imposed by the statute which is the parent of his right.
I
shall explain this further. Section 2(16) of the Indian Companies Act defines
"share" thus :
"
'Share' means share in the share capital of the company, and includes stock
except when a distinction between stock and shares is expressed or
implied."
Section
28 provides :
" (1) The
shares or other interest of any member in a company shall be movable property,
transferable in manner provided by the articles of the company.
(2)
Each share in a company having a
share capital shall be distinguished by its appropriate number."
Then
section 108 requires a company within three months after it has allotted its
shares or within three months after the registration of the transfer of any
share, as the case may be, to complete and have ready for delivery the
certificates of shares. Rules 95 to 102 of Table A in the First Schedule of the
Act confers on the holder of a share the right to receive his dividend. But,
this is a right which is qualified and limited by the several conditions laid
down in the rules. The holder of a share cannot claim that he is entitled to a
fraction of the property of the company and insist on a dividend being paid. A
shareholder will not be heard to say that he holds a specific fraction of the
property owned by the company, that the company has made so much profit and that
he must be paid so much dividend. The rules lay down that no dividend shall
exceed the amount recommended by the directors. Rules 60 to 67 of Table A
confer on a shareholder the right to vote in person or by proxy at any meeting
of the members of the company. Rule 24 et seq. formulate the circumstances
under which shares be forfeited. I do not think that when the holder of a share
has forfeited his share under the circumstances provided for in the Act and the
rules, it will avail him to say that it involves an infringement of the
fundamental right conferred upon him by article 19(I)(f) of the Constitution.
Again, under various situations the interest which a person acquires in a
company by reason of his holding a share or shares is liable to be altered without
his consent in a variety of circumstances. The memorandum of association may be
altered under section 12 of the Companies Act to enable the company to sell or
dispose of the whole or any part of the undertaking of the company or to
amalgamate with any other company or body of persons [See section 12(I),
clauses (f) and (g)]. The only legal protection that the shareholder has is
that conferred by section 12(2) and section 20A of the Act. The former provides
that the alteration shall not take effect until and except in so far as it is
confirmed by the court. The latter provides that no member of the company shall
be bound by an alteration made in the memorandum after the date on which he
became a member if and so far as the alteration requires him to take or
subscribe for more shares than the number held by him on the date ot in any way
increase his liability to contribute to the share capital of, or otherwise to
pay money to the company. Similarly, the articles of a company which vitally
affect the shareholder may be altered under section 20 of the Act. A
shareholder may be also affected in several other ways by the action of the
majority. The company may issue preference shares or it may issue debentures or
it may make further issues of ordinary shares at a discount. All these are
matters which would materially affect the pecuniary interest of the holder of a
share, but he cannot object to any of those on the ground that it involves an
infringement of his fundamental right under article 19(I)(f) of the Constitution.
When
we come to the matter of the transfer of shares we find provision made in that
regard in sections 34 and 35 and elsewhere. Section 54A prohibits a company
limited by shares from buying its own shares or the shares of a public company
of which it is a subsidiary except in certain circumstances. Here is one
limitation on the untrammeled power of the transfer of shares which the
petitioners claim. It will be appreciated that when section 54A says that no
company shall have any power to buy its own shares it also at the same time
says that a member may not transfer his shares to the company. Yet another
restriction upon the power to transfer is to be found in section 87F. this
section prohibits a company other than an investment company from purchasing
shares or debentures of any company under management by the same managing agent
unless the purchase has been previously approved by a unanimous decision of the
board of directors of the purchasing company. Rule 20 of Table A gives power to
the directors to decline to register any transfer of shares, not being fully
paid shares, to a person of whim they do not approve. It also gives them a
right to decline to register any transfer of shares on which the company has a
lien. Here are other limitations on the untrammeled power of transfer which is
claimed by Mr. Balakrishna Ayyar.
Section
2(13) empowers a private company to restrict the right to transfer its shares.
Now, what section 153B does is only to impose another limitation on the
untrammeled power of transfer. That section merely provides that under certain
circumstances the majority of members of the company shall have the right to
insist that the minority shall convey their shares to the persons to whom they
have conveyed their own shares. The statute which creates the right of transfer
also imposes limitations on the exercise of that right, and, one of those
limitations is that laid down in the impugned section. It will have been seen
that subject to his right to invoke the assistance of the court and certain
authorities created by the Act, the property which a person acquires by
purchasing a share in a company is liable to be injured in several ways by the
decisions and acts of the majority of the members of the company. As I said
before, a share is a creature of the statute; its shape, its strength and its
mobility are determined by the statute or statutory instruments and powers. A
person who acquires such a creature complain of the qualities inherent in it.
I
shall now examine the authorities cited before me. Mr. Balakrishna Aiyar, the
learned advocate for the petitioners, referred me to Bankey v. Jhingan, Namazi
v. Dy. Custodian of Evacuee Property,
The
true nature of a share has been explained in the well known Borland's Trustee's
case, where it was held that the provisions in a company's articles of
association compelling a shareholder at any time during the continuance of the
company to transfer his shares to particular price are not void as being
repugnant to absolute ownership, or as tending to perpetuity. I quote from
pages 287 and 288 :
"It
is said that the provisions of these articles compel a man at any time during
the continuance of this company to sell his shares to particular persons at a
particular price to be ascertained in the manner prescribed in the articles.
Two arguments have been founded on that. It is said, first of all, that such
provisions are repugnant to absolute ownership. It is said, further, that they
tend to perpetuity...... It is the first time that any such suggestion has been
made, and it rests, I think, on a misconception of what a share in a company
really is. A share, according to the plaintiff's argument, is a sum of money
which is dealt with in a particular manner by what are called for the purpose
of argument executory limitations. To my mind it is nothing of the sort. A
share is the interest of a shareholder in the company measured by a sum of
money, for the purpose of liability in the first place, and of interest in the
second, but also consisting of a series of mutual covenants entered into by all
the shareholders inter se in accordance with section 16 of the Companies Act,
1862. The contract contained in the articles of association is one of the
original incidents of the share. A share is not a sum of money settled in the
way suggested, but is an interest measured by a sum of money and made up of
various rights contained in the contract, including the right to a sum of money
of a more or less amount. That view seems to me to be supported by the
authority of
See
also Halsbury's Laws of England, Third Edition, Volume 6, page 252 :
"The
articles of association of a private company within the meaning of the Act
restrict the right to transfer its shares, and the articles of most companies
contain some restrictions on the right of transfer. A restriction on the right
to transfer shares is not repugnant to be absolute ownership of the shares but
is one of the original incidents of the shares attached to them by the contract
contained in the articles."
In
Allen v. Gold Reefs of West Africa Ltd., facts as follows : "A limited
company by one of its articles provided that it should have a lien for all
debts and liabilities of any member to the company 'upon all shares (not being
fully paid) held by such member.'
The
company, by way of purchase money for the property acquired by it, allotted
fully paid shares to Z., a nominee of the vendor to the company .Z. also
applied for and had allotted to him shares not paid up. He was the only holder
of fully paid up shares. At his death he was indebted to the company in arrears
of calls on the unpaid shares, but his assets were insufficient to pay the
arrears. Thereupon the company, by special resolution under section 50 of the
Companies Act, 1862, altered the above article by omitting therefrom the words
'not being fully paid', thus creating a lien on Z.'s fully paid shares."
The
court held that the company had power to alter its articles by extending its
lien to fully paid shares. At page 672 LINDEY M.R. said:
"How
shares shall be transferred, and whether the company shall have any lien on
them, are clearly matters of regulation properly prescribed by a company's
articles of association. This is shown by Table A in the schedule to the
Companies Act, 1862, clauses 8,9,10Speaking, therefore, generally, and without
reference to any particular case, the section clearly authorizes a limited
company, formed with articles which confer no lien on fully paid up shares, and
which allow them to be transferred without any fetter, to alter those articles
by special resolution, and to impose a lien and restrictions on the registry of
transfers of those shares by members indebted to the company.
But
then comes the question whether this can be done so as to impose a lien or
restriction in respect of a debt contracted before and existing at the time
when the articles are altered. Again, speaking generally, I am of opinion that
the articles can be so altered, and that, if they are altered bona fide for the
benefit of the company, they will be valid and binding as altered on the
existing holders of paid up shares, whether such holders are indebted or not
indebted to the company when the alteration is made."
I
have already stated more than once that where a person holds a right under a
statute he cannot claim a larger right than that conferred by the statute. Put
in this way the matter seems to be plain enough. But, in view of the arguments
urged at the bar, I shall refer to two cases. One is reported is Laxman v.
D.F.Officer. The petitioner in that case was a ryot holding certain fields in
Raigarh District. There were tendu trees and Hindu plants in those fields. The
Deputy Commissioner, Raigarh, issued a pamphlet under clause 23(I) of the
Central Provinces States Land Tenure Order, 1949, directing the ryots to sell
tendu leaves plucked from the trees and plants in their fields to a certain
firm and to no one else. The petitioner challenged the legality of that order.
The court observed :
"The
argument then is that clause 23(I) thus infringes the fundamental right of a
ryot to dispose of property and that it has therefore become void by the
operation of article 31 read with article 19(I)(f) and (g) of the Constitution.
This argument assumes that the ryot had an unfettered right which was taken
away by clause 23(I). The right to collect and appropriate tendu leaves was
first conferred on a ryot by the Land Tenure Order. We have, therefore, to
ascertain the nature and extent of the right upon consideration of the relevant
portions of the Land Tenure order. these provisions are clauses 22 and 23(I) of
the Land Tenure Order. We are clear that reading these clauses together it is
apparent that the right intended to be conferred was not an unqualified one but
a qualified one. The effect of the Constitution is not to enlarge a proprietary
right or any other right in property or in a holding of a citizen before the
commencement of the Constitution. Where the right itself is, as here, of a
limited character, it would remain so despite the coming into force of the
Constitution."
See
also the observations of SUBBA RAO J. in Dr. K.C.Nambiar v. State of Madras. At
page 355, the learned Judge observed :
"....
a statutory tenant, the creation of the Act, with certain rights and
restrictions cannot accept the rights and complain of the restrictions."
Besides
all this, the contentions of Mr. Balakrishna Aiyar wholly ignore the history of
human economic development. At a time when every man lived under his own tree
it would have been perfectly legitimate to say that no one should be compelled
to go away from under his tree for the benefit of someone else. That would have
been right in the days before history began. In recent centuries, trade,
manufacture, transport and other economic activities have grown in such a way
that to operate them efficiently and successfully large aggregates of capital
are required. To operate a high grade steel plant or a fleet of oceangoing
ships or air-liners or a heavy chemical industry, capital is required in masses
which individuals or partnerships cannot ordinarily raise or provide. It is
necessary to mobilise the savings and resources of numerous individuals and
this is affected by the machinery of a joint stock company. The moment that
stage is reached the necessity arises for internal regulation. Rules are
required to protect the shareholders from the dishonesty of directors. Rules
are required to protect the minority from obstructing the majority. Various
provisions exist in the Companies Act, not always very effective, to bring
dishonest directors to heel. When a minority feels that the majority is acting
oppresively it can seek redress in the company court. But, situations may well
arise when the majority consider that the majority consider that the minority
is standing in the way of what it considers to be an advantageous arrangement
and there must be some provision to resolve the deadlock that would otherwise
arise and section 153B seems to be designed for that purpose. It may be that
the persons who are in a minority are wiser and more farsighted, but, if they
cannot convert the majority to their point of view and the deadlock persists, a
way out must be provided and that is what section 153B of the Act seeks to do.
If it were to be ruled that the section is invalid and ultra vires it may not
be long before the machinery of joint stock enterprise is slowed down till it
completely stops. That being so, I would be prepared to say, were it necessary
to do so, that the limitation imposed by section 153B of the Act is a reasonable
one and also in the public interest. To hold otherwise would be, it seems to
me, to reverse the process of economic growth.
Nor
can I see anything unjust in the provision. A person who subscribes for or buys
shares in a company can by making reasonable enquiries know what exactly he is
going in for, what rights he would be getting and how they are hedged in. If
with full awareness he buys a particular set of rights how can he be heard to
complain that it is not larger than what he bargained for ? I must overrule the
contention of Mr. Balakrishna Aiyar that section 153B is ultra vires the
Constitution.
The
next question is, are the circumstances of the present case such that the court
should interfere. Section 153B, so far as it is now material, runs as follows :
"Where
a scheme or contract involving the transfer of shares or any class of shares in
a company.....to another company.....has within four months after the making of
the offer......been approved by the holders of not less than three fourths in
value of the shares affected, the transferee company may, at any time within
two months after the expiration of the said four months, give notice in the
prescribed manner to any dissenting shareholder that it desires to acquire his
share, and where such a notice is given the transferee company shall, unless on
an application made by the dissenting shareholder within one month from the
date on which the notice was given the court thinks fit to order otherwise, be
entitled and bound to acquire those shares."
It
will be seen that this section gives the transferee company a right to acquire
the shares held by the dissenting members of the transferor company unless the
court otherwise orders. Now,. a court cannot take away the right which the law
confers on a person without good and adequate cause. What will be good and
adequate cause the statute does not say, and, this probably for the reason that
it is impossible to visualise and provide for every possible contingency. When
the legislature had declined to enumerate I would not venture to make a
catalogue. Obviously, however, certain circumstances are relevant. Were on
examining an arrangement the court feels that it is a wicked thing to do, it
will naturally deny to the transferee the right it claims under this section.
So too if the transaction appears to the court to be manifestly oppressive or
unjust or unfair or unconscionable. Similarly also where the court is satisfied
that the sanction of the majority has been obtained by fraud, deception or
other improper means. In this connection the observations of MAUGHAM J. in In
re Hoare and Co. Ltd. are pertinent :
"I
have some hesitation in expressing my view as to when the court should think
fit to order otherwise. I think, however, the view of the legislature is that
where not less than nine-tenths of the shareholder in the transferor company
approve the scheme or accept the offer prima facie, at any rate, the offer must
be taken to be a proper one, and in default of an application by the dissenting
shareholders, which includes those who do not assent, the shares of the
dissentients any be acquired on the original terms by the transferee company.
Accordingly I think it is manifest that the reason for inducing the court to
`order otherwise' are reasons which must be supplied by the dissentients who
take the step of making an application to the court, and that the onus is on
them of giving a reason why their shares should not be acquired by the
transferee company.
One
conclusion which I draw from that fact is that the mere circumstances that the
sale or exchange is compulsory is one which ought not to influence the court.
It has been called an expropriation but I do not regard that phrase as being
very apt in the circumstances of the case. The other conclusion I draw is this,
that again prima facie the court ought to regard the scheme as a fair one
inasmuch as it seems to me impossible to suppose that the court, in the absence
of very strong grounds, is to be entitled to set up its own view of the
fairness of the scheme in opposition to so very large majority of the
shareholders who are concerned. Accordingly, without expressing a final opinion
on the matters, because there may be special circumstances in special cases I
am unable to see that I have any right to order otherwise in such a case as I
have before me, unless it is affirmatively established that, notwithstanding
the views of a very large majority of shareholders the scheme is unfair. There
may be other grounds, but I see no other grounds available in the present case
for the interference of the court."
Similar
views were expressed in Government Telephone Board v. Hormusji 2. In that case
BEAUMONT C.J. observed :
"For
myself I accept the view that the burden is upon the dissentients to adduce
reasons for thinking that the majority of shareholder were wrong."
Mr.
Balakrishna Aiyar, the learned advocate for the petitioners, contended that the
present transaction is not a bona fide one at all. He remarked that the
directors of Parry and Co. Ltd., obtained a large benefit by this transaction
and that as a result of this arrangement they were able to repatriate about Rs.
37,50,000 to
Mr.
Balakrishna Aiyar next said that with part of the money which the directors of
Parry and Co. Ltd. obtained by selling their shares to the East India
Distilleries they purchased from Parry and Co. the shares which that company
held in the East India Distilleries. Now, Mr. Nambiar for the respondents
explained that this was done not surreptiously or improperly but in pursuance
of the scheme set out in the letter which the East India Distilleries wrote to
Parry and Co. Ltd. on 18th October, 1955. In paragraph 4 of page 4 of that
letter it is stated :
"Parry
and Co. Ltd. has a considerable investment (amounting to about Rs. 30 lakhs at
current market prices) in this company and it is hoped that its directors will
be able to arrange for the purchase of these shares in such a manner as to
ensure continuity of interest in the management of the Parry group of
companies."
A
copy of this letter was sent to every shareholder of Parry and Co. and the
purchase was reported to all the ordinary shareholders of Parry and Co. Vide
Exhibit R. 9, dated 28th January, 1956. In paragraph 1 of Exhibit B. 9, it is
stated :
"We
have to advise that we have now arranged (subject to the conditions set out in
paragraph 3 below) for Mr. H.I. Wonfor to purchase, or to procure the purchase
of, the shares in the East India Distilleries and Sugar Factories Ltd., now
held by this company."
And,
in paragraph 4 of that letter it is explained why this is done :
"This
sale has been made in order to comply with the request contained in paragraph 4
of the letter of offer from the East India Distilleries and Sugar Factories
Ltd., dated 18th October, 1955, that the directors of this company should make
arrangements for the purchase of these shares in such a manner as to ensure
continuity of interest in the management of the Parry group of companies."
Even
supposing that there was something improper about this sale and purchase-I am
not suggesting that there was any impropriety-that would be a criticism of the
conduct of the directors of Parry and Co., in relation to their dealings with
the property of Parry and Co. That would not show that the transaction in
question, viz., the acquisition of the shares of Parry and Co. by the East
India Distilleries is in any way improper.
Mr.
Balakrishna Aiyar raised another point. Parry and Co. has six directors. Two of
these directors are also directors of the East India Distilleries. All the
directors of Parry and Co., constitute a private company called the Coromandel
Investment Trust Ltd. On 23rd February, 1956, the Coromandel Investment Trust
Ltd. On shareholder of Parry and Co. offering to give them bonus shares in
"B" class shares of the East India Distilleries. This, it was
suggested, was an improper way of securing the assent of the majority I do not
agree with this view. The date within which the members of Parry and Co. who
held ordinary shares were required to intimate their acceptance of this party
of the offer made by the East India Distilleries expired on the 20th. The offer
of bonus shares by the Coromandel Investment Trust was made on 23rd March,
1956, that is to say, after the time fixed for the exercise of the option had
expired. It would not therefore have normally influenced the decision of the
majority. Mr. Balakrishna Aiyar explained that though the letter is dated 23rd
a large number of shareholders of Parry and Co. knew that such an offer would
be made. That may well be so, but then it was an offer that was available to
all. The position, therefore, would be-I am proceeding on the basis that the promise
to give bonus shares was known in advance-that instead of getting one $ 1
"B" share in the East India Distilleries in exchange for five Rs. 2
shares in parry and Co. such of those shareholders as elected to take
"B" shares would get in addition an extra share for every four $ 1
share which they acquired in the East India Distilleries. A person who held 20
ordinary shares of Rs. 2 each in Parry and Co. and who elected to take $ 1
"B" share in the East India Distilleries under the terms of the
original offer would get four $ 1 shares. As a result of the further offer made
by the Coromandel Investment Trust he would get five shares instead of four.
Mr.
Balakrishna Aiyar next suggested that human nature being what it is, such an
offer would not have been made by the Coromandel Investment Trust unless it was
for their advantage. Normally no doubt a person does not part with property for
nothing, but Mr. nambiar explained why such an offer came to be made. In the
letter dated 18th October, 1955, which the East India Distilleries wrote to
Parry and
"The
new `B' shares now being offered in exchange for ordinary shares in your
company will rank for any dividend which may be declared on the `B' shares
after the date of issue of the new shares and will rank in all other respect
pari passu with the existing `B' shares. In this respect, we undertake not to
declare any further dividend on our `B' share capital until after the dated of
issue of the new `B' shares, referred to in this offer."
The
share capital of the East India Distilleries consisted of a certain number of
"A" shares of the nominal value of 16 sh. each and a certain number
of "B" shares of the nominal value of 20 sh. each. With a view to
make all the shares uniform the East India Distilleries proposed to capitalise
a portion of its reserves amounting to $20,000 and to utilise the amount in
paying up an additional 4 sh. per share on the company's "A" shares.
Now these proposals were objected to by a certain number of "B" shareholder
on the ground that it was unfair to them. Their point was that the money of the
company was being used to benefit the "A" shareholders while they got
nothing. In order to overcome their opposition the East India Distilleries
decided to capitalise a further sum of $75,000 out of its reserve and issue
bonus shares to the "B" shareholders also in the ratio of 1:4. Now,
when the existing "B" shareholders in the East India Distilleries got
this benefit there was an obligation cast on the East India Distilleries to
give the same benefit to those shareholders in Parry and Co. who opted to take
"B" shares. That obligation arose by reason of the statement in the
letter dated 18th October, 1955, that the new shares allotted to the holders of
Parry and Co. would rank in every respect pari passu with the existing shares.
And if that promise had not been kept difficulties would arise. On the
materials available it is not at all permissible to say that the consent of the
majority was obtained by any improper means.
Mr.
Balakrishna Aiyar next contended that the price of Rs. 5-8-0 per share which
was offered does not take into account all the assets of Parry and Co. In
paragraph 12 of the petition it is stated :
"Admittedly
no price is offered for the goodwill of the (second respondent) company ; no
compensation is paid either for the benefit arising from the agencies held by
the firm ; nor is any consideration paid for the transfer of a well-knit
organisation operating in the main cities of
On
this point it is necessary to mention that the market price of the ordinary
shares of Parry and Co. at the relevant time was Rs. 4-8-0. The offer by the
East India Distilleries was to pay one rupee more per share. Mr. Balakrishna
Aiyar did not contend that the price offered was less that the market price. In
fact, he agreed that the market price was only Rs. 4-8-0 and that the offer was
one rupee above the market rate. But his complaint was that the market price
would not reflect all the hidden resources and strength of a company like that
of Parry and Co. That may be so. I had occasion to go into a similar question
in Applications (Nos. 553 and 554 of 1956. Leela Mahajan v. T. Stanes & Co.
Ltd.). There I agreed with the view expressed by WYNN-PARRY J. in In re Press
Caps Ltd. :
"A
valuation is only an expression of opinion.....but the final test of what is
the value of a thing is what it will fetch if sold."
Mr.
Balakrishna Aiyar next said that if the directors of Parry and Co. had tried to
sell the whole block of holdings which they held they would not have got even
Rs. 4-8-0. That may be so, but then, it does not show that the price offered to
the petitioners is unfair.
Mr.
Balakrishna Aiyar finally stated that no public purpose is served by pushing
through this scheme or contract. His complaint was that if this is allowed to
go through, "the East India Distilleries will control Parrys and not vice
versa, whereas up to now Parrys have been the managing agents for East India
Distilleries. The advantages of the scheme are all for the East India
Distilleries and what it gains must naturally be lost to the second respondent."
On
this argument it is sufficient to say that section 153B does not require that
the transaction should be in the interest of the public ; it is sufficient if
the prescribed majority of shareholders agree. It is for the members concerned
to decide what is for their benefit and not for the court to substitute its
discretion on what would be advantageous to them.
No
circumstances have been shown to exist in the case which would justify me in
refusing to the transferee company the right which the statute gives to them.
The application is therefore dismissed with costs. Advocate's fee Rs. 350.
Application dismissed.
[1942]
12 COMP. CAS. 254 (CA)
LORD
GREENE, M.R., LUXMOORE, L.J., GODDARD, L.J.
JANuary
16, 1942
Wallington, K.C, and Heckscher, for the Appellant.
Wynn Parry, K.C., and W. Raymond Jennings, for the
Respondent.
Lord Greene, M.R. [his
Lordship stated the facts, and having concurred with the finding of Bennett,
J., with reference to the fraudulent misfeasance of the appellant,
continued]—That being the conclusion to which I have come, it would be
sufficient to dispose of the appeal. But although the learned Judge found a
case of fraud made out against Mr. Vanbergen, he did not make a declaration or
grant any relief based on that part of the case, because he had come to the
conclusion that the case was one which fell within Section 45 of the Companies
Act, 1929. It will be remembered that he took the view that the cheque of
Ł15,980 was not drawn in reference to any real transaction at all, and was,
accordingly, a mere giving away of V.G.M.'s money. That section provides that,
subject to certain exceptions with which I need not deal, it shall not be
lawful for a company to give whether directly or indirectly, and whether by
means of a loan, guarantee, the provision of security or otherwise, any
financial assistance for the purpose of or in connection with a purchase made
or to be made by any person of any shares in the company." Then there is a
penalty of Ł100 in case of contravention.
Those whose memories enable them to recall what had been
happening after the last war for several years will remember that a very common
form of transaction in connection with companies was one by which persons—call
them financiers, speculators, or what you will—finding a company with a
substantial cash balance or easily realisable assets such as War Loan, bought
up the whole or the greater part of the shares of the company for cash and so
arranged matters that the purchase money which they then became bound to
provide was advanced to them by the company whose shares they were acquiring,
either out of its cash balance or by realisation of its liquid investments.
That type of transaction was a common one, and it gave rise to great
dissatisfaction and, in some cases, great scandals I think that it is not
illegitimate to bear in mind that notorious practice in considering the ambit
of the section. I do not mean by that that if the language of the section is
wide enough to extend beyond transactions of that general character, that would
afford any ground for cutting the language down; the only use which I think it
is legitimate to make of it is that the existence of this very questionable
practice affords a reason for the word "purchase" in the section. If,
as a matter of construction, "purchase" extends to cases such as the
present, where the money is used not in connection with the purchase of the
company's shares but in connection with the subscription of the company's
shares, that construction must be put upon the language.
The sole question is whether or not the word
"purchase" in this section covers a case where the money which the
company provides is used to assist a subscription for the company's own shares.
There could, I think, be no doubt that if that question were answered in favour
of the respondent, the Ł15,980 was provided by the company by way of financial
assistance, because whether a company provides the money by way of gift or by
way of loan or by buying assets from the person who is purchasing the shares at
a fraudulent undervalue, all those transactions, it seems to me, would fall
within the phrase "financial assistance". I therefore feel no
difficulty about that; but, with all respect to Bennett, J., I am unable to
agree with the view that he took that the subscription by these three directors
for shares in V.G.M, was, within the meaning of the section, a
"purchase" of those shares. In the first place, throughout the whole
of the Companies Act the language that is used with regard to the issue of
shares to subscribers is invariably confined to words like "issue",
"subscription", "application", "allotment", and
so forth. There is not a single passage in the Act to which we were referred,
nor to which my fairly complete recollection of the Act goes, in which the word
"purchase" is used in relation to the transaction of subscription.
That being so, it seems to me that a very clear context would be required to
enable a meaning to be put upon the word "purchase" in this section
which would extend it so as to cover the acquisition of shares by subscription.
Quite apart from those considerations of mere language of
the Act, it seems to me that the word "purchase" cannot with
propriety be applied to the legal transaction under which a person, by the
machinery of application and allotment, becomes a shareholder in the company;
he does not purchase anything when he does that. Counsel for the appellant
endeavoured heroically to establish the proposition that a share before issue
was an existing article of property, that it was an existing bundle of rights
which a shareholder could properly be said to be purchasing when he acquired it
by subscription in the usual way. I am quite unable to accept that view. A
share is a chose in action. A chose in action implies the existence of some
person entitled to the rights, which are rights in action, as distinct from
rights in possession, and, until the share is issued, no such person exists.
Putting it in a nutshell, the difference between the issue of a share to a
subscriber and the purchase of a share from an existing shareholder is the
difference between the creation and the transfer of a chose in action. The two
legal transactions of the creation of a chose in action and the purchase of a
chose in action are quite different in conception and in result.
The result, therefore, is that I can find no context in
this section which enables me to construe the word "purchase" as
bearing the extended meaning suggested, and I cannot agree with the view which
Bennett, J., took on that part of the case.
Luxmoore, L.J.—I agree.
Goddard, L.J.—I agree.
VARADACHARIAR, BURN AND PANDRANG ROW, JJ.
REF CASE NO.
6 OF 1935
NOVEMBER 9, 1936
The Government Pleader
(K.S. Krishnaswami Ayyangar) K.S. Champakesa Ayyangar for Government.
S. Duraisamy Ayyar instructed
by Messrs. King and Partridge for Respondents.
Varadachariar J.—The
question arising for decision in this reference relates to the stamp duty
payable on a certain form filed with the Registrar under Sec. 104 of the Indian
Companies Act.
By an arrangement between the
Madura Mills Limited, Madura, and Harveys Limited, Tuticorin, it was agreed
that 20,000 fully paid up shares in the Madura Mills should be allotted to the
Harveys in consideration of an allotment by the latter to the former of 1,000
fully paid up shares of Harveys as well as of an agreement to do ginning for the
Madura Company at a specified rate for a period of ten years. It is stated that
the original arrangement was only oral, but its substance has been embodied in
resolutions recorded in the books of both the companies. Under Sec. 104 of the
Indian Companies Act it is required that where a contract relating to the issue
of shares fully paid up otherwise than in cash has not been reduced to writing,
the company shall, within one month after the allotment, file with the
Registrar the prescribed particulars of the contract stamped with the same
stamp duty as would have been payable if the contract had been reduced to
writing. A statement embodying the above particulars was accordingly filed by
the Madura Mills before the Registrar on 29th August 1933. There was also
produced an agreement dated 26th March 1933 bearing a twelve annas stamp.
The language of the agreement
dated 26th August 1933 is calculated to suggest that the allotment had not yet
been made but was intended to be made in future. Similar language appears in
some of the other papers also before us. This is scarcely reconcilable with the
scheme of Sec. 104 of the Indian Companies Act nor with the records in the case
of what acutally happened. The Collector's letter to the Board of Revenue shows
that
The Collector who referred the matter to the Board for opinion was apparently inclined to think that the reciprocal allotment must be regarded as amounting to a sale and therefore the transaction was liable, to stamp duty as a conveyance. Before the Collector as well as before the Board, reliance seems to have been placed on the decision of the Lahore High Court in Bhola Ram & Sons Ltd. v. The Crown (I.L.R. 15 Lah. 501) in support of the argument that where a transaction does not amount to a conveyance but is merely an agreement to convey, the document does not require to be stamped as a conveyance. The facts in that case are not quite analogous to those of the present but there can be very little doubt as to the correctness of the general principle therein recognised. See also In re Swadesi Cotton Mills Co., Ltd., 30 A. L.J. 394 (F.B.) The Board's reference incidentally mentions another argument advanced before it on behalf of the party namely, that there was no question of conveyance, here; because the transaction did not relate to immoveable property. There is no substance in that argument, as the Board themselves observe, because, the definition of conveyance in tile Stamp Act will apply as much to the transfer of moveable as to the transfer of immoveable property.
Before us Mr. Doraiswamy Aiyar
put his argument on two grounds. He contended that though the allotment was
complete it did not by its very nature amount to a 'transfer of property'
within the meaning of the definition of conveyance because the company cannot
be regarded in any sense as the owner of its own shares, so that when it issues
or allots shares it cannot be said to be transferring property. It is one thing
to say that the shares are property in the hands of a shareholder (e.g., S. 28
of the Companies Act), but, it is a wholly different position when the shares
are being for the first time issued by the company itself. Alternatively, he
contended that even if there should be any possibility of regarding this
transaction as in the nature of a 'sale' of shares, it could not amount to a
'conveyance' unless property has passed thereunder, that according to the
definition of 'goods', in the Sale of Goods Act, shares are 'goods', that under
S. 4 of the Sale of Goods Act a 'contract of sale' is nothing more than an
'agreement to. sell' until the property in the goods to-be sold passes, and
that under S. 18 where there is a contract of sale of 'unascertained' goods no
property is transferred to the buyer unless and until the goods are ascertained
In the present case, at the time of the oral arrangement the particulars of
which were filed before the Registrar, there had been no appropriation of any
specified shares in either company to the other company in pursuance of the
allotment and he accordingly maintained that the transaction could not amount
to anything more than a mere 'agreement to sell' with the meaning of S. 4 of
the Sale of Goods Act. Reliance was placed in this connection on the
observations of the Judicial Committee in. Maneckji Pestonji v. Wadilal
Sarabahai and Co., I.L.R. 50 Bom. 360 (P.C). In the view that we take on the
first question, it does not seem to us necessary to express any opinion on the
second.
On the first question, the learned Government Pleader did not dispute the proposition that a company cannot be regarded as holding its own shares. But he nevertheless suggested that there is nothing wrong in regarding the company as owning the shares which it issues and in that sense it may be possible to bring the case within the definition of 'conveyance' in the Stamp Act. We find it difficult to follow this distinction. As we have already observed, it is no doubt true that in the hands of a shareholder, a share is property and when a shareholder exchanges his shares with another it may be possible to regard the transaction as amounting to a transfer whether by way of exchange or conveyance: Cf, Coats v. Inland Revenue Commissioners (1897) 2 Q.B. 423. But when the company is for the first time issuing shares, it seems to us that there is no question of property already possessed by the company being thereby transferred to the allottee. Whatever may be the exact nature of the right which the allottee acquires between the date of allotment and the date of the entry of his name in the register it is difficult to regard the issue of the shares to him by allotment as amounting to a 'transfer of property' by the company to him. On this ground, we must hold that the contract of which the particulars were recorded in Form VII did not amount to a 'conveyance', and that Form VII was properly treated by the parties as an 'agreement'.
[1987] 62 Comp. Cas. 414 (Mad)
v.
P. Govindaswami
M.N. CHANDURKAR, C. J.
C.R.P. NO. 4120 OF 1984
December 14, 1984
JUDGMENT
M.
N. Chandurkar, C. J.—This revision
petition is directed against a wholly unsustainable order which has the effect
of divesting the petitioners of ownership of 12,387 shares by an ad interim
mandatory injunction which has been almost mechanically passed by the trial
court.
It is
not necessary to go into the merits of the suit which the plaintiff-respondent
No. 1 has filed in the City Civil Court, Madras, in which substantially the
plaintiff's case is that the first and second defendants (petitioners Nos. 1
and 2) on behalf of defendants Nos. 3 to 21 (petitioners Nos. 3 to 21) in the
suit had agreed to transfer to the plaintiff 16,387 equity shares of M/s.
Century Flour Mills Ltd., Madras, respondent No. 2 herein.
Respondent
No. 2 herein is a public limited company, hereinafter referred to as "the
company", in which admittedly defendants Nos. 1 to 20 had obtained 12,387
shares in pursuance of an agreement between the plaintiff and defendants dated
December 12, 1976. One of the terms of the agreement dated December 12, 1976,
was that the first, second and third defendants were to be made directors, out
of whom the first defendant was to be the full-time director of the company.
Defendant No. 21 also owns 4,000 shares in the company. According to the
plaintiff, these shares were transferred to defendant No. 1 in pursuance of an
agreement under which defendant No. 21 had advanced a loan to the plaintiff,
and it was agreed that defendant No. 2 was to be eligible only to the interest
and other benefits arising out of these shares. The plaintiff has already filed
a suit, C. S. No. 453 of 1983, on the original side of this court for a
declaration of ownership of those shares and an injunction has been issued to
defendant No. 21 restraining him from dealing in any manner with those 4,000
shares. That order has later been vacated, and an appeal filed by the plaintiff
against the order vacating the injunction was later withdrawn.
The
plaintiff's case is that at the annual general meeting held on July 22, 1983,
the first three defendants were not elected as directors; and, consequently,
the first defendant had automatically vacated office as wholetime director of
the company. There is some dispute between the parties with regard to the
meeting held on July 22, 1983, and some of the defendants, including defendant
No. 21, have already filed in this court, Company Petition No. 17 of 1983.
It
may be, at this stage, conveniently stated that in Company Applications Nos.
397 and 398 of 1983 in Company Petition No. 17 of 1983, by an order dated
August 22, 1984, a learned single judge of this court has held that no valid
annual general meeting was held on July 22, 1983, and that petitioners Nos. 1,
5 and 6 in the company petition, who are defendants Nos. 1, 2 and 3 in the
suit, continued to be the directors as per the unamended article 97. The
learned judge has further held that since there was no annual general meeting
on July 22, 1983, the term of directors had to be reckoned from September 30,
1982. Accordingly, the learned judge made an order that the respondents in the
company petition would be restrained by an injunction from interfering in any
manner with the three defendants functioning as directors of the company, and
the first defendant discharging his duties as a wholetime director of the
company. A further injunction was issued against the first respondent in the
company petition from convening or holding meeting of the board of the first
respondent-company without due notice in writing by registered post to
petitioners Nos. 1, 5 and 6 in the company petition. It appears that after this
order was passed by the learned single judge, the suit came to be filed on
September 6, 1984, in which, surprisingly, no reference has been made to the
order of the learned single judge, but averments have been made to the contrary
that the three defendants have ceased to be directors of the company. However,
the substantial relief which is asked for in the plaint is that by way of
settlement of some money transactions between the parties through the good
offices of one Sri N. P. V. Ramaswami Udayar, an agreement has been arrived at
between the parties, by which the first two defendants, on behalf of the
remaining defendants, agreed to transfer 16,387 equity shares of the company to
the plaintiff. The details of the holding of each of the defendants were given
in the plaint as a schedule. These are not relevant for the purpose of this
revision petition. It was also alleged that some cash payments were made, and
since the defendants were not transferring the shares, the plaintiff was forced
to file the suit. In the suit, as many as eight substantive reliefs had been
sought. The main relief is one of declaration that the plaintiff is the owner
of 16,387 equity shares of M/s. Century Flour Mills Ltd.,
At
this stage, it has to be mentioned that in Company Petition No. 17 of 1983, the
plaintiff in this suit has filed an application for recording the terms of the
compromise, under which, according to the plaintiff, the defendants were under
an obligation to transfer the shares. This application is C. A. No. 583 of 1984
(page 10 of the paper book). In this application, the details as to how the
compromise has been arrived at have been given, and it is stated that several
drafts were exchanged between the parties, and the final terms arrived at between
the plaintiff and defendants Nos. 1 to 3 were recited. It was stated that the
defendants were unwilling to abide by the terms and that is why it became
necessary to file
the application for directions under rule 9 of the Companies (Court) Rules,
1959, and Order 23, rule 3, Civil Procedure Code, read with section 402 of the
Companies Act to record the compromise and issue suitable directions giving
effect to the terms concluded between the parties. A judge's summons was taken
out. For this purpose, along with the affidavit, "memo of settlement
arrived at between the petitioner and respondents" was filed. This was
done in August, 1984, i.e., prior to the suit. However, this finds no reference
in the plaint itself.
Now, on the day on which the suit was filed, three separate
interim applications came to be filed by the plaintiff, viz., I.A. Nos. 16444,
16445 and 16446 of 1984. There is an endorsement on I.A. Nos. 16444 of 1984
that that application was received at 5 p.m. on September 6, 1984. Since
chronologically, the other two applications bear later numbers, at best, they
must have been received at the same time or a few minutes later. On receipt of
these three applications which have endorsements of the counsel that there is
no caveat in the suit register, the Registrar seems to have registered those
applications and they were put up before the court almost immediately. The
endorsements made by the Registrar on the three applications were, therefore,
to have taken some time, and all this obviously happened after 5 p.m. The
learned judge granted all the three applications by making interim orders also
almost immediately after they were filed, and the three orders are identical in
terms. It is enough to reproduce the order on LA. No. 16444 of 1984, which
reads as follows:
"Heard. Perused case records. Satisfied that the
object of granting the interim injunction would be defeated by the delay.
Hence, ad interim injunction and notice 8.10.84". Sd/……………
8.10.1984.
There is intrinsic evidence in this record to indicate how
mechanically these orders have been made without any application of mind,
because the order in I. A. No. 16446 of 1984 renders wholly ineffective the
orders made on Applications Nos. 16444 and 16445 of 1984 on the same day and at
the same time. Application No. 16444 of 1984 was intended for the relief of an
ad interim injunction restraining defendants Nos. 1 to 20 from disposing of in
any manner 12,387 shares by sale, mortgage, gift, pledge or otherwise till the
disposal of the suit. This order which is at page 73 of the paper book had in
effect frozen the shares. LA. No. 16445 of 1984 was made for an ad interim
injunction restraining defendants Nos. 1 to 20 from exercising voting rights in
respect of 12,387 shares of M/s. Century Flour Mills Ltd. The occasion for
exercising voting rights would arise only if and when a meeting of shareholders
would be held. This injunction was granted and defendants Nos. 1 to 20 were restrained from exercising voting rights in respect of the
disputed shares. The combined effect of these two orders is that defendants
Nos. 1 to 20 were prevented from exercising their rights as either shareholders
or the first three defendants functioning as directors of the company. Also
virtually, the effect of these two orders was that the order of the learned
single judge in Company Applications Nos. 307 and 308 of 1983 which was made
about two months prior to the date on which the trial judge granted the
injunction was completely set at naught. It is also obvious that these orders
were obtained by the plaintiff without disclosing the fact that there was
already an order of the High Court holding that the three defendants continued
to be directors of the company.
What
is surprising is that after having made these orders, the learned judge has
also made an order, which is challenged in this revision petition, on the same
day directing Century Flour Mills Ltd., which is described as
"garnishee" to issue forthwith duplicate shares in respect of 12,387
shares of M/s. Century Flour Mills Ltd. standing in the name of defendants Nos.
1 to 20 to the plaintiff. The learned judge has made a further order directing
that the said 12,387 shares should be immediately transferred in the name of
the plaintiff. The result of this order is that there are now no shares in
respect of which the order made on the two earlier applications on which those
orders can operate. The effect of this order also is that the suit filed by the
plaintiff substantially stands decreed on the very day on which the suit has
been filed at the end of the day. This order of mandatory injunction has been
challenged in this revision petition.
When
the matter came up for admission, since allegations were made against the
learned judge in the memorandum of revision as well as in a complaint made to
me for being dealt with administratively that the injunction order was made
after court hours and without notice to the parties who would be seriously
affected by such an injunction, I directed the learned judge to make a report
as to how such an order came to be passed ex parte. The learned judge has sent
a report that at the time when he made the order, he was satisfied that the
object of granting the order would be defeated by the delay, and that he bona
fide thought that an interim order could be made which could be reversed. In
this report, however, he has further stated that he now realises that he should
not have passed the ad interim order of mandatory injunction.
Mr.
Gandhi, who appears on behalf of the original plaintiff, has, at the outset,
contended that the revision petition filed by the defendants should be
dismissed, because no appeal or revision petition lies against an interim
order, and he has placed reliance on a Division Bench decision of this court in
Abdul Shukkoor Sahib v. Umachander, AIR 1976 Mad 350. The Division Bench has,
in Abdul Shukkoor's case, AIR 1976 Mad 350, held that no appeal will lie
against an ex parte ad interim injunction, but the specific remedy available in
Order 39, rule 4, Civil Procedure Code, has to be availed of by the interdicted
party so that a final reasoned order could be obtained in the trial court
itself against which the Code has provided an obvious appeal under Order 43,
rule 1(r). That was a case in which against an ad interim temporary injunction
restraining the defendants from interfering with the plaintiff's peaceful
possession and enjoyment of the suit property, the defendants filed an appeal
before the Subordinate Judge, and the Subordinate Judge passed an order
suspending the interim injunction. This order of the Subordinate Judge was
challenged in the revision petition. While holding that the order of ad interim
injunction was not appealable, the Division Bench held that the order of the
Subordinate Judge was absolutely without jurisdiction, because no appeal lay
against the ad interim order, and the order of the Subordinate Judge was set
aside. Now, it is true that the Division Bench has held in Abdul Shukoor's
case, AIR 1970 Mad 350, that no appeal will lie against an order of ad interim
injunction. But to accept the contention of the plaintiff in the present case
that the defendants should first appear before the trial court and move the
trial court for setting aside the injunction would really have the effect of
permitting the plaintiff to have the benefit of an order which is patently
erroneous and to say the least, perverse and has been obtained by suppressing
material facts. In any case, the High Court, in the exercise of its revisional
jurisdiction under section 115 of the Civil Procedure Code, cannot allow an
order which amounts to an abuse of the powers vested in the trial court to
stand once such an order comes to the notice of the High Court.
It is
apparent that there are several infirmities in the order of ad interim
mandatory injunction made by the trial court. The petition seeking an order of
ad interim mandatory injunction purports to have been "under section 151,
Civil Procedure Code, read with Order 39, rule 7". Originally, the
petition appears to have been made under Order 39, rules 1, 2 and 7, but the
figures "1, 2" and the word "and" have been struck off.
Now, it is true that if there is power in the court to grant a relief, mention
of a wrong provision of law in the petition will not deprive a party of his
right to a relief if he is otherwise entitled to such relief. But when
positively, a petition is filed under Order 32, rule 7, Civil Procedure Code,
the learned judge should have applied his mind to the question as to whether
the case before him really fell within Order 39, rule 7, Civil Procedure Code.
Order 39, rule 7, Civil Procedure Code, which has the marginal heading
"Detention, preservation, inspection, etc., of subject-matter of
suit", enables the court to make three kinds of orders specified in clauses
(a), (b)and(c). Order 39, rule 7(1), Civil Procedure Code, reads as follows :
"7 (1) The court may, on the application of any party to a suit, and on such terms as it thinks fit,—
(a) make an order for the detention,
preservation or inspection of any property which is the subject-matter of such
suit, or as to which any question may arise therein;
(b) for all or any of the purposes aforesaid
authorise any person to enter upon or into any land or building in the
possession of any other party to such suit; and
(c) for all or any of the purposes aforesaid
authorise any samples to be taken, or any observation to be made or experiment
to be tried, which may seem necessary or expedient for the purpose of obtaining
full information or evidence".
Mr.
Gandhi, appearing on behalf of the plaintiff, was fair enough to concede that
the ad interim mandatory injunction could not have been asked for under Order
39, rule 7, of the Civil Procedure Code at all. The learned judge has obviously
not applied his mind to the correct provision of law under which the plaintiff
was asking for an order of ad interim mandatory injunction.
The
second infirmity in the order is that the order of ad interim mandatory
injunction is made against "Messrs Century Flour Mills Limited" which
is not even a party to the suit. Messrs Century Flour Mills Limited is a public
limited company and merely by adding the name of Messrs Century Flour Mills
Limited as respondent No. 22 in the petition for ad interim mandatory
injunction, it would not empower the court to issue an injunction against
Messrs Century Flour Mills Limited directing it to issue duplicate shares. In
paragraph 10 of his affidavit, in support of his application in I A No. 16446
of 1984, the plaintiff has stated :
"I
am taking this application impleading M/s. Century Flour Mills Ltd., having its
registered office at Indian Chamber Buildings, First Floor, Esplanade, Madras
600 001, as the garnishee so as to help this Hon'ble Court to pass necessary
orders directing the garnishee, M/s. Century Flour Mills Ltd., Madras, to issue
duplicate shares in respect of 12,387 shares standing in the name of defendants
Nos. 1 to 20 and also direct the garnishee, M/s. Century Flour Mills Ltd.,
Madras, to transfer the above 12,387 shares in the name of the plaintiff and
save him from irreparable loss and damages".
It is
not known as to how Messrs Century Flour Mills Limited was described as a
"garnishee" and in what proceedings, Messrs Century Flour Mills Ltd. was a garnishee.
Technically, assuming that Messrs Century Flour Mills Ltd. was under the
control of the plaintiff, the trial court could not have made an order of ad
interim mandatory injunction without Messrs Century Flour Mills Limited being a
party to the suit. The fact that an ad interim order of mandatory injunction
has been made against the company which is not even a party to the suit, and
not against the defendant itself, indicates that the interim mandatory
injunction has been issued in a most casual manner without any application of
mind.
The learned judge seemed to have completely lost sight of
the fact that the ad interim order of mandatory injunction was in this case of
a very peculiar type and the right of the plaintiff to get such an ad interim
injunction could not be determined without reference to the provisions of the
Companies Act. The right of a party to have duplicate shares issued or to have
his name entered in the register of members of a public limited company has to
be determined with reference to the provisions of the Companies Act. The "shares"
in a company are movable property. Section 82 of the Companies Act provides
that the shares or other interest of any member in a company shall be movable
property, transferable in the manner provided by the articles of the company.
Transfer of shares is a matter in respect of which there is an express
statutory provision in section 108 of the Companies Act. Section 106(1) which
provides that the transfer of a share is not to be registered except on
production of the instrument of transfer, reads as follows :
"A company shall not register a transfer of shares in,
or debentures of, the company, unless a proper instrument of transfer duly
stamped and executed by or on behalf of the transferor and by or on behalf of
the transferee and specifying the name, address and occupation, if any, of the
transferee, has been delivered to the company along with the certificate
relating to the shares or debentures, or if no such certificate is in
existence, along with the letter of allotment of the shares or debentures :
Provided that where, on an application in writing made to
the company by the transferee and bearing the stamp required for an instrument
of transfer, it is proved to the satisfaction of the board of directors that
the instrument of transfer signed by or on behalf of the transferor and by or
on behalf of the transferee has been lost, the company may register the
transfer on such terms as to indemnity as the board may think fit :
Provided further that nothing in this section shall
prejudice any power of the company to register as a shareholder or debenture
holder any person to whom the right to any shares in, or debentures of, the
company has been transmitted by operation of law".
This provision shows that a company is prohibited from
registering the transfer of shares in the company, unless there is a proper
instrument of transfer which is duly stamped and which is executed by or on
behalf of the transferor and by or on behalf of the transferee is delivered to
the company along with the certificate relating to the shares or debentures, as
the case may be. However, under the proviso, if it is proved to the
satisfaction of the board of directors that the instrument of transfer signed
by or on behalf of the transferor and by or on behalf of the transferee has been
lost, the company may register the transfer on such terms as to indemnity as
the board may think fit, but this can be done only on an application in writing
to the company by the transferee and bearing the stamp required for an
instrument of transfer. However, if the shares of a company have been
transmitted by operation of law, the company is entitled to register as
shareholder or debenture holder, the person to whom the shares have been
transmitted by operation of law. Sub-section (1A) of section 108 requires the
instrument of transfer of shares to be in the prescribed form. There is an
elaborate procedure prescribed under section 108 which has to be complied with
before a transferee of a share could have his name registered in the books of
the company. The provisions of section 108 would, therefore, show that the
title of the transferee to get on the register of shareholders consists in the
possession of the share certificates, together with the transfer form signed by
the registered holder (see Maneckji Peslonji Bharucha v. Wadilal Sarabhai and
Co. [1926] ILR 50 Bom 360; AIR 1926 PC 38). The combined effect of section 82
read with section 108 of the Companies Act is that though the shares of a
company are "movable" property, in so far as the company is concerned,
unless there is a valid deed of transfer in accordance with section 108 of the
Companies Act, the transferee cannot claim to have his name entered in the
register of members of the company.
Even so far as the issue of duplicate shares of the company
is concerned, the right to get a duplicate share is regulated by section 84.
Under section 84(1), a certificate, under the common seal of the company,
specifying any shares held by any member, is prima facie evidence of the title
of the member to such shares. Sub-section (2) of section 84 reads as follows :
"A certificate may be renewed or a duplicate of a
certificate may be issued, if such certificate—
(a) is proved to have been lost or destroyed, or
(b) having been defaced or mutilated or torn is surrendered
to the company".
The learned judge has not considered the effect of section
84 or section 108 of the Companies Act when he went on to make an order that duplicate shares should be issued, and the said shares
should be immediately transferred in the name of the plaintiff. The learned
judge was bound to consider whether he could issue an injunction against a
company which is not a party, and whether the plaintiff was entitled to bypass
the provisions of the Companies Act when he asked for the several reliefs as
prayed in the plaint. He should have considered these matters on his own even
if the plaintiff's counsel had not referred to them.
Important
questions of law are involved in the suit. The plaintiff's right to get the
ownership of the shares in question itself is not beyond doubt. Such a right is
not founded on any document and will have to be decided only on oral evidence.
It could not even be prima facie said that the plaintiff had any present
undisputed right on the basis of a compromise which even according to the
plaintiff himself, the concerned defendants were not accepting. There was clear
suppression of facts on the part of the plaintiff when he did not disclose to
the court the fact that he has applied for the alleged compromise being recorded
in the company court. He has also not disclosed that there was already an
adjudication in the company court before the filing of the suit and that the
three defendants continue to be the directors of the company. Injunction is an
equitable relief and the suppression of the above facts was, in my view, enough
to deprive the plaintiff of the right to get the relief of injunction.
There
are not only disputed questions with regard to the present right of the
plaintiff to the ownership of the shares in question, but as already pointed
out, important questions of law are involved in respect of the provisions of
the Companies Act, and it was wholly improper on the part of the trial court to
make an order of ad interim mandatory injunction in the present case. A
mandatory injunction is an order compelling a defendant to restore things to
the condition in which they were when the plaintiff's complaint was made.
Salmond defines "mandatory injunction" as an order requiring the
defendant to do a positive act for the purpose of putting an end to a wrongful
state of things created by him or otherwise in fulfilment of the legal
obligations, for example, an order to pull down a building which he had already
erected to the obstruction of the plaintiff's rights "Mandatory
injunctions" are dealt with in section 39 of the Specific Relief Act which
reads as follows :
"When, to prevent the breach of an obligation, it is necessary to compel the performance of certain acts which the court is capable of enforcing, the court may in its discretion grant an injunction to prevent the breach complained of, and also to compel performance of the requisite acts".
A
mandatory injunction can, therefore, be issued in order to compel the
performance of certain acts in order to prevent the breach of an obligation
which the court is capable of enforcing. It is true that the obligation may
flow from a contract. But then, an agreement enforceable at law has to be there
between the parties on the basis of which the obligation can be ascertained. In
the instant case, the agreement on which the plaintiff is relying is itself to
be established.
The
object of an injunction is prevention (sic) and the maintenance of the status
quo ante. Normally, this object is achieved by merely a restrictive order which
forbids the carrying out of a threat of injury, or the repetition of an
injurious act. In the given case, however, the acts committed by the defendant
may leave an abiding injury, and it may be difficult to restore the status quo
ante unless that which has been done is undone. A mandatory injunction is
issued to undo the effect of an injurious act. A very familiar example of such
an injury is where the defendant erected a building which causes a perpetual
obstruction to the access of light to the plaintiff's house, to which amount of
light he has a legal right. In such a case, it is obvious that restoration of
the parties to their former condition is impossible except by ordering the
demolition of the building. Sometimes in order to prevent the breach of the
legal right, and to compel the performance of certain acts, the defendant is
ordered to undo that which he has done. A mandatory injunction is granted only
in rare cases, and normally, a mandatory injunction is granted, if at all, only
to restore the status quo and not to establish a new state of things differing
from the state which existed at the date when the suit was instituted. The
effect of a mandatory injunction, so far as the defendant is concerned, is more
serious than in the case of a prohibitory injunction, because, where by a
mandatory injunction, the defendant is enjoined to do any particular act, he
may be put to expenses and trouble which may be very considerable. That is why,
though the power to grant injunction has to be exercised with great caution,
much greater caution is necessary in the case of making an order of mandatory
injunction which is very rarely granted.
The
present case is an illustration of what harm a mandatory injunction can cause
when passed in a casual manner, as a matter of course. The plaintiff has still
to establish his right to the shares in question. The factum of the compromise
in pursuance of which the plaintiff claims that the defendants had promised to
transfer the shares to him is itself the subject-matter of an application under
Order 23, rule 3, Civil Procedure Code, before the company court. The averments
in the plaint which will have to be established before the plaintiff can claim
any right to the shares in question, are disputed questions of fact on which
evidence will have
to be recorded when the suit goes to trial, because the main issue in the suit
relate to the factum of the compromise on which the plaintiff relies. Even on
the averments in the plaint, it cannot be said that the plaintiff has made out
any prima facie case for a mandatory injunction, and yet the defendants have
been summarily divested of the ownership of the shares in question of the value
of more than Rs. 10 lakhs by one stroke of the pen of the learned judge. In the
view I have taken, the order of mandatory injunction made by the trial court is
set aside and Application No. 16446 of 1984 is rejected.
Before parting with the case, it is necessary to observe
that the trial courts must realise that injunctions, whether prohibitory or
mandatory, should not be granted as a matter of course, and the trial court
must exercise extreme caution and care before an order of injunction is made,
and it has to decide the question relating to the grant of an ad interim
injunction according to well-established principles. The trial court, even at
the stage of making an ad interim order of injunction, has to apply its mind
seriously to the question whether the plaintiff has made out a prima facie case
for the grant of an injunction. The circumstance that an ad interim order can
be vacated after the defendant appears and contests the correctness of the
order of injunction is no justification for issuing an injunction as a matter
of course.
Accordingly, the order of the trial court made in I. A. No.
16446 of 1984 is set aside. The revision petition is allowed with costs.
Counsel's fees are computed at Rs. 500.
I am informed that the
defendants have already moved the company court for the transfer of the suit to
its file. Having regard to the manner in which the trial court has dealt with
the matter, it will be in the interest of justice to withdraw the suit from the
court and transfer the suit to the file of the Principal Judge,
[2003] 46 SCL
695 (sc)
Supreme Court of
v.
Kerala Kaumudi (P.) Ltd.
Mrs. RUMA PAL AND B.N. SRIKRISHNA, JJ.
CIVIL APPEAL NOS. 3253 TO 3261 OF 1991
AUGUST 1, 2003
Section 290, read with section 108, of the Companies
Act, 1956 and section 29 of the Indian Contract Act, 1872 - Directors -
Validity of acts of - As a result of dispute, family companies controlling
interests in concerns were agreed to be divided among four brothers -
Accordingly, transfer of shares was effected in all family concerns -
Controlling interest in company in dispute was given to appellant and another
brother M and his children transferred their shares in company to appellant -
Subsequently, karar was entered into contemplating that effective control of
all family concerns were to be divided among four brothers - However,
subsequently, other brothers and mother held successive Board meetings and
passed special resolution by which powers of MD were assumed by mother followed
by decision to increase share capital - Additional shares were issued and said
shares were issued to other brothers - Extraordinary General Meeting (EGM) was
called wherein appellant was removed as MD and relevant articles of company to
that effect were deleted - All through that period, appellant was not given any
notice at all - Appellant filed application for rectification of company’s
share register under section 155 by cancellation of allotment of additional
shares to other brothers and for removal of name of M from company’s share
register - Whether where there was an immediate and unconditional transfer of
shares with stipulation for determination of consideration for transfer to be
mutually agreed on in future, it could not be said that agreement for transfer
of shares was conditional on determination of price of shares - Held, yes -
Whether it could not be said that, if there had been no such determination, no
transfer could have taken place - Held, yes - Whether transfer of shares by M
and his children should be held effected validly to appellant - Held, yes -
Whether since appellant was acting as MD at relevant time and no valid notice
as required either under article of association or under Companies Act was
given to him, holding Board meetings as well as EGM would be void and
subsequent alteration/deletion of article and removal of appellant would be bad
in law - Held, yes - Whether since appellant and his group, all of whom held
shares in company, were not given notice to apply for allotment of additional
shares, subsequent allotment of shares to appellant’s brothers at meeting was
invalid - Held, yes - Whether since requirement of 75 per cent voting to pass
special resolution was not fulfilled, special resolution passed would be
invalid - Held, yes
Section 10 of the Specific Relief Act, 1963 -
Cases in which specific performance of contract enforceable - Appellant’s suit
of specific performance of ‘karar’ as mentioned in facts under heading
‘Directors - validity of acts of’ was also decreed in his favour - Whether
where each of brothers had been given majority shareholding in respective
family concerns against their name in Karar and other three brothers had taken
benefit of said karar, they were bound to comply with all its terms - Held, yes
- Whether since appellant had transferred bulk of his shareholding in family
companies which were under majority control of other three brothers, appellant
was entitled to insist on performance of karar giving benefit to him - Held,
yes
Facts
Kerala Kaumudi, the company in dispute was a
publishing company promoted by the parents of four brothers, viz.,
Madhusoodhanan, Srinivasan,
According to Madhusoodhanan, Mani and his
children had already transferred their entire holding of 390 shares in Kerala
Kaumudi to Madhusoodhanan in May 1985, prior to the agreement for division. As
a result, Mani and his children had no shares in the company and he had the
controlling shareholding.
It was the case of the other three brothers
that a Board meeting of Kerala Kaumudi was held at which the mother; Madhavi,
assumed the powers of the managing director in purported ouster of
Madhusoodhanan. A second Board meeting, was held in which a decision was taken
to increase the paid-up share capital of Kerala Kaumudi by issuing additional
shares. At another Board meeting these additional shares were issued to Ravi
and Srinivasan and one share was transferred by
On appeal, by a common judgment, the Division
Bench reversed the findings of the Single Judge.
On appeal to the
Held
(A) Issue of transfer of shares by Mani and
his children to Madhusoodhanan
The documentary evidence relating to the
transfer showed without a shred of doubt that there was a valid transfer of
shares by Mani and his children. The intention of Mani and his group to
transfer their shareholding to Madhusoodhanan was evident from the minutes of
meeting held on 19-3-1985. Although the mode of transfer was subsequently
changed, that intention was affirmed at the Board meeting of Kerala Kaumudi
held on 23-4-1985. Resolutions as appearing in the minutes of the meeting were
also signed by Mani. The sixth resolution clearly envisaged three distinct
stages : an immediate and unconditional transfer of shares, then, the
settlement of Mani’s income tax liabilities by Kerala Kaumudi and, after both
these stages, the determination of the consideration for the transfer to be
mutually agreed on. [Paras 21.3 and 21.4]
The Division Bench, therefore, erred in
holding that the agreement for transfer of shares was conditional on the
determination of the price of the shares and in concluding that as there had
been no such determination, no transfer could have taken place. The express
intention was to effect an immediate transfer of the shares and to agree upon
the consideration later. Section 9 of the Sale of Goods Act, 1930 permits that.
[
Section 4, read with section 2(10), of the
Sale of Goods Act, 1930 requires that the contract of sale must provide for the
payment of money as a consideration for the transfer of goods, or to put it
differently, that a price must be paid. But section 9 of the 1930 Act allows
the parties not to fix the price at the time of the transfer and to leave the
determination of the amount of consideration to a later date. An agreement
which provides for the future fixation of price either by the parties
themselves or by a third party is capable of being made certain and is not
invalid as provided under section 29 of the Contract Act, 1872. In view of such
categoric and clear statutory provisions, the submission of Mani that such a
contract was void for uncertainty because the price was not fixed, was
unacceptable. [
The minutes of the Board meeting held on
21-5-1985 were read and approved on 4-6-1985. Both meetings were attended by
Madhavi, Madhusoodhanan, Srinivasan and
It was evident from that that the share
transfer forms which were placed before the board meeting had been executed and
were otherwise duly completed or else the question of the approval of such
transfer would not arise. [
There were the minutes of the meeting held on
26-8-1986, when Madhusoodhanan, was already effectively removed from the
control of Kerala Kaumudi. It stated about transfer of shares by Mani to
Madhusoodhanan. [
In the annual return filed with the registrar
of companies, in the list of past and present members and debenture holders,
the names of all parties had been given including the names of Mani, and his
children. However, against their names it had been mentioned that they had
effected transfer of their shareholding to Madhusoodhanan. Particulars of the
transfer made by each as well as the date of registration of the transfer had
been given as 21-5-1985. [
On 1-3-1986 in keeping with the statutory
requirement relating to the ownership of newspapers, a statement was published
in Form IV. In the list of shareholders there was no mention of Mani or either
of his children as shareholders. There was no protest by Mani or any of the
other shareholders which would have naturally been made if the statements were
incorrect. Even after ouster of Madhusoodhanan from the Board, in the list of
shareholders filed with the Registrar of Companies as part of the annual Return
of Kerala Kaumudi, Mani was shown as holding only one share and Madhusoodhanan
as holding 612 shares in the company. That return had been filed under the
signature of Srinivasan and Ravi as Managing Director and Director of Kerala
Kaumudi, respectively, together with a certificate by
This was again done in the annual return of
Kerala Kaumudi filed under the signature of
The one share which was shown in Mani’s name
in the annual return for 1986 and 1987 was sold by Ravi to Mani at a meeting
held on 26-8-1986 which had been recorded in the minutes and affirmed in the
same affidavit of Madhavi on behalf of
The admission to membership was in terms of
article 24(a) of the articles of association of Kerala Kaumudi, which directed
that no share shall be transferred to a person who was not a member so long as
any member or any person selected by the Directors as one whom it was desirable
in the interest of the company to admit to membership, was willing to purchase
the same at fair value. In other words, a non-member of the company could be
sold a share of the company even. When a member wished to purchase it, provided
the directors selected him as ‘a person whom it was desirable in the interest
of the company to admit to membership’ and provided that such person was
willing to purchase the share. [
If the transfer by Mani and his children of
their entire shareholding in Kerala Kaumudi to Madhusoodhanan had not been
effected, there was no question of ‘admitting’ Mani to the membership of the
company. The minutes of the meeting held on 26-8-1986 which had been admitted
by Srinivasan and the affidavits of Madhavi and Mani, thus, proved that Mani
and his family held no shares in the company until the single share was
transferred by
Under section 194 minutes of meetings kept in
accordance with the provisions of section 193 shall be evidence of the
proceedings recorded therein and, unless the contrary was proved, it shall be
presumed under section 195 that the meeting of the Board of Directors was duly
called and held and all proceedings thereat to have duly taken place. The onus
was on Mani to disprove that the transfers had not taken place as recorded in
the minutes of the Board meeting held on 21-5-1985, an onus that he had
singularly failed to discharge. [
The articles of association of the company (article
81) allowed Directors to regulate their meetings as they would think fit. Also
article 89 said that a resolution in writing circulated to all the Directors
and assented to by a majority of them would be as valid as a resolution passed
at a meeting of the Board of Directors. The minutes right be prepared
subsequently but they must be duly entered in the minute book and initialled
and it was nobody’s case that that was not done. Finally, Madhusoodhanan had
also said that formal meetings were held and that important decisions were
circulated to all members. In any event, the conclusion about the transfer of
shares by Mani and his children to Madhusoodhanan would stand without the
support of the statutory presumption under section 195. [
Mani did not attend the Board meeting held on
21-5-1985 or any other till he was admitted to membership of Kerala Kaumudi on
26-8-1986. Apart from that telling circumstance supporting Madhusoodhanan’s
case, Srinivasan had attended and signed the minutes of the meeting on
21-5-1985. Claim that no such meetings were in fact held and that whenever he
signed the minutes of the meetings held during the managing directorship of
Madhusoodhanan, he did so at the instance of the latter without being aware of
the contents of the minutes, was hardly likely. The brothers were already at
daggers drawn and it was unbelievable that he would place such unquestioning
faith in Madhusoodhanan. Additionally, the entries in the attendance register
of Kerala Kaumudi also belied that assertion. Besides, the falsity of that
explanation was apparent from the minutes of the meeting held and the statutory
records submitted by Srinivasan after Madhusoodhanan was removed as managing
director of Kerala Kaumudi which continued to state that Mani and his children
had transferred their shares in the company to Madhusoodhanan. [
The fact that all the parties, including Ravi,
Srinivasan and Mani himself, all hardened businessmen, not only proceeded on
the basis that there was effective transfer of Mani and his childrens
shareholding to Madhusoodhanan but also certified the same to the Registrar of
Companies, and additionally affirmed that such transfer had taken place on oath
in their affidavits could only lead to the conclusion that the transfer had
been legally effected on the basis of duly executed share transfer forms in
compliance with the provisions of the Act. [
In examination, admittedly the case was that
Mani and his children had agreed to transfer their shareholding to Madhusoodhanan.
[
Given the documentary evidence of completed
transfers, it was more than probable that the ‘real’ share transfer forms were
never produced by Mani and his group and that share transfer deeds which were
produced by Mani were prepared in 1984 as claimed by Madhusoodhanan. It was
improbable that share transfer stamps having been purchased by Mani and his
group for the share transfers which were recorded as effected four days later,
would not have been utilized. In that state of evidence it could not reasonably
be held that Mani and his group had been able to establish that the transfer of
the 390 shares by them to Madhusoodhanan was effected in violation of section
108 or any other provision. [
All evidences indicated that there were in
existence duly executed share transfer forms prepared in conformity with the
provisions of section 108 which everyone had accepted and acted upon and which
were deliberately not produced. [
The relevant share transfer forms must be taken
to have been duly executed. Although Mani and Madhusoodhanan had agreed to
determine the actual consideration later, clearly some consideration was agreed
to be shown on the share transfer forms. A voucher for the cost of share
transfer stamps was produced by Mani’s group. The stamps must have been
purchased on the basis of the consideration which was shown on the share
transfer forms at the prescribed percentage under the Stamp Act. [
But it was also clear from the evidence on
record that that was not the ‘actual’ price which was to be determined
consensually by Mani and Madhusoodhanan. [
The lawyer sent notice on behalf
of Mani to Madhusoodhanan threatening legal action unless Madhusoodhanan paid
‘the balance sale consideration of Rs. 50 lakhs’ since Mani had positively
asserted that he must get a price between Rs. 50 and 75 lakhs, and that price
negotiated was ‘in between the said figures’. [
It was apparent that ‘mani’ had received some
consideration for the transfers although the consideration may have moved from
Kerala Kaumudi to Mani.
Therefore, the transfers by Mani and his
children were effected validly to Madhusoodhanan. Their prayer for
rectification of the share register was therefore rejected and the decision of
Division Bench in the appeal was accordingly set aside. [
(B) The removal of Madhusoodhanan as managing
director
Three
conditions had to be fulfilled before any alteration of the articles could take
place;
(i) Notice specifying the intention to
propose the resolution as an extraordinary resolution must be given.
(ii) The
resolution must be passed by 75 per cent of the members present and;
(iii) Not less than 21 days notice of the meeting must be duly
given.
The requirements
are cumulative and mandatory. [
Coming now to the facts of the instant case,
it was apparent that none of the three preconditions for effecting an
alteration in the Articles of Kerala Kaumudi by deleting Article 74 were
fulfilled. It may be recalled that at the Board meeting held on 23-7-1986 in
connection with Madhusoodhanan’s functioning as a Managing Director, only a
limited resolution was taken, namely, that Madhavi ‘shall assume the executive
powers of the managing director with immediate effect for effective running of
the organisation’. The resolution that an extraordinary general body meeting be
convened at a date suitable to the Chairman ‘to discuss and take decisions on
matters arising out of the above decisions’ was, therefore, confined to that
limited resolution. [
In the notice dated 25-7-1986 purporting to
call an EGM, there was no mention whatsoever of any intention or proposal to
amend the articles of the company. [
At the Extraordinary General Meeting held on
16-8-1986, when a special resolution was taken up for consideration. Madhavi
proposed that ‘another special resolution also be passed deleting article 74 of
the articles of association of the company’. [
That acknowledged that there was no Earlier
Extraordinary General meeting deleting article 74 as Madhavi had claimed in the
meeting dated 23-7-1986. Furthermore, it showed that the special resolution
which was proposed in the notice was not the resolution which was ultimately
passed. In the garb of ratifying the resolution taken by the Board of
Directors, what was in fact ‘ratified’ was not only the proposal to remove ‘MD’
as the director but also the immediate deletion of article 74 of the articles
of association of the company. The expression of intention in the notice under
section 81(1) of the Indian Companies Act, 1913 (corresponding to section
189(2)(a) of the 1956 Act) should be sufficiently specific so as to effectively
inform each member of the company of the actual resolution sought to be passed
in the general meeting. The notice must be frank, open, clear and satisfactory.
If it is not, the notice is bad and the special resolution is vitiated and
cannot be acted upon. If any attempt is made by the directors to get the sanction
of the shareholders, it must be made on a fair and reasonably full statement of
the facts upon which the directors are asking the shareholders to vote and
special resolutions obtained by means of a notice which did not substantially
put the shareholders in the position to know what they were voting about,
cannot be supported. [
Since the further resolution to delete article
74 formed no part of the notice of the Extraordinary General Meeting, in all
fairness the special resolution on the basis of such defective notice was
insupportable in law could not be given effect to. That finding was sufficient
to hold that the deletion of article 74 of the articles of the association of
the company was invalid and that, therefore, Madhusoodhanan continued to be the
managing director of Kerala Kaumudi as claimed by him. [
The two modes envisaged for service of notice
are personal service and service by post. There is no other mode envisaged.
That not satisfied that the service of the notice was effected either on
Madhusoodhanan or any other shareholder in his group, including KIPL by either
of the modes specified. [
That was no ordinary general meeting, but a
meeting where a special resolution was to be passed. That had to be done under section
81 of the 1913 Act, to which article 49 is expressly subject, and the
requirement for giving due notice under section 81 is mandatory. Furthermore,
article 49 speaks of an “accidental omission” to give notice not affecting the
proceedings. In other words the omission must be bona fide, and not an omission
which was wilful as in the instant case. [
Furthermore, the third condition to be
fulfilled before the Articles can be amended under section 81(1) of the 1913
Act, (section 189(2)(c) of the 1956 Act) is that at least 75 percent of the
members entitled to vote and voting must support the resolution. That mandatory
need to have the special resolution passed by a statutory majority of 75 per
cent was also sought to be circumvented by the respondents by the purported
issue of additional shares to
Resultantly, the removal of the appellant
Madhusoodhanan was not proper. [
(C) Issue of additional shares
Madhavi assumed charge as managing director of
the company on 23-7-1986 with the object of ousting Madhusoodhanan from his
control over the affairs of Kerala Kaumudi. This needed to be ratified by the
general body of shareholders. So the notice dated 25-7-1986 was issued for
holding the extraordinary general meeting on 16-8-1986 with the requisite
statutory majority of 75 per cent. [
A decision was taken by the respondents at the
meeting of the Board on 1-8-1986 to increase the share capital of the company
by issuing additional shares. At the same meeting, the Chairman (Madhavi) was
authorised by the two other directors present, namely,
None of the evidence produced by the
respondents, at all established that the notice dated 25-7-1986 of the Board
meeting to be held on 1-8-1986 was served on Madhusoodhanan. Apart from that
fatal legal flaw, the evidence merely recorded that an unknown or at least an
unnamed person handed over a sealed envelope to one Mohan Raj who then handed
it over to a peon, who was to hand it over to Mrs. Madhusoodhanan. No one had
come forward to say that the sealed envelope contained the notice dated
25-7-1986. Assuming it did, there was nothing to show that the envelope
ultimately reached Madhusoodhanan. The affidavit affirmed by Mohan Raj
contradicted the entry in the local delivery book. Apart from anything else,
Mohan Raj had himself admitted that he had not forwarded the notice to
Madhusoodhanan in several documents and in affidavit, besides also giving oral
evidence to that effect. There was no reason to disbelieve Mohan Raj’s oral
testimony as to the circumstances under which he had affirmed the affidavit
relied on by the respondents. [
As far as the outward register was concerned,
it had not been proved as to who dispatched the notice nor did the register
show how the dispatch was effected. [
So far as the outward dispatch register was
concerned, the mode of dispatch had not been mentioned nor was there anything
to show that the notice was in fact dispatched. In the circumstances, it could
be held that Madhusoodhanan was not given any notice of the Board meeting said
to have been held on 1-8-1986. [
Since Madhusoodhanan did not know of the
meeting held on 1-8-1986, he was not aware, as the respondents were, either
that additional shares were being issued or that the application for additional
shares had to be made within seven days of the meeting. [
As far as the certificate of posting was
concerned, it was not explained why it did not record the dispatch of notices
to any other shareholder. When the relationship between the parties was already
so embittered, proof of service of notice under certificate of posting must be
viewed with suspicion. [
In the instant case, the certificate of
posting was suspect. Assuming that such suspicion was unfounded, it did not in
any event amount to conclusive proof of service of the notice on Madhusoodhanan
or on any of the other addresses mentioned in the certificate. Except for
producing the dispatch register and the certificate of posting, no one on
behalf of the respondents came forward to vouch that they had personally sent
the notice through the post to Madhusoodhanan and his group. Madhusoodhanan had
written two letters contemporaneously dated 4-8-1986 and 8-8-1986 to
Srinivasan, the General Manager of Kerala Kaumudi and to Madhavi complaining
that he was not receiving any mail at all. Those letters were admittedly
received but not replied to by the respondents. It was also apparent from a
perusal of those letters that Madhusoodhanan had no knowledge whatsoever of the
notice for application for allotment of additional shares. Had there been such
notice, it was improbable that Madhusoodhanan who was fighting for retaining
his control over Kerala Kaumudi, would have risked losing such control by
abstaining from applying for the additional shares. [
In the circumstances, it could be held that
Madhusoodhanan and his group were not served with the notice dated 1-8-1986. It
was, therefore, unnecessary to decide whether the period prescribed in the
notice to apply for the shares was too short or contrary to the articles of association
of Kerala Kaumudi. [
Once it was held that Madhusoodhanan and his
group, all of whom held shares in Kerala Kaumudi, were not given notice to
apply for allotment of the additional shares, it must be held that the
subsequent allotment of the shares to Ravi and Srinivasan at the meeting held
on 8-8-1986 and the affirmation of such allotment at the meeting allegedly held
on 16-8-1986, were vitiated thereby and invalid. [
(D) Specific performance of the Karar
16-1-1986
The basic fact is that each of brothers had
been given the majority shareholding of 52 per cent in the companies specified
against their names in the Karar. Since the other three brothers had taken the
full benefit of the Karar, they were bound to comply with all its terms. It was
not open to them to accept that portion of the Karar which was in their favour
and jettison the rest. The Karar which was in the nature of a family settlement
seeking to settle disputes between brothers, having been already acted upon at
least to the extent that the four brothers were each given the majority
shareholding in the different companies as mentioned in the Karar, should not
be lightly interfered with. [
It was also on record that Madhusoodhanan had
transferred the bulk of his shareholding in the companies which were to be
under the majority control of the other three brothers. The Single Judge had
held that Madhusoodhanan had given evidence that he had taken steps for closing
down the companies not mentioned in the Karar. That finding had not been
questioned. All the clauses except that for the transfer of the ‘inherited
shares’ to Madhusoodhanan had been acted on. Madhusoodhanan was entitled to
insist on the performance of that clause as well. [
It is settled law that shares are movable
properties and are transferable. As far as private companies like Kerala
Kaumudi were concerned, the articles of association restricted the
shareholder’s right to transfer shares and prohibit any invitations to the public
to subscribe for any shares in, or debentures of, the company. [
Subject to that restriction, a holder of
shares in a private company may agree to sell his shares to a person of his
choice. Such agreements are specifically enforceable under section 10 of the
Specific Relief Act, 1963. The section provides that specific performance of
such contracts may be enforced when there exists no standard for ascertaining
the actual damage caused by the non-performance of the act agreed to be done;
or when the act agreed to be done is such that compensation in money for its
non-performance would not afford adequate relief. In the case of a contract to
transfer movable property, normally specific performance is not granted except
in circumstances specified in the Explanation to section 10. One of the
exceptions is where the property is ‘of special value or interest to the
plaintiff, or consists of goods which are not easily obtainable in the market’.
It had been held by a long line of authority that shares in a private limited
company would come within the phrase ‘not easily obtainable in the market’. [
There is a distinction between the issue of
new shares by a company and the transfer of shares already issued by a
shareholder. In the first case, it is the company which issues and allots the
new shares. In the second, the transaction is a private arrangement and the
company comes into the picture only for the purposes of recognition of the
transferee as the new shareholder. Therefore, while it is imperative that the
company should be a party to any agreement relating to the allotment of new
shares, before such an agreement for division can be enforced, it is not
necessary for the company to be a party in any agreement relating to the
transfer of issued shares for such agreement to be specifically enforced
between the parties to the transfer. [
There was no restriction on the
transferability of shares in the Karar. It was an agreement between particular
shareholders relating to the transfer of specified shares, namely, those
inherited from the late Sukumaran and Madhavi, inter se. It was unnecessary for
the company or the other shareholders to be a party to the agreement executed
on 15-7-1985 several months prior to the Karar. The parties who had consciously
entered into the agreement regarding the transfer of their parent’s shares
were, therefore, obliged to act in terms of the Karar. Having regard to the
nature of the shareholding, on the basis of law as enunciated in S.P. Jain v.
Kalinga Tubes AIR 1965 SC 1535 and Bank of India Ltd. v. JAH Chinoy AIR 1950 PC
90 it must be held that the Karar was specifically performable. [
As far as the question of consideration was
concerned, it was already held that parties could agree to subsequently
determine the price at which the shares were sold as section 9 of the Sale of
Goods Act, 1930 expressly provides that such contracts are perfectly legal.
Besides, the Karar in terms did not call upon parties to determine the
consideration. All it said was that once the consideration was determined by
Madhusoodhanan and Mani, it would be made known to the others. Since there was
no such determination, there was no question of informing anyone. The finding
that there was no determination of the consideration in respect of the
inherited shares as a ground for holding that the Karar was not specifically
performable was similarly incorrect as the determination of the price formed no
part of the Karar. [
In view of clear averment, made in plaint and
the finding of the Division Bench regarding the contravention of section 16 of
the Specific Relief Act was perverse. On the question of delay, the cause of
action arose when Madhavi died in December, 1987. It could not reasonably be
said that filing of the suit ten months later was unreasonably delayed since
some time must be given to see whether the parties did what they were required
to do under the Karar after Madhavi’s death. [
The Division Bench appeared to have relied on
clause (a) of section 20(2) to deny specific performance of the Karar by
holding that Madhusoodhanan had obtained an unfair advantage over others under
the Karar because he had been allotted the more ‘substantial’ companies. That
logic flies in the face of clause (a) of sub-section (2) to section 20 and the
Explanation thereto. [
Section 20(2)(a) of the Specific Relief Act is
an instance of such legislative clarity that it needs no paraphrasing to
highlight its intent. The Division Bench was clearly wrong in its foray into
the question of the value of the assets allotted under the Karar. It had,
despite Explanation 1 to section 20(2) refused specific performance of the
Karar on one of the excluded grounds viz., inadequacy of consideration. [
The parties was at loggerheads and it was
unlikely that they would mutually agree to a price to be paid for the 390
transferred shares or the ‘inherited shares’ as envisaged at the meeting held
on 23-4-1985 or to a mutually acceptable third party in terms of clause 11 of
the Karar. Therefore, there should be specific performance of the Karar and
arbitrator should be appointed for estimating the value of assets. [
Editor’s Note
Regarding application for rectification of
Register of members of company KIPL, it was held that since minutes recorded
that transfer deed had been placed before the Board, transfers were approved by
the Board, in presence of only witness for petitioners and since none of
documents which were duly maintained by company recording transfer of shares
was disproved, tranfer of share would be joint.
It was further held that where in evidence it
was proved that all communication to company KIPL was addressed to Kumudi
Building; even telephone and Post Box Nos. were also allotted in said address,
it was to be held that the company had an office in Kumudi Buildings to which
members of its management and staff had right of access.
Cases referred to
Baillie v. Oriental Telephone & Electric
Co. Ltd. [1914-15] All ER 1420 (para 22.16), N.V.R. Nagappa Chettiar v. Madras
Race Club AIR 1951 Mad. 831 (para 23.2), Hector Whaling Lt. In re [1936] 1 Ch.
208 (para 23.2), Mst. L.M.S. Umma Saleema v. B.B. Gujaral [1981] 3 SCC 317
(para 23.17), Shiv Kumar v. State of Haryana [1994] 4 SCC 445 (para 23.17), Izhar
Ahmad Khan v. Union of India AIR 1962 SC 1052 (para 23.20), Sodhi Transport Co.
v. State of U.P. AIR 1986 SC 1099 (para 23.21), Syed Akbar v. State of
Karnataka AIR 1979 SC 1848 (para 23.21), State of Madras v. A. Vaidyanatha Iyer
AIR 1958 SC 61 (para 23.21), Dahyabhai Chhaganbhai Thakkar v. State of Gujarat
AIR 1964 SC 1563 (para 23.22), K.K. Modi v. K.N. Modi [1998] 3 SCC 573 (para
24.7), V.B. Rangaraj v. V.B. Gopalakrishnan AIR 1992 SC 453 (para 24.9),
Jainarain Ram Lundia v. Surajmull Sagarmull AIR 1949 F.C. 211 (para 24.10),
Bank of India Ltd. v. Jamsetji A.H. Chinoy AIR 1950 PC 90 (para 24.10) and S.P.
Jain v. Kalinga Tubes AIR 1965 SC 1535 (para 24.11).
A.T.M. Rangaramanujan, Gopal Jain, Prateek
Jalan, Ms. Nandini Gore, Ashish Jha, Jasmine D., R.N. Karanjawala, Ms. Manik
Karanjawala, for the
Appellant. L. Nageshwar Rao, T.L.V. Iyer, P.P. Rao, Fazlin Anam, E.M.S. Anam
and P.A. Ahmed, for the Respondent.
Judgment
Ruma Pal, J. - An internecine dispute between the members of a family relating to
the controlling interests in companies has given rise to the nine appeals which
are being disposed of by this judgment. Given the number and nature of the
proceedings, to avoid any confusion, the parties are referred to by their names
and not in the capacity in which they have sued or been sued except when
describing the collective stand of all the respondents in these appeals, when
they are referred to simply as ‘the respondents’.
2. The
main protagonists in all the litigations are Madhusoodhanan, Srinivasan, Ravi
and Mani who are brothers, with Madhusoodhanan on one side and Srinivasan,
3. Kerala
Kaumudi is a private company incorporated under the Indian Companies Act, 1913
which was promoted in 1955 by the parents of the four brothers. Besides Kerala
Kaumudi other “family” concerns were incorporated including Kaumudi Investments
(P.) Ltd., Kerala Exports (P) Ltd., Kaumudi News (P.) Ltd., Laisa Publications
(P.) Ltd., Shiv Printers & Publishers,
4. The business of Kerala Kaumudi (which was the flagship company ) is to
own and publish newspapers, journals and other literary works and undertakings.
Its authorised share capital is 20 lakhs divided into 2,000 shares of Rs. 1,000
each. The total number of issued and paid up equity shares in Kerala Kaumudi
was 1575. During the lifetime of K. Sukumaran each of the brothers along with
their parents had shares in Kerala Kaumudi and the shareholding was as follows
:
|
Sr. No. |
|
|
|
|
1. |
Mani |
222 |
shares |
|
2. |
Valsa Mani |
84 |
shares |
|
|
(Mani’s daughter) |
|
|
|
3. |
Sukumaran Mani |
84 |
shares |
|
|
(Mani’s son) |
|
|
|
4. |
Madhusoodhanan |
390 |
shares |
|
5. |
Srinivasan |
390 |
shares |
|
6. |
|
390 |
shares |
|
7. |
Madhavi |
3 |
shares |
|
8. |
Sukumaran |
9 |
shares |
|
9. |
Kaumudi Investments |
3 |
shares |
|
|
(P.) Ltd. |
|
|
|
|
Total |
1575 |
shares |
5. Sukumaran
died on 18th September, 1981. He was the Managing Director of Kerala Kaumudi
from 1955 to 1973 and its Chairman from 1973 till his death. He was succeeded
as Chairman by his widow Madhavi. Madhusoodhanan was appointed as Managing
Director of Kerala Kaumudi in 1973 immediately after Sukumaran died. On 25th
January, 1985, Madhusoodhanan was appointed as Managing Director and Editor of
Kerala Kaumudi for life. He was also empowered to exercise the powers given to
the Director under Article 79 of the Articles of Association. At the same time
Srinivasan was appointed as General Manager of Kerala Kaumudi for life and
6. The
disputes between the parties started soon after the death of Sukumaran in
September 1981. When these reached ahead, on 29th November, 1984 a resolution
was taken at a meeting (Ex. P-190) of the company which was signed by the four
brothers and Madhavi by which the controlling interests in the different family
companies were agreed to be given to the four brothers on the basis of their
active interest in a particular concern. Kerala Kaumudi’s control was to be
with Madhusoodhanan. In implementation, Transfer of shares in these companies
were effected between the brothers and their respective families. The disputes
however did not abate. On 24th October,1985 an agreement was entered into
between the parties in an attempt to resolve their differences. This agreement
has been exhibited in the proceedings as Ext. P1. On 23rd December, 1985, a
second agreement (Ext. P-2) was entered into by which it was, inter alia,
agreed that all the various family- controlled companies and firms would be
divided among the four brothers.
7. On
16th January, 1986 a third agreement was entered into, which has been marked as
Ext. P.3. The parties to the third agreement were Madhavi, Mani,
Madhusoodhanan, Srinivasan and
8. According
to Madhusoodhanan, Mani and his children had already transferred their entire
holding of 390 shares in Kerala Kaumudi to Madhusoodhanan in May 1985, prior to
the third agreement. As a result, Mani and his children had no shares in Kerala
Kaumudi, Madhusoodhanan had 612 shares, and Sreenivasan and
9. On
23rd July, 1986, a Board Meeting of Kerala Kaumudi was held at which Madhavi
assumed the powers of the Managing Director in purported ouster of
Madhusoodhanan. The meeting is disputed by Madhusoodhanan. He says that no such
meeting was in fact held and that the minutes were subsequently drawn up. A
second Board meeting, which is also disputed by Madhusoodhanan, was held on 1st
August, 1986 in which a decision was taken to increase the paid-up share
capital of Kerala Kaumudi by issuing 425 additional shares of Rs. 1,000 each.
At a Board meeting held on 8th August, 1986 these additional shares were issued
to Ravi and Sreenivasan and one share was transferred by
10. In
this background, several proceedings were filed by the parties against each
other some of which may be taken up for consideration together. The first lot
consists of six matters relating directly to Kerala Kaumudi and the
shareholding in Kerala Kaumudi. The six are :
(i) C.P. No. 14 of 1986 filed by
Madhusoodhanan for rectification of the company’s share register under section
155 of the Companies Act, 1956 by cancellation of the allotment of 425 shares
to
(ii) Company petition, C.P. No. 31 of 1988
filed by KIPL for similar reliefs.
(iii) A suit filed by Madhusoodhanan in the
Munsif’s Court, Trivandrum being O.S. No. 1329 of 1986 (subsequently
re-numbered as C.S. No. 3/89, when withdrawn to the High Court) for a decree
declaring that he continued to be the Managing Director of Kerala Kaumudi and
for a declaration that the Board meetings held on 23-7-1986, 1-8-1986 and the
meetings subsequent thereto were illegal and ultra vires the Articles of
Association of the company.
(iv) A suit being O.S. No. 482/88
(subsequently re-numbered as C.S. No. 5/89, when withdrawn to the High Court)
filed by KIPL against Kerala Kaumudi for similar reliefs.
(v) A suit filed by Madhusoodhanan for
specific performance of the third agreement, Ex.P.3.(O.S. No. 483/88,
subsequently re-numbered as C.S. 6/89 when withdrawn to the High Court).
(vi) C.P. No. 26 of 1987 filed in 1987 by Mani
and his children for a declaration that the transfer of 390 shares by them to
Madhusoodhanan pursuant to the Board’s decision dated 21-5-1985 was illegal and
void and for rectification of the share register by recording them as the
owners of 222, 84 and 84 shares respectively.
These six matters are now numbered
as CA Nos. 3253-3258 of 1991 before us.
11. The
second set of litigation being Company Petition No. 15 of 1986 was filed in
1986 by Mani’s wife Kastoori Bai, daughter Valsa, Ravi’s wife Shylaja, and
Sreenivasan’s wife Laisa as well as Madhavi for rectification of the share
register of KIPL. This is now numbered as CA 3260 of 1991.
12. The
third set consists of CP No.11 of 1987 ( now CA 3261 of 1991) filed by Vaishak,
the minor son of Madhusoodhanan, for rectification of the share register of
Kerala Kaumudi.
13. The
fourth set of proceedings originally consisted of two suits filed before the
Munsif’s Court,
14. All
the original suits were transferred to the High Court under the provisions of
section 446 of the Companies Act and were heard along with the several company
petitions noted earlier. About 296 documents were tendered in evidence by the
parties. Seven witnesses were examined. The four witnesses who deposed in
support of Madhusoodhanan were P.K. Kurien, Advocate (PW 1), Mohan Raj, former
Personal Assistant to Madhusoodhanan (PW 2) Vasudevan, former Company Secretary
(PW 3) and Madhusoodhanan himself (PW 4). As far as the opponents were
concerned, Mani (RW 1), Srinivasan (RW 2) and Laisa Srinivasan (RW 3) gave
evidence in support of their stand.
15. The
Single Judge decided CP No. 14 of 1986 in Madhusoodhanan’s favour. The
application for rectification was allowed and the allotments of shares made in
the meeting held on 8-8-1986 were set aside and rectification of the share
register of Kerala Kaumudi by deleting the further allotment of 425 shares each
to Sreenivasan and
16. The
second set of proceedings initiated by Mani’s wife and others viz. CP No. 15 of
1986, for rectification of the share register of KIPL and the third set filed
by Madhusoodhanan’s minor son, Vaishak for rectification of the share register
of Kerala Kaumudi (CP No. 11 of 1987) were dismissed.
17. The
two suits filed by Kerala Exports and KIPL (CS 2 of 1989 and CS 4 of 1989
respectively) relating to their continued possession in Kaumudi Buildings were
decreed.
18. The
aggrieved parties preferred appeals in each of the matters. By a common
judgment, the Division Bench reversed the findings of the learned Single Judge
in all of the appeals except in the appeal from CS 2 of 1989. Nine Special
Leave Petitions were filed in this Court in the separate proceedings on which
leave was granted on 27th August, 1991.
19. We
propose to deal with issues which can be said to be common to the different
sets of litigations before giving our conclusions on each appeal separately.
20. The
underlying question in the first set of litigations viz. who has the
controlling interest in Kerala Kaumudi has given rise in turn to the following
topics :
(A) The
transfer of shares by Mani and his children to Madhusoodhanan ;
(B) The
removal of Madhusoodhanan as Managing Director ;
(C) The
issue of additional shares to
(D) Specific
performance of the agreement (Karar) dated 16-1-1986.
(A) Transfer of shares by Mani and his children to Madhusoodhanan.
21.1 In
C. P. 26/87, Mani and his group prayed for rectification of the share
register of Kerala Kaumudi by deleting the name of Madhusoodhanan as a
shareholder in respect of the shares which Mani and his group had transferred
to him in 1985. The prayers proceed on the basis that there was in fact a
transfer of shares in 1985 which was, after two years, sought to be set aside.
The grounds on which this was asked for were :
A. The consideration for the transfer had
not been agreed upon and no consideration had in fact been paid.
B. No
proper documents had been executed effecting the transfer.
C. Neither Valsa nor Sukumaran, Mani, a
minor had any knowledge of the transfer and the transfer of their shares was
invalid.
D. Section 108 of the Companies Act, 1956
had not been complied with in respect of any of the transfers.
21.2 The
learned Single Judge rejected all four contentions, and in our view, rightly.
The Division Bench held in favour of Mani and his group on grounds which are
legally and factually unsustainable for the reasons stated in the following
paragraphs.
21.3 The
documentary evidence relating to the transfer, shows without a shred of doubt
that there was a valid transfer of shares. To begin with the minutes of the
meeting held on 19th March, 1985 [Ex. R-62(a)] which were signed by Mani,
records:
“Shares
of Sri M.S. Mani. All the shares in Kerala Kaumudi owned by Sri M.S. Mani and
family would be pledged by him to Sri M.S. Madhusoodhanan who shall extend
financial facilities to Sri M.S. Mani. The loan will be paid with 22 per cent
interest by Sri Mani when Sri M.S. Madhusoodhanan shall release the shares of
Sri M.S. Mani. The modus operandi of the transaction shall be decided in
consultation with barrister P.K. Kurien of Menon and Pai.”
21.4 The
intention of Mani and his group to transfer their shareholding to
Madhusoodhanan is evident from this. Although the mode of transfer was
subsequently changed, this intention was affirmed at the Board meeting of
Kerala Kaumudi held on 23rd April, 1985. The fifth and sixth resolutions as
appearing in the minutes of the meeting [Ex.P.-62(b)] which were also signed by
Mani read as under :
“Sri M.S. Mani
Letter
of resignation from the direct directorship of Kerala Kaumudi (P.) Ltd.
effective from 23-4-1985 afternoon submitted by Sri M.S. Mani was approved by
the Board.
(6) Shares owned by Sri M.S. Mani and family in
Kerala Kaumudi (P) Ltd.
“Shares
owned by Sri M.S. Mani and family in Kerala Kaumudi (P.) Ltd. will be
transferred to Sri M.S. Madhusoodhanan forthwith on a consideration to be
mutually agreed between the transferor and the transferee. The liabilities of
Sri M.S. Mani to the income tax department etc. up to 31st March,1985 should be
settled by Kerala Kaumudi (P.) Ltd. before finally deciding a consideration for
the share transfer. The Kerala Kaumudi (P.) Ltd. undertakes to discharge the
liabilities arising on account of personal guarantees given by Sri M.S. Mani
for the company.” [Emphasis supplied]
The sixth resolution clearly envisages three
distinct stages: an immediate and unconditional transfer of shares, then, the
settlement of the Mani’s income tax liabilities by Kerala Kaumudi and, after
both these stages, the determination of the consideration for the transfer to
be mutually agreed on.
21.5 The
Division Bench, therefore, erred in holding that the agreement for transfer of
shares was conditional on the determination of the price of the shares and in
concluding that as there had been no such determination, no transfer could have
taken place. The express intention was to effect an immediate transfer of the
shares and to agree upon the consideration later. Section 9 of the Sale of
Goods Act, 1930 permits this.
21.6 Section
4 read with section 2(10) of the Sale of Goods Act, 1930 require that the
contract of sale must provide for the payment of money as a consideration for
the transfer of goods, or to put it differently, that a price must be paid. But
section 9 of the 1930 Act allows the parties not to fix the price at the time
of the transfer and to leave the determination of the amount of consideration
to a later date. An agreement which provides for the future fixation of price
either by the parties themselves or by a third party is capable of being made
certain and is not invalid as provided under section 29 of the Contract Act,
1872 [See : Illustration (e)]. In view of such categoric and clear statutory
provisions, the submission of learned counsel representing Mani that such a
contract is void for uncertainty because the price was not fixed, is
unacceptable. The passage from Benjamin’s Sale of Goods (1974 Edn.) relied on
which says :
“If
the price is left to be agreed upon subsequently between the parties, there
will ordinarily be no binding contract, on the grounds of uncertainty, unless
and until they later reach agreement on a price. Moreover, an agreement to
leave the price open to further negotiation will normally exclude any inference
that the price should be a reasonable price in accordance with the provisions
of section 8(2).”
may be an exposition of the law as it is in
“But
in accordance with the principle that the Courts will endeavour to uphold bargains
which the parties believe themselves to have concluded, especially in the case
of executed or partially executed contracts, it may sometimes be possible
either to infer an intention that at any rate a reasonable price should be paid
if no price is later settled, or to have regard to other circumstances, such as
the course of dealing between the parties.”
In this case, there can be no doubt that the
first stage of the agreement for the immediate transfer of shares was executed
and the Division Bench erred when it held to the contrary.
21.7 The
questions as to what would be the reasonable price for the shares, the mode of
its determination and whether any consideration has already been paid by
Madhusoodhanan to Mani are considered subsequently.
21.8 The
minutes of the Board meeting held on 21st May, 1985 (Exhibit P-62 (C)) of
Kerala Kaumudi record that the following share transfer deeds were placed
before the Board, namely, the deeds relating to the transfer of 222 shares by
M.S. Mani to Madhusoodhanan, 84 shares by Valsa Mani to Madhusoodhanan, 84
shares by Sukumaran Mani to M.S. Mani and 84 shares by Mani to Madhusoodhanan.
The Board resolution goes on to record.
“After
discussion the share transfers were approved by the Board and the Managing Director
and any other Director was authorised to sign the relative new share
certificates to be issued in favour of Sri M.S. Madhusoodhanan and to affix the
common seal of the company in the share certificates in the presence of the
Company Secretary.”
21.9 The
minutes of the Board meeting held on 21st May 1985, were read and approved on
4th June, 1985. Both meetings were attended by Madhavi, Madhusoodhanan,
Srinivasan and
21.10 It is
evident from this that the share transfer forms which were placed before the
Board had been executed and were otherwise duly completed, or else the question
of the approval of such transfer would not arise.
21.11 Apart
from these minutes, are the minutes of the meeting held on 26th August, 1986,
when Madhusoodhanan, was already effectively removed from the control of Kerala
Kaumudi. Item No. 4 of the minutes relates to the transfer of a share by
“Smt.
C.N. Madhavi pointed out that the sale consideration of the shares held by Sri
M.S. Mani which was around 24 per cent of the total shares of the company at
the time of transfer had not been paid by Sri M.S. Madhusoodhanan. She pointed
out Sri M.S. Mani was the seniormost Director of the company and he is the
eldest son of late Sri Sukumaran, the founder of the company. She also pointed
out that Sri M.S. Mani is eligible for 1/5 of the shares held in the name of
his father. She further pointed out that it is prestigious for the company that
Sri M.S. Mani, the former senior Director and glorious editor of the newspaper
to be a shareholder of the company.”
21.12 In the
Annual Return of Kerala Kaumudi dated 27th June, 1985 filed under section 159
of the Companies Act, 1956 with the Registrar of Companies, in the list of past
and present members and debenture holders, the names of all parties have been
given including the names of Mani, and his children. However against their
names it has been mentioned that they had effected transfer of their
shareholding to Madhusoodhanan. Particulars of the transfer made by each as
well as the date of registration of the transfers have been given as 21st May,
1985. (Ex. P-128).
21.13 On 1st
March, 1986 in keeping with the statutory requirement relating to the ownership
of newspapers, a statement was published in Form IV. In the list of
shareholders the names of Madhusoodhanan,
21.14 Even
after the ouster of Madhusoodhanan from the Board of Kerala Kaumudi, in the
Annual Return dated 26 September, 1986 [Ex. P.128 (a)], in the list of
shareholders filed with the Registrar of Companies as part of the Annual Return
of Kerala Kaumudi, Mani is shown as holding only one share and Madhusoodhanan
as holding 612 shares in the company. This return has been filed under the
signatures of Srinivasan and Ravi as Managing Director and Director of Kerala
Kaumudi respectively together with a certificate by
21.15 This
was again done in the Annual Return of Kerala Kaumudi filed under the signature
of
21.16 The
explanation given by Mani that he did not respond to the statutory declarations
although they did not show his name or the names of his children as
shareholders of Kerala Kaumudi because there was an agreement to transfer the
shares and because of the close relationship between parties, is specious.
According to Mani’s evidence, he had not agreed to transfer his shares at all
because the consideration had not been fixed. Furthermore, the relationship
between the parties was anything but cordial. It was only after Madhusoodhanan
had initiated proceedings in 1986, that Mani, more than two years after the
transfer for shares filed the application for rectification of the share
register.
21.17 Even
if there were any doubt on the issue, the fact which settles the matter
conclusively are the admissions in the counter affidavit filed by Madhavi in CP
No. 14 of 1986 on behalf of herself and on behalf of Ravi, Srinivasan and Mani
(wherein Mani is referred to as the “fifth counter petitioner” and
Madhusoodhanan as “the petitioner”) She has affirmed :
“(a) In
fact the fifth counter petitioner left the company in the year 1985 and has
transferred all the 390 shares belonging to him and his children (major
daughter and minor son) to the petitioner, receiving only a miniscule part of a
consideration and accepting the promise of the petitioner to pay him the
balance without even insisting on formal documents to evidence the promise of
the petitioner.
(b) Once
Article 74 was amended to the petitioner’s liking, his attitude started
changing slowly. Even then we did not take it seriously. That is why the fifth
counter petitioner transferred his shares to the petitioner, giving him
literally a strangle hold on the company.
(c) He
(Mani) and his minor son had held 306 shares in the company which he had
transferred to the petitioner in 1985.
(d) The petitioner holds 612 equity shares of
Rs. 1,000 each of the company.”
Mani has also said in an affidavit affirmed on
28th November, 1986 in Application 305/86 (arising out of CP No.14/86) :
“After
the meeting was over the petitioner and respondents 2 to 5 that is, the mother
and sons had informal talk in the same room. During the course of this, the
second respondent asked the petitioner why he has not paid the balance
consideration for shares transferred by me to him in 1985. The petitioner said
that he would pay the same as and when he had money. The second respondent
thereupon suggested that the petitioner may in that event transfer the shares
back to me.”
21.18 The
one share which is shown in Mani’s name in the Annual Return for 1986 and 1987
was sold by
“The
meeting of the Board of Directors held on 26th August,1986 expressly considered
the question whether the fifth respondent (Mani) is to be selected as one whom
it is desirable in the interest of the company to admit to its membership. The
Board resolved that the fifth respondent (Mani) is not only a desirable person,
but his admission to the membership of the company will enhance its prestige
and strengthen its administration. The Board felt that in the circumstances it
was essential that the fifth respondent (Mani) was to be inducted as a member
of the company.”
That he was “admitted” to membership and
“inducted” as a member of the company by the transfer of one share on 26th
August, 1986 has been acknowledged by Mani himself in his affidavit affirmed in
the same proceedings on 28 November, 1986.
21.19 This
admission to membership was in terms of Article 24(a) of the Articles of
Association of Kerala Kaumudi, which directs that no share shall be transferred
to a person who is not a member so long as any member or any person selected by
the Directors as one whom it is desirable in the interest of the company to
admit to membership, is willing to purchase the same at fair value. In other
words a non-member of the company can be sold a share of the company even when
a member wishes to purchase it, provided the Directors select him as “a person
whom it is desirable in the interest of the company to admit to membership” and
provided that such person is willing to purchase the share.
21.20 If the
transfer by Mani and his children of their entire shareholding in Kerala
Kaumudi to Madhusoodhanan had not been effected, there was no question of
“admitting” Mani to the membership of the company. The minutes of the meeting
held on 26 August, 1986 which have been admitted by Srinivasan and the
affidavits of Madhavi and Mani thus prove that Mani and his family held no
shares in the company until the single share was transferred by
21.21 We
have been unable to understand the logic of the Division Bench by which it
sidestepped this inevitable conclusion, when it said “It is open to a party to
take an extra precaution to ward off possible disconcerting experiences while
planning for the future”. Ignoring—or at least not giving sufficient weight—to
the wealth of evidence in favour of the submissions of Madhusoodhanan, the
learned judges of the Appellate Court sought to base their assessment of the
evidence on the absence of documents, such as income-tax returns of
Madhusoodhanan, which according to them would have shown the acquisition of the
additional shares by Madhusoodhanan from Mani, an exercise which was entirely
uncalled for in the face of the positive evidence already on record and the
repeated admissions of Mani and his group before the Court.
21.22 Furthermore,
under section 194 of the Companies Act, 1956, minutes of meetings kept in
accordance with the provisions of section 193 shall be evidence of the
proceedings recorded therein and, unless the contrary is proved, it shall be
presumed under section 195 that the meeting of the Board of Directors was duly
called and held and all proceedings thereat to have duly taken place. The onus
was on Mani to disprove that the transfers had not taken place as recorded in
the minutes of the Board meeting held on 21 May,1985, an onus that he has
singularly failed to discharge. Learned counsel for Mani submitted that the
statutory presumption was not available as Madhusoodhanan had admitted that no
formal meetings were held and that the minutes were prepared after informal
discussions by the Company Secretary and shown to Srinivasan who signed the
same after it was approved by Madhusoodhanan. The submission is unacceptable
for three reasons. First: The Articles of Association of the Company (Art.81)
allow Directors to regulate their meetings as they think fit. Also Art. 89 says
that a resolution in writing circulated to all the Directors and assented to by
a majority of them shall be as valid as a resolution passed at a meeting of the
Board of Directors. Second, section 193(1) of Companies Act, 1956 provides :
“Minutes
of proceedings of general meetings and of Board and other meetings. - Every company
shall cause minutes of all proceedings of every general meeting and of all
proceedings of every meeting of its board of directors or of every committee of
the Board, to be kept by making within thirty days of the conclusion of every
such meeting concerned, entries thereof in books kept for that purpose with
their pages consecutively numbered.”
Therefore, the minutes may be prepared
subsequently, but they must be duly entered in the Minute Book and initialled
and it is nobody’s case that this was not done. Finally, Madhusoodhanan has
also said that formal meetings were held and that important decisions were
circulated to all members. In any event, our conclusion that the transfer of
shares by Mani and his children to Madhusoodhanan would stand without the
support of the statutory presumption under section 195 of the 1956 Act.
21.23 Exhibit
P-3, the third agreement which was referred to at the outset has a clause which
relates to the sale of Mani’s shares in Kerala Kaumudi to Madhusoodhanan which
both sides have referred to and relied upon but there has been no consensus as
to the correct interpretation of the clause. This controversy is addressed in
detail in connection with Madhusoodhanan’s suit for specific performance of the
agreement.
21.24 Had this
clause been the only basis on which this Court were called upon to decide
whether there had been a transfer or sale of the shares of Mani’s group to
Madhusoodhanan, no doubt it would have been difficult to determine what had in
fact happened. However, the clause is only one of a series of documents, the
authenticity of which cannot be disputed, which clearly show that the transfer
had taken place although the exact consideration may not have been agreed upon
or paid.
21.25 Mani
did not attend the Board meeting held on 21st May, 1985 or any other till he
was admitted to membership of Kerala Kaumudi on 26th August, 1986. Apart from
this telling circumstance supporting Madhusoodhanan’s case, Srinivasan had
attended and signed the minutes of the meeting on 21st May, 1985. His claim
that no such meetings were in fact held and that whenever he signed the minutes
of the meetings held during the managing directorship of Madhusoodhanan, he did
so at the instance of the latter without being aware of the contents of the
minutes is hardly likely. The brothers were already at daggers drawn and it is
unbelievable that he would place such unquestioning faith in Madhusoodhanan.
Additionally, the entries in the Attendance Register of Kerala Kaumudi (Ex.
P-81) also belies this assertion. Besides, the falsity of this explanation is
apparent from the minutes of the meeting held and the statutory records
submitted by Srinivasan after Madusoodhanan was removed as Managing Director of
Kerala Kaumudi which continued to state that Mani and his children had
transferred their shares in the company to Madhusoodhanan.
21.26 The
fact that all the parties, including Ravi, Srinivasan and Mani himself,
hardened businessmen all, not only proceeded on the basis that there was
effective transfer of Mani and his childrens’ shareholding to Madhusoodhanan
but also certified the same to the Registrar of Companies, and additionally
affirmed that such transfer had taken place on oath in their affidavits can
only lead to the conclusion that the transfer had been legally effected on the
basis of duly executed share transfer forms in compliance with the provisions
of the Companies Act, 1956.
21.27 Nevertheless,
the respondents argue, there were in fact no share transfer forms which were
placed before the Board and the only transfer forms executed by Mani and his
children were invalid because of non-compliance with section 108 of the
Companies Act, 1956.
21.28 In his
examination in chief, in response to the question whether he and his children
had transferred their shareholding to Madhusoodhanan, Mani said :
“When
I decided to relinquish my directorship, the Secretary brought the required
letter, which I signed. Later the forms for transferring our shares to the
petitioner (Madhusoodhanan) were brought. But I found that the consideration
column in those forms were not filled. Petitioner told me that the
consideration can be fixed later and the transfer may be effected immediately.
But I said that I will sign it only after fixing the consideration. Even so, in
order to assure him that I will transfer the shares, I signed the forms and
handed it over to my wife for keeping them in safe custody. I knew that if the
matters were not finalised within 60 days the forms cannot be made use of
thereafter. So I requested the petitioner several times to fix up the
consideration. But he did not do so. I did not hand over the forms to the
petitioner.”
The admitted case therefore is that Mani and
his children had agreed to transfer their shareholding to Madhusoodhanan, but
according to them, such transfer never took place.
21.29 Mani
produced the share transfer deeds, presumably from the custody of his wife as
Exhibits R 9-12. Exhibit R 9 is signed on 11-5-1985. It is an unstamped
document and purports to record the transfer of 222 shares by Mani to
Madhusoodhanan. Similarly R. 10 is a share transfer form signed by Valsa on
11-5-1985 transferring 84 shares to Madhusoodhanan. The document bears stamps
of the value of 720 rupees on the reverse. R.11 is a share transfer form signed
by Mani’s wife as a transferee recording the transfer of 84 shares by Sukumaran
Mani to MS Mani. It is dated 11th May, 1985. It also bears stamps of the value
of Rs 720. R.12 is a share transfer form signed on 11th May, 1985 by Mani
transferring 84 shares to Madhusoodhanan. The document is signed on 11th May,
1985. All the share transfer forms bear the stamp of what appears to be of the
office of the Registrar of Companies dated 20-4-1985. All four exhibits show
that they have been entered in the Register of Transfers of Kerala Kaumudi on
23rd May, 1985 and bear the serial numbers 30, 33, 31 and 32 respectively.
21.30 There
is a controversy as to whether these share forms were the share forms which
were placed before, and approved by the Board of Directors of Kerala Kaumudi at
the meeting held on 21st May, 1986. Madhusoodhanan claims that these are not
the share transfer forms. Mani and his group contend to the contrary. The issue
would be of importance if one were to allow the respondents to resile from
their admissions. We are not minded to do so. Nevertheless, since the reasoning
of the Division Bench rests to a large extent on the question whether the
transfer was in accordance with section 108 of the Companies Act, it would be
appropriate to pronounce on this.
21.31 Section 108 of the Companies
Act, 1956 insofar as it is relevant provides :
“Transfer
not to be registered except on production of instrument of transfer. - (1) A
company shall not register a transfer of shares in, or debentures of, the
company, unless a proper instrument of transfer duly stamped and executed by or
on behalf of the transferor and by or on behalf of the transferee and
specifying the name, address and occupation, if any, of the transfer has been
delivered to the company along with the certificate relating to the shares or
debentures, or if no such certificate is in existence, along with the letter of
allotment of the shares or debentures;”
21.32 According
to Mani, the share transfer forms were not duly stamped and could not be given
effect to under section 108 of the 1956 Act. If Exhibits R9 to R12 are indeed
the share transfer forms, he would be correct. In our view they are, in all
likelihood, not the transfer forms which were placed before the Board of
Directors on 21st May, 1985.
21.33 It is
on record, that Madhusoodhanan had made an application for production of the
original share transfer forms from the custody of the company. It must be
remembered that from March 1986, Madhusoodhanan no longer had any control over
the affairs of Kerala Kaumudi. The papers, books and other records of the
company were in the custody and control of those who controlled Kerala Kaumudi
namely Srinivasan and
21.34 The
Division Bench held that exhibits R.9 to R.12 were the “real” share transfer
forms because they were dated 23-5-1985 and the evidence of Madhusoodhanan was
that he had signed only one set of transfer forms in 1985. The Division Bench
also relied upon what appears to be an unsigned stamp of the office of the
Registrar of Companies dated 20th April, 1985 although no one has pledged his
or her oath to it. Having come to the conclusion that the share transfer forms
produced by Mani, exhibits R.9 to R.12, were the “real” transfer forms, the
Division Bench set about demolishing those documents as being invalid and not
legally effective.
21.35 In our
opinion, given the documentary evidence of completed transfers, it is more than
probable that the “real” share transfer forms were never produced by Mani and
his group and that exhibits R. 9 to R. 12 were prepared in 1984 as claimed by
Madhusoodhanan. Mani has himself stated :
“At
that time it was proposed to start
The
21.36 The
Annual Returns signed by Srinivasan and
21.37 On the question of the invalidity of the transfers of Valsa and
Sukumaran Mani to Madhusoodhanan, Valsa Mani was admittedly a major on 21st
May, 1985. And yet the Division Bench held that Mani continued to stand in a
fiduciary relationship with her and therefore “the transfer which purports to
have been effected by Valsa Mani on her own will clearly indicate the stamp of
illegality and invalidity”. The reasoning is incomprehensible and unacceptable.
Valsa was an adult and legally competent to enter into a contract of sale of
her sharers to Madhusoodhanan which she duly did.
21.38 As far
as the shares of Sukumaran Mani are concerned, in our opinion, the learned
Single Judge was right when he said that Mani’s group could not question the
transfer of the shares of Sukumaran Mani on account of his minority, as
Sukumaran Mani had not effected any transfer directly in favour of
Madhusoodhanan. As Sukumaran Mani was at the relevant point of time a minor,
his shares were transferred by his mother as guardian to his father, Mani, who
had in turn transferred the shares to Madhusoodhanan. The Appellate Court was
wrong when it held that the transfer of the shares of Sukumaran Mani was “an
absolute nullity in the eye of law” on the ground that the initial transfer by
Sukumaran Mani was invalid because it was sought to be effected by Sukumaran
Mani’s mother who was not his legal guardian and who “figured as a guardian
only as a ruse for getting over the statutory provision”. The transfer of
Sukumaran Mani’s share through his mother to Mani has not been challenged.
Therefore the issue of Sukumaran Mani’s minority and his mother’s competence to
act as his legal guardian, were not issues which could be relevantly raised before,
or decided by the appellate court.
21.39 Coming
now to the question of consideration, the Division Bench on an interpretation
of section 108 held that “the fixation of the price was a condition precedent, even
in relation to an important and mandatory procedural formality like the payment
of stamp duty to make the transfer lawful and proper”.
21.40 We
have already held that the relevant share transfer forms must be taken to have
been duly executed. Although Mani and Madhusoodhanan had agreed to determine
the actual consideration later, clearly some consideration was agreed to be
shown on the share transfer forms. As noted, Exhibit R.18 produced by Mani’s
group is a voucher for the cost of share transfer stamps. The stamps must have
been purchased on the basis of the consideration which was shown on the share
transfer forms at the prescribed percentage under the Stamp Act.
21.41 But it
is also clear from the evidence on record that this was not the “actual” price
which was to be determined consensually by Mani and Madhusoodhanan. On 19th
January, 1985, Mani wrote a letter to Madhusoodhanan which has been exhibited
as P-134. The letter states :
“This
is in continuation of discussion I had with you, regarding the sale of Flow
line machine, Sheet-fed offset and the Cutting machine to me. My offer is Rs 3
lakhs for all the three machines. This amount may be deducted from the sale
value of shares you owe to me. Kindly let me know your decision so that I can
arrange to lift the machines.”
Then we have the paragraphs from the
affidavits of Madhavi and Mani quoted earlier which talk of the “balance
consideration”.
21.42 Finally
is the lawyer’s notice dated 20-3-1987 (Ex.P-83) sent on behalf of the Mani to
Madhusoodhanan threatening legal action unless Madhusoodhanan paid “the balance
sale consideration of Rs. 50 lakhs”. “Since Mani had positively asserted that
he must get a price between 50 and 75 lakhs, and that price negotiated was in
between the said figures”.
21.43 Madhusoodhanan’s
claim in this regard is inconsistent. At one stage he claimed that the
consideration for the transfer was recorded in the transfer form. At another
stage he said :
“As
far as transferring the shares is concerned, it is already transferred at the
face value by fixing the proper stamps and the process have been completed. The
excess amount I will pay on the shares will depend upon finally when he
transfers the 3 shares to me; but I will not enter into a written agreement, I
will continue to pay as and when the 5th respondent required money.
The
only agreement was that whatever be and price paid for the shares, that should
not be known to anybody else including our wives.”
21.44 Madhusoodhanan
has claimed that he in fact paid Rs. 10 lakhs to Mani. In his letter dated
28-7-1986 written to Srinivasan. Madhusoodhanan had asserted (Exhibit P 11)
that he had paid Rs. 5 lakhs to M.S. Mani as part payment for his shares which
had been purchased by Madhusoodhanan and that this brought the total payment
made on this account to Rs. 10 lakhs. Mani contended that there was a total
failure of consideration, a contention which was accepted by the Appellate
Court. The truth appears to lie somewhere in between.
21.45 There
is no dispute that the machines were in fact lifted by Mani, pursuant to Ex.
P-134. Exhibit R-14 evidences payment by Kerala Kaumudi of Rs. 3 lakhs to
Madhusoodhanan for, ostensibly purchasing property at
(B) The removal of Madhusoodhanan
as Managing Director
22.1 That
Madhusoodhanan had been continuing for some time as Managing Director of Kerala
Kaumudi is evident from the minutes of the Board meeting held on 5th July, 1983
[Ex. P-62(g)]. The minutes of the Board meeting dated 25th January, 1985 [Ex.
P-62(H] records the presence of Madhavi, Mani, Madhusoodhanan, Srinivasan and
“Mr.
M.S. Madhusoodhanan, presently the Managing Director and Editor be and is
hereby appointed the Managing Director and Editor of the Company for life or
until he voluntarily retires on the existing remuneration, which remuneration
may be revised by the Board from time to time with the consent of Mr. M.S.
Madhusoodhanan. He shall also in exercise of his duties as Managing Director
exercise the powers given to the directors under Article 79.”
22.2 It
is not a dispute that an Extraordinary General Meeting was held which approved
this resolution and that the Articles of the company were duly amended by the
introduction of Article 74.
22.3 The
last meeting of Kerala Kaumudi attended by Madhusoodhanan was of 5th February,
1986. It does not appear from the minutes of the meeting [Exhibit P-2 (J)] that
anything of import relevant to the issues to be decided in these appeals took
place on that day. Then comes the first meeting, which, according to
Madhusoodhanan ,was illegal . This was held on 23rd July, 1986. The minutes of
the meeting [Exhibit P-62 (K)] show that Madhavi, Madhusoodhanan, Srinivasan
and
“Resolved
that Smt.C.N. Madhavi, Chairman shall assume the executive powers of the
Managing Director of the company with immediate effect for efficient running of
the organisation.
Resolved
that an extraordinary general body meeting be convened at a date suitable for
the Chairman to discuss and take decisions on matters arising out of the above
decisions and that the Chairman be and is hereby authorised to issue notices to
all concerned.”
The fact whether any notices were at all
issued to Madhusoodhanan or to the other shareholders in his group including
his children or to K.I.P.L. is seriously disputed by them. According to Mani
and his group however, notices were duly issued of the meeting which was due to
be held on 1st August, 1986.
22.4 The
minutes of the meeting held on 1st August, 1986 [P-62 (L)] records that
Madhavi, Srinivasan and
“Resolved
that the issued share capital of the company be and is hereby increased to Rs.
20 lakhs by issuing additional shares worth Rs. 4.25 lakhs (for 25 shares of
Rs. 1000 each) at par. The Chairman was authorised to issue notices to the
existing shareholders to apply for shares within seven days.”
Madhusoodhanan and K.I.P.L. say that since
they did not get any notice of the meeting and were not otherwise informed of
what had taken place, they did not apply for allotment of any part of the
additional shares which had been decided to be issued. As a result in the next
meeting which was alleged to have been held on 8th August, 1986,[Ex. P-62 (M)]
between 9 a.m. and 10 a.m. at Madhavi’s residence and attended only by Madhavi,
Srinivasan and Ravi, 425 shares were allotted to Srinivasan and Ravi on applications
dated 4th August, 1986 received from them — 212 shares being allotted to
Srinivasan and 213 shares to Ravi.
22.5 The
next meeting which is the subject-matter of challenge by Madhusoodhanan is the
meeting held on 26th August, 1986. It was attended by Madhusoodhanan, albeit,
according to the minutes [ Ex P - 62 (N) ], under protest. It was at this
meeting that Mani was admitted as a shareholder of Kerala Kaumudi by
22.6 However,
the unkindest cut was yet to come. Madhavi, as Chairman, proposed “that an
extraordinary general meeting of the company be convened to remove Sri M.S.
Madhusoodhanan from the directorship of the company for his actions against the
interest of the company and his misconduct”. Madhusoodhanan objected and said
that this could not be done without amending the Articles of Association. The
minutes go on to record that Madhavi pointed out that Article 74 of the
Articles of Association had already been deleted at an extraordinary general
meeting of the company held for that purpose and also that the legal opinion
was that the Board of the prescribed number of members could convene a general
body meeting for removal of a Director in exercise of the powers under section
284 of Companies Act, even if a person be appointed a Director for life. A
resolution was then taken to convene an extraordinary general meeting on 25th
September, 1986 to pass the following resolution :
“Resolved
that Sri M.S. Madhusoodhanan be and is hereby removed from being a Director of
the company with immediate effect in accordance with section 284 of Companies
Act, 1956 and all other provisions in this behalf of the Companies Act, 1956
and Articles of Association of the company.”
The Extra Ordinary General Meeting of Kerala
Kaumudi was held on 25th September, 1986 at its registered office. The
resolution to forthwith remove Madhusoodhanan as Director under section 284 of
the Companies Act, 1956 was passed taking into consideration the additional
shareholding of
22.7 On
27th September, 1986 the Board of Directors of the Kerala Kaumudi held a
meeting attended by Madhavi, Srinivasan and
22.8 According
to Madhusoodhanan, resolutions quoted above removing him as Managing Director
of Kerala Kaumudi were illegal because in terms of Article 74 of the Articles
of Association of Kerala Kaumudi, Madhusoodhanan was appointed the Managing
Director and editor of the company for life. It is contended that in accordance
with the Memorandum and Articles, 75 per cent of the votes was required to
amend the Articles. Mani’s group (including Madhavi) held only 50 per cent of
the shares of Kerala Kaumudi. The remaining 50 per cent shares were held by
Madhusoodhanan and his family and KIPL. The second submission of Madhusoodhanan
and KIPL is that they were not given any notice of the Board meeting which was
purportedly held on 1st August, 1986 at which the decision was taken to offer
further shares for allotment and that they were not given any opportunity to
apply for the additional shares. It is also the submission of Madhusoodhanan
and KIPL that in fact no meeting was held on 8th August, 1986, at which the further
shares were allotted to
22.9 Madhusoodhanan
and KIPL’s application Nos. CP 14/86 and CP 31/88 were therefore filed for
rectification of the share register of Kerala Kaumudi as noted earlier and suit
CS No. 3/89 was filed by Madhu-soodhanan for a declaration that he is the
Managing Director of Kerala Kaumudi, KIPL’s CS No. 5/89 was filed for
cancellation of the impugned annual general meetings and extraordinary general
meetings of Kerala Kaumudi.
A. Alteration of Article 74 of the
Articles of Association of Kerala Kaumudi
22.10 Sub-section
(1) of section 31 of the Companies Act, 1956, provides that the company may
alter its articles only by special resolution subject to the provisions of the
Act and the conditions contained in its memorandum. Our attention has not been
drawn to any condition in the memorandum of Kerala Kaumudi which prescribes
something different from the provisions of the Act for effecting an alteration
of the articles. Article 49 of the Articles of Association of Kerala Kaumudi
provides :
“Subject
to the provisions of sub-section (2) of section 81 of the Indian Companies Act,
1913, relating to special resolutions, fourteen days’ notice at the least
(exclusive of the day on which the notice is served, or deemed to be served but
inclusive of the day for which notice is given) specifying the place, the day
and the hour of meeting and, in case of special business, the general nature of
that business, shall be given in manner hereinafter mentioned, or in such other
manner, if any, as may be prescribed by the Company in General Meeting to such
persons as are, under the Indian Companies Act, 1913 or the Regulations of the
Company, entitled to receive such notices from the Company, but the accidental
omission to give notice to or the non-receipt of notice by any member shall not
invalidate the proceedings at any General Meeting.”
22.11 The
corresponding section in the 1956 Act to section 81 of the Indian Companies
Act, 1913, is section 189. The relevant extract of section 81 of the 1913 Act
reads :
“81.
Extraordinary and special resolutions. - (1) A resolution shall be an
extraordinary resolution when it has been passed by a majority of not less than
three-fourths of such members entitled to vote as are present in person or by
proxy (where proxies are allowed) at a general meeting of which notice
specifying the intention to propose the resolution as an extraordinary
resolution has been duly given.
(2)
A resolution shall be a special resolution when it has been passed by such a
majority as is required for the passing of an extraordinary resolution and at a
general meeting of which not less than twenty-one days’ notice specifying the
intention to propose the resolution as a special resolution has been duly given
:
Provided
that, if all the members entitled to attend and vote at any such meeting so
agree, a resolution may be proposed and passed as a special resolution at a
meeting of which less than twenty-one days’ notice has been given.
** ** **
(7)
For the purpose of this section notice of a meeting shall be deemed to be duly
given and the meeting to be duly held when the notice is given and the meeting
held in manner provided by the articles, or under this Act.”
22.12 Therefore three conditions had
to be fulfilled before any alteration of the Articles could take place.
(i) Notice
specifying the intention to propose the resolution as an extraordinary
resolution must be given;
(ii) The
resolution must be passed by 75 per cent of the members present ; and
(iii) Not less than 21 days notice of the meeting must be duly
given.
The requirements are cumulative
and mandatory.
22.13 Coming
now to the facts of this case, it is apparent that none of the three preconditions
for effecting an alteration in the Articles of Kerala Kaumudi by deleting
Article 74 were fulfilled. It may be recalled that at the Board meeting held on
23rd July, 1986 [Ex.P.62(K)] in connection with Madhusoodhanan’s functioning as
a Managing Director, only a limited resolution was taken, namely, that Madhavi
“shall assume the executive powers of the Managing Director with immediate
effect for effective running of the Organisation”. The resolution that an
extraordinary general body meeting be convened at a date suitable for the
Chairman “to discuss and take decisions on matters arising out of the above
decisions” was therefore confined to this limited resolution. Exhibit R -5 is
the notice dated 25th July, 1986 purporting to call an extraordinary general
meeting of the shareholders of Kerala Kaumudi on 16th August, 1986 at 11 AM to
inter alia consider and if thought fit to pass as a special resolution the
following :
“Resolved
that the consent of the Company be and is hereby accorded in order to satisfy
the requirements of section 192 (c) and other applicable provisions, if any, of
the Companies Act, 1956, to ratify the following resolutions adopted by the
Board of Directors of the Company at its meeting dated 23-7-1986.
1.
Resolved that Smt. C.N. Madhavi, Chairman, shall assume the executive powers of
the Managing Director of the Company with immediate effect for efficient
running of the Organisation.”
22.14 There
is no mention whatsoever in the notice of any intention or proposal to amend
the articles of the company. The Explanatory statement annexed with the notice
states (in so far as it is relevant) “Special resolutions have been brought
before the General Body, since it is felt that the effect of the said
resolutions taken by the Board and being implemented may have the effect of
curbing the powers of the Managing Director vested with him by the General
body”.
22.15 What
has been deliberately and completely glossed over is that Madhusoodhanan’s
power was not sought to be merely curbed, but completely denuded. At the
Extraordinary General meeting held on 16th August, 1986 [Ex. P-57 (a)], when
the special resolution was taken up for consideration, Madhavi said that she
would like to submit a report “in continuation of the Explanatory statement
mentioned in the notice” and then proposed that “another special resolution
also be passed deleting Article 74 of the Articles of Association of the
company”.
22.16 This
acknowledges that there was no earlier extraordinary general meeting deleting
Art.74 as Madhavi had claimed in the meeting dated 23-7-1986. Furthermore it
shows that the special resolution which was proposed in the notice was not the
resolution which was ultimately passed. In the garb of ratifying the resolution
taken by the Board of Directors on 23-7-1986 , what was in fact “ratified” was
not only the proposal to remove Madhusoodhan as Director but also the immediate
deletion of Article 74 of the Articles of Association of the Company. The
expression of intention in the notice under section 81(1) [corresponding to
section 189 (2)(a) of the 1956 Act] should be sufficiently specific so as to
effectively inform each member of the company of the actual resolution sought
to be passed in the general meeting. The notice must be frank, open, clear and
satisfactory. If it is not, the notice is bad and the special resolution
vitiated and cannot be acted upon. “If any attempt is made by the directors to
get the sanction of the shareholders, it must be made on a fair and reasonably
full statement of the facts upon which the directors are asking the
shareholders to vote...and special resolutions obtained by means of a notice
which did not substantially put the shareholders in the position to know what
they were voting about cannot be supported” - see Baillie v. Oriental Telephone
& Electric Co Ltd. [1914-15] All E.R.Rep. 1420.
22.17 Since
the further resolution to delete Art. 74 formed no part of the notice of the
Extraordinary General Meeting, which in all fairness it should have, we have no
doubt in our minds that the special resolution on the basis of such defective
notice is insupportable in law and cannot be given effect to. This finding is
sufficient to hold that the deletion of article 74 of the Articles of the
company was invalid and that therefore Madhusoodhanan continued to be the
managing director of Kerala Kaumudi as claimed by him in CS 3/89.
22.18 However
we may also indicate briefly here our additional reasons for reaching this
conclusion. The notice (Ex. R-35) was required to have been served on all the
members of the company either by post or personally in terms of Article 108 or
section 53 of the Act. The second imperative for a special resolution to be
validly passed is that notice of the general meeting must be ‘duly’ given. The
mode of service of notice on members has been provided for under Article 108
which is similar to section 53 of the 1956 Act in all material respects. The
two modes envisaged are personal service and service by post. There is no other
mode envisaged. We are not satisfied that the service of the notice was
effected either on Madhusoodhanan or any other share holder in his group,
including KIPL by either of the modes specified.
22.19 The
submission of the respondents that under Article 49 of the Articles of
Association of the Company even if no notice were given of the Extraordinary
General Meeting, this would not vitiate the proceedings is misconceived. This
was no ordinary general meeting, but a meeting where a special resolution was
to be passed. This had to be done under section 81 of the 1913 Act, to which
Article 49 is expressly subject, and the requirement for giving due notice
under section 81 is mandatory. Furthermore, Article 49 speaks of an “accidental
omission” to give notice not officiating the proceedings. In other words the
omission must be bona fide, and not an omission which was wilful as it was in
this case.
22.20 Furthermore,
the third condition to be fulfilled before the Articles can be amended under
section 81(1) of the 1913 Act, (Section 189 (2)(c) of the 1956 Act) is that at
least 75 per cent of the members entitled to vote and voting must support the
resolution. This mandatory need to have the special resolution passed by a
statutory majority of 75 per cent was also sought to be circumvented by the
respondents by the purported issue of additional shares to
(C) Issue of additional shares
23.1 In
order to push through the so-called special resolution deleting Article 74 with
the requisite majority of 75 per cent, it was necessary from the respondents’
point of view to ensure that Madhusoodhanan’s shareholding which was more than
50 per cent of the paid-up share capital of the company was reduced to 25 per
cent. This was sought to be achieved by the respondents in two stages. First,
by taking a decision to increase the paid up share capital of the Company by
issuing an additional 425 shares. Second, by not giving Madhusoodhanan or any
of his group to any chance participate in the fresh allotment of shares and
ensuring that the shares were allotted to
23.2 As
we have seen, Madhavi assumed charge as Managing Director of the company on
23-7-1986 with the object of ousting Madhusoodhanan from his control over the
affairs of Kerala Kaumudi. This needed to be ratified by the general body of
shareholders. The minimum period of notice for a general body meeting under
Article 49 read with section 81 of the Act is “not less than 21 days”, that is
there should be a clear interval of 21 days and in computing the period the
date of the meeting and the date of service of the notice is to be excluded. (See
N.V.R. Nagappa Chettiar v.
23.3 A
decision was taken by the respondents at the meeting of the Board on 1st
August, 1986 [Ex. P-62(l)], to increase the share capital of the company to Rs.
20 lakhs by issuing additional shares worth Rs. 4.25 lakhs. At the same meeting
, the Chairman (Madhavi) was authorised by the two other directors present
namely
23.4 According
to Madhusoodhanan and his group they neither knew of the meeting dated 1st
August, 1986 nor did they receive any notice with regard to the allotment of additional
shares nor of the meetings said to have been held on 8-8-1986 and 16-8-1986, in
which the allotment of additional shares to
23.5 The Learned Single Judge held that no notice either of the Board meeting
held on 1st August, 1986 or for the issue of additional shares had been served
on Madhusoodhanan. He also referred to Articles 40, 41 and 18 of the Company to
hold that the notice period of seven days to apply for allotment of additional
shares was far too short. He upheld the contention of Madhusoodhanan that no
meetings were in fact held on 8-8-1986 or 16-8-1986 and that there was as such
no valid allotment of the additional shares to
23.6 The evidence produced by the
respondents in this regard is as follows :
(i) an entry dated 25th July, 1986 in the
local delivery book of Kerala Kaumudi [Ex. R. 8(a)] which shows against the
name and address of Madhusoodhanan that “one letter regarding Board and General
Body Meetings” was acknowledged as having been received on behalf of
Madhusoodhanan by one Mohanraj, the then personal assistant of Madhusoodhanan
(PW.2) who has written that he “handed same over to Mrs. Madhusoodhanan through
Mr. Raghunathan, peon”. There is no remark under the column “By whom
delivered”.
(ii) an entry in the outward register of
Kerala Kaumudi [Ex. P-93 (p)] which shows that “one letter Board meeting on
1-8-1986. Gl. Body meeting on 16-8-1986” was dispatched on 25-7-1986 to
Madhusoodhanan with copies to Srinivasan,
(iii) an affidavit of Mohan Raj affirmed on
25th August, 1986 [in O.S. 1329 of 1986 (Ex. R-7)] in which he has affirmed
“sealed envelopes from the Chairman, Kerala Kaumudi (P.) Ltd. was served on me
on 25-7-1986 and 1-8-1986 and I have signed the local delivery book as a token
of its acknowledgement and I have duly forwarded the letters to Sri M.S. Madhusoodhanan”.
Not one of these pieces of evidence at all
establish that the notice dated 25th July, 1986 of the Board meeting to be held
on 1st August 1986 was served on Madhusoodhanan. As far as item (i) is
concerned, it certainly does not amount to personal service on Madhusoodhanan
as required under the Articles or section 53 of the Companies Act, 1956. Apart
from this fatal legal flaw, the exhibit merely records that an unknown or at
least an unnamed person handed over a sealed envelope to Mohan Raj who then
handed it over to a peon, Raghunathan, who was to hand it over to Mrs.
Madhusoodhanan. No one has come forward to say that the sealed envelope
contained the notice dated 25th July, 1986. Assuming it did, there is nothing
to show that the envelope ultimately reached Madhusoodhanan. The affidavit
affirmed by Mohan Raj on 25th August 1986 (Ex. R-7) contradicts the entry in
the local delivery book. Apart from anything else, Mohan Raj has himself
admitted that he had not forwarded the notice to Madhusoodhanan in several
documents namely in Exhibits P.36, P.46, P.53 and in an affidavit exhibited as
P.49, besides also giving oral evidence to this effect. We find no reason to
disbelieve Mohan Raj’s oral testimony as to the circumstances under which he
had affirmed the affidavit relied on by the respondents.
23.7 As
far as the outward register is concerned, it has not been proved as to who
dispatched the notice nor does the register show how the dispatch was effected.
It is unclear on what material the Division Bench proceeded on the basis that
it was sent by post under certificate of posting. In any event, if this were
indeed so, where is the certificate? Its absence is significant.
23.8 Also
significant is the absence of the actual notice alleged to be dated 25th July,
1986 of the Board meeting held on 1st August, 1986. Why was it not produced by
the respondents? What did the notice say? Did it indicate the intention to
issue additional shares for the purposes of increasing the share capital
company as it should have? We do not know. But we can only observe that the
absence of the notice raises a presumption against the respondents. And in so
far as the outward dispatch register is concerned, the mode of dispatch has not
been mentioned nor is there anything to show that the notice was in fact
dispatched. In the circumstances, we have no doubt that Madhusoodhanan was not
given any notice of the Board meeting said to have been held on 1st August,
1986.
23.9 The
respondents have relied on Madhusoodhanan’s letter dated 8th August, 1986 to
Srinivasan (Ex. P.35) in which he complained that he had not been receiving his
personal mail or letters addressed to him as Managing Director since 4th
August, 1986 and that the usual method of handing over such mail to his personal
assistant was not been followed, to contend that the notice dated 25th July,
1986 had been duly served on Madhusoodhanan and received by him.
23.10 The
letter is a complaint regarding the complete blocking of all mail both personal
and official by the respondents since 4th August, 1986. It cannot be construed
as an admission that all mail prior to that date had been duly received. In
fact, on the same date that exhibit P.35 had been written by Madhusoodhanan to
Srinivasan, he also wrote to Madhavi (Ex.P.24) that on 3rd August, 1986 he came
to know “while holding discussions with the Deputy Manager of Canara Bank,
23.11 Since
Madhusoodhanan did not know of the meeting held on 1st August, 1986, he was not
aware, as the respondents were, either that additional shares were being issued
or that the application for additional shares had to be made within seven days
of the meeting.
23.12 Exhibit
R. 26 is a Notice Dated 1-8-1986 issued under the signature of Madhavi. It
refers to financial difficulties faced by the company which made it necessary
for the Board by its Resolution dated 1-8-1986 to issue 425 equity shares of
Rs. 1,000 each for subscription to the existing shareholders. The notice which
appears to be addressed to Madhu-soodhanan, his two children, Srinivasan and
his daughter,
23.13 Article
40 of the Articles of the company requires all new shares to be offered to all
existing shareholders “in proportion, as nearly as the circumstances admit to
the amount of the existing shares to which they are entitled”. The offer is
required to be made by notice “specifying the number of shares offered, and
limiting the time within which the offer, if not accepted, will be deemed to be
declined. . . .”
The notice, exhibit R-26, is not
in this form at all.
23.14 However,
the respondents have sought to rely upon the following evidence in support of
their contention that Madhusoodhanan was given an opportunity to apply for the
additional shares by service of a notice dated 1-8-1986. :
(a) An entry in the local delivery book of
Kerala Kaumudi [Ex. R-8 (b)] which ostensibly records that on 1st August, 1986,
Madhusoodhanan, Managing Director, Kerala Kaumudi, Trivandrum was “Authorised
to issue notices to the existing shareholders & one letter for Board
meeting”. There is an unidentified signatory who has acknowledged receipt of
this document on 1-8-1986. According to Srinivasan’s oral testimony, the
signature is that of Mohan Raj;
(b) Exhibit P. 93(a) is an entry in the
outward register of Kerala Kaumudi indicating the dispatch of the notice;
(c) A Certificate of Posting dated 1-8-1986
(Ex. R.25) which purports to relate to service of the notice on Madhusoodhanan,
his children and KIPL.
23.15 Both
the learned Single Judge and the Division Bench accepted that the signature of
the person acknowledging receipt of the notice was Mohan Raj. Where they have
differed is whether this amounted to service upon Madhusoodhanan, his children
or on KIPL either in fact or in law. The learned Single Judge held it did not.
The Division Bench disagreed. Considering the facts, we have no hesitation in
holding the learned Single Judge was right.
23.16 We
have already held that service on Mohan Raj did not amount to personal service
within the meaning of Article 108 of the Articles of Association of the Company
or section 53 of the Companies Act, 1956. Even on the factual score, for the
reasons set out by us earlier in connection with service of the notice dated
25-7-1986, we are not satisfied that Madhusoodhanan was in fact served with a
notice through Mohan Raj. Besides, the relevant entry does not refer to the
notice.
23.17 As far
as the certificate of posting is concerned, it is not explained why it does not
record the dispatch of notices to any other shareholder. When the relationship
between the parties was already so embittered, proof of service of notice by
certificate of posting must be viewed with suspicion. Judicial notice has been
taken that certificates of posting are notoriously “easily” available. What was
seen as a possible but rare occurrence in 1981 (Mst. L.M.S. Ummu Saleema v.
B.B. Gujaral [1981] 3 SCC 317) is now seen as common. Thus in Shiv Kumar v.
State of
“We
have not felt safe to decide the controversy at hand on the basis of the
certificates produced before us, as it is not difficult to get such postal seals
at any point of time.”
Despite
this ground reality and on a misinterpretation of the provisions of section
53,the Appellate Court came to the indefensible conclusion that “evidence
regarding dispatch of a communication under certificate of posting attracts the
irrebuttable statutory presumption under section 53 (2)(b) that the notice had
been duly served”, that “it is not open now to project a plea of absence of
service of notice and a substantiation thereof by evidence” and that even if it
were proved that the notice did not reach the addressee, the evidence could not
be “ formally accepted and formally acted upon by the court” such contrary
evidence “being necked (sic) out at the threshold”.
23.18 This
Court in Mst. L.M.S. Ummu Saleema’s case (supra) said that a certificate of
posting might lead to a presumption if the letter was addressed and was posted,
that it, and in due course, reached the addressee. “But, that is only a
permissible and not an inevitable presumption. Neither section 16 nor section 114
of the Evidence Act, compels the Court to draw a presumption. The presumption
may or may not be drawn. On the facts and circumstances of case, the Court may
refuse to draw the presumption. On the other hand the presumption may be drawn
initially but on a consideration of the evidence the Court may hold a
presumption rebutted and may arrive at the conclusion that no letter was
received by the addressee or that no letter was ever dispatched as claimed”.
23.19 This
general rule regarding certificates of posting has not been changed under
section 53 of the Companies Act, although it does provide that if a document is
sent by post in the manner specified, “service thereof shall be deemed to be
effected”. The word “deemed” literally means “thought of” or, in legal parlance
“presumed”.
23.20 There
is a distinction between “presumption” and “proof”. A presumption has been
defined as “an inference, affirmative or disaffirmative of the truth or
falsehood of a doubtful fact or proposition drawn by a process of probable
reasoning from something proved or taken for granted” Izhar Ahmad Khan v. Union
of India AIR 1962 SC 1052. They are rules of evidence which attempt to assist
the judicial mind in the matter of weighing the probative or persuasive force
of certain facts proved in relation to other facts presumed or inferred (ibid).
Sometimes a discretion is left with the Court either to raise a presumption or
not as in section 114 of the Evidence Act. On other occasions, no such
discretion is given to the Court so that when a certain set of facts are
proved, the Court is bound to raise the prescribed presumption. But that is
all. The presumption may be rebutted.
23.21 While
construing section 28B of the U.P. Sales Tax Act which inter alia provides that
if a transit pass is not produced at the check post on entry and at the point
of exit, “it shall be presumed that the goods carried thereby have been sold
within the State”, the contention that the phrase “it shall be presumed that”
meant that “it shall be conclusively held” was negatived. After referring to
section 4 of the Evidence Act it was held by this Court in Sodhi Transport Co.
v. State of
“.
. . The words ‘shall presume’ require the Court to draw a presumption
accordingly, unless the fact is disproved. They contain a rule of rebuttable
presumption. These words i.e., ‘shall presume’ are being used in Indian
judicial lore for over a century to convey that they lay down a rebuttable
presumption in respect of matters with reference to which they are used and we
should expect that the U.P. Legislature also has used them in the same sense in
which Indian Courts have understood them over a long period and not as laying
down a rule of conclusive proof. In fact these presumptions are not peculiar to
the Evidence Act. They are generally used wherever facts are to be ascertained
by the judicial process.” (p. 1105)
It was accordingly held that the words “shall
presume” contained in section 28B of the U.P Sales Tax Act only require the
authorities concerned to raise a rebuttable presumption that the goods must
have been sold in the State if the transit pass is not handed over at the check
post at point of exit and that it was open to the transporter to still prove
that the goods had been disposed of in a different way. (See also Syed Akbar v.
State of Karnataka AIR 1979 SC 1848; State of Madras v. A. Vaidyanatha Iyer AIR
1958 SC 61).
23.22 Raising
of a presumption, therefore, does not by itself amount to proof. The result of
a mandatory requirement for raising a presumption cast on Court, as there is
under section 53(2) of the Companies Act, is that the burden of proof is placed
on the person against whom the presumption operates for disproving it. It is
only if such person is unable to discharge the burden, that the court will act
on the presumed fact. (See Dahyabhai Chhaganbhai Thakkar v. State of Gujarat
AIR 1964 SC 1563). A presumption however is of course not always rebuttable.
But the mere use of the word “shall” before the word “presume” or other like
word does not mean that the presumption is irrebuttable or conclusive. An
irrebuttable presumption is couched in different language, normally indicating
that proof of one set of facts shall be “conclusive proof” of a second set. An
example of this is Rule 3 of the Rules framed in 1956 under section 18 of the
Citizenship Act, 1955 which was the subject-matter of challenge in Izhar Ahmad
Khan’s case (supra). Section 53(2) contains no such language.
23.23 Consequently,
the words “shall presume” in section 53 sub-section (2) means a rebuttable
presumption which the Court must raise provided the basic facts namely the due
posting of the document is proved, the onus being on the addressee to show that
the document referred to in the certificate of posting was not received by him.
23.24 In the
present case, the certificate of posting is suspect. Assuming that such
suspicion is unfounded, it does not in any event amount to conclusive proof of
service of the notice on Madhusoodhanan or on any of the other addressees
mentioned in the certificate as held by the Division Bench. Except for
producing the dispatch register and the certificate of posting, no one on
behalf of the respondents came forward to vouch that they had personally sent
the notice through the post to Madhusoodhanan and his group. Madhusoodhanan had
written two letters contemporaneously dated 4-8-1986 and 8-8-1986 (Ex. P-24 and
Ex. P-35) to Srinivasan, the General Manager of Kerala Kaumudi and to Madhavi
complaining that he was not receiving any mail at all. These letters were
admittedly received but not replied to by the respondents. It is also apparent
from a perusal of those letters that Madhusoodhanan had no knowledge whatsoever
of the notice for application for allotment of additional shares. Had there
been such notice it is improbable that Madhusoodhanan who was fighting for
retaining his control over Kerala Kaumudi, would have risked losing such
control by abstaining from applying for the additional shares.
23.25 In the
circumstances we hold that Madhusoodhanan and his group were not served with
the notice dated 1-8-1986 . It is therefore unnecessary to decide whether the
period prescribed in the notice to apply for the shares was too short or
contrary to the Articles of Association of Kerala Kaumudi.
23.26 Once
we have held that Madhusoodhanan and his group, all of whom held shares in
Kerala Kaumudi, were not given notice to apply for allotment of the additional
shares, it must be held that the subsequent allotment of the shares to Ravi and
Srinivasan at the meeting held on 8-8-1986 and the affirmation of such
allotment at the meeting allegedly held on 16-8-1986 were vitiated thereby and
invalid.
23.27 Although
there appears to be substance in the submission of Madhusoodhanan, as accepted
by the learned Single Judge, that no meetings were in fact held on 8-8-1986 or
on 16-8-1986, in view of our finding relating to the non-service of the notice
dated 1-8-1986, we refrain from deciding the issue.
23.28 We,
therefore, set aside the decision of the Division Bench in MFA 330/90, AS No.
164/90 and AS No. 165/90 and affirm the judgment and order of the learned
Single Judge in CP 14/86 and the decree in CS No. 3/89 and CS No. 5/89
including the directions in connection with the allotment of the additional 425
shares.
23.29 KIPL’s
application CP 31/88 was dismissed by the Single Judge and the appeal therefrom
(MFA 559/90) also rejected. Since the subject matter of KIPL’s application is
covered by Madhusoodhanan’s application CP 14/86 and was for identical reliefs,
we merely dispose of the appeal in terms of this judgment without any further
observation.
(D) Specific Performance of the
Karar 16th January, 1986
24.1 The
last proceeding relating to Kerala Kaumaudi was CS 6/89 which was a suit filed
by Madhusoodhanan for specific performance of the Karar dated 16th January,
1986.
24.2 We
have already held that by May, 1985, Mani and his group had transferred their
shareholding in Kerala Kaumudi to Madhusoodhanan, and that as a result of such
transfer Madhusoodhanan and his group held more than 50 per cent of the shares
in the company. On 15th July, 1985, Madhavi is alleged to have executed two
agreements and a will transferring the 9 shares of the late Sukumaran and her own
3 shares to
24.3 It
is in this background that the agreement dated 16th January, 1986 must be read.
The original of which is in Malayalam and which has been described by the
parties as the Karar, has 11 clauses. It is admittedly written by Mani and is
signed by Madhavi, Mani, Madhusoodhanan, Srinivasan and
(A) “Mr. M.S. Mani is selling some of his
shares in Kerala Kaumudi to Mr. M.S. Madhusoodhanan and the price of that share
will be informed to the other parties in time”.
(B) “the value of the shares of Kerala
Kaumudi which is to be sold by M.S. Mani to M.S. Madhusoodhanan will be
informed to others at the appropriate time”.
(C) “the price paid by M.S. Madhusoodhanan on
the sale of Kerala Kaumudi shares by M.S. Mani will be intimated to other
parties as and when (it is done)”.
24.4 Having
regard to our finding on the question of transfer of Mani’s 390 shares to
Madhusoodhanan in May, 1985, perhaps the appropriate translation is the one put
forward by the official translator which is set out above as (C). This
difference of opinion, however, is really of no moment, because the
subject-matter of Madhusoodhanan’s claim for specific performance is limited to
that part of the Karar which provides for the division of shares of the late
Sukumaran and Madhavi in the percentage of 50: 25: 25 between Madhusoodhanan,
|
Mani |
Laisa Publications (P.) Ltd. |
|
Madhusoodhanan |
Kaumudi Investment (P.) Ltd.; |
|
|
Kaumudi Exports (P.) Ltd.; |
|
|
Kaumudi News Service (P.) Ltd. |
|
|
|
|
|
Kaumudi Films Outdoor Unit; Electronics
and Equipment Corporation; |
|
Srinivasan |
Srinivasan Printers and
Publishers Private Ltd. |
All other establishments were required to be
closed down and Madhusoodhanan was appointed for that purpose. Clause 9 provides
that if any shareholder in any of the concerns wishes to sell his shares, they
must be offered to the “52 per cent shareholders” at a price to be fixed by the
others. If the 52 per cent shareholders refuse to purchase the share, the
others would have to do so at the value fixed by the concerned company’s
auditors according to the Company’s balance-sheet for the previous year. Clause
10 provides that the agreement would bind the four brothers and their heirs in
the event of the death of any one of them before the agreement was completely
implemented. The last clause in the Karar is clause 11. It provides that all
pending litigation regarding the subject matter of the Karar, should be
withdrawn and that all disputes should be mutually settled, and if this is not
possible the matter should be referred to an acceptable third party whose
decision would be binding.
24.5 On
2nd December, 1987 Madhavi died and on 10th October, 1988, Madhusoodhanan filed
CS 6/89 for transfer of 50 per cent of the late Sukumaran and Madhavi’s shares
to him and the transfer of 50 per cent of KIPL’s shareholding in Kerala Kaumudi
to
24.6 The
learned Single Judge decided each of the issues raised in favour of
Madhusoodhanan and decreed the suit. The Division Bench allowed the appeal (AS
211/9). The reasons which persuaded the Division Bench to allow the appeal were
first: no steps had been taken by Madhusoodhanan for determination of the price
of 390 shares or the ‘inherited shares’ or for making the same known to the
other parties or for carrying out the other provisions in the Karar - in
particular closing down of Blue Travels, Kaumudi Hotels and Blue Transports.
Second, there was no averment in the plaint regarding consideration and no
relief sought for in relation to the fixation or payment of consideration.
Third, in contravention of section 16 of the Specific Relief Act there was no
averment in the plaint about the preparedness of Madhusoodhanan to pay the
consideration; fourth, since there had been no transfer of the 390 shares, it
was not possible to enforce the Karar in respect of the bulk of shares
regarding which specific performance had been claimed. Fifth, Madhusoodhanan
could not claim specific performance of only that part of the agreement which
was in his favour without performing the obligations which were cast on him by
the other clauses. These clauses were inseparable and part performance of the
agreement was not possible. Sixth, there was an undue delay in filing the suit.
Seventh, compared to the assets owned by Kerala Kaumudi and KIPL, both of which
were to go to Madhusoodhanan in terms of the Karar, the worth of Kala Kaumudi
(allotted to Mani) and Ravi Printers (allotted to Ravi) was insignificant, the
last fact justifying the court’s refusal to grant specific performance of the
Karar under section 20 of the Specific Relief Act. The appeal was, therefore,
allowed and the suit dismissed.
24.7 We
have already said that except for clauses 1, 2, 3 and 11, all the other clauses
of the Karar related to the division of the several concerns among the four
brothers. In deciding whether the agreement should be implemented, the
Appellate Court overlooked the basic fact that each of brothers had been given
the majority shareholding of 52 per cent in the companies specified against
their names in the Karar. Since the other three brothers had taken the full
benefit of the Karar, they were bound to comply with all its terms. It was not
open to them to accept that portion of the Karar which was in their favour and
jettison the rest. And the Karar which is in the nature of a family settlement
seeking to settle disputes between brothers, having been already acted upon at
least to the extent that the four brothers were each given the majority
shareholding in the different companies as mentioned in the Karar, should not
be lightly interfered with. (See: K.K. Modi v. K.N. Modi [1998] 3 SCC 573).
24.8 The
Division Bench has not adverted to this all. It is also on record that
Madhusoodhanan had transferred the bulk of his shareholding in the companies
which were to be under the majority control of the other three brothers. The
learned Single Judge had held that Madhusoodhanan had given evidence that he
had taken steps for closing down the companies not mentioned in the Karar. This
finding has not been questioned. All the clauses except for the transfer of the
‘inherited shares’ to Madhusoodhanan had been acted on. Madhusoodhanan was
entitled to insist on the performance of this clause as well.
24.9 The respondents cited Article 29 of the Articles of the company in
support of their argument that exhibits R. 59 and R. 60 overrode the Karar
insofar as it required that 50 per cent of the shares of the late K. Sukumaran
and Madhavi had to be transferred to Madhusoodhanan on Madhavi’s death. Article
29 says that the executors or administrators of the deceased sole holder of a
share shall be the only persons recognised by the company as having any title
to the share. It was the contention of the respondents that insofar as the
Karar provided for the transfer of the shares of the late Sukumaran and Madhavi
to Madhusoodhanan, it was contrary to Article 29 of the Articles of Association
of the company and could not be enforced. This submission is made on the basis
of the decision of this Court in V.B. Rangaraj v. B. Gopalakrishnan AIR 1992 SC
453.
That decision must be understood and read
after enunciating certain basic principles relating to the transfer of shares
and in the background of earlier decisions on the subject. It is settled law
that shares are movable properties and are transferable. As far as private
companies like Kerala Kaumudi are concerned, the Articles of association
restrict the shareholder’s right to transfer shares and prohibit any
invitations to the public to subscribe for any shares in, or debentures of, the
company. This is how a “private company” is now defined in section 3 (1)(iii)
of the Companies Act, 1956 and how it was defined in section 2 (13) of the 1913
Act.
24.10 Subject
to this restriction, a holder of shares in a private company may agree to sell
his shares to a person of his choice. Such agreements are specifically
enforceable under section 10 of the Specific Relief Act, 1963, which
corresponds to section 12 of the Specific Relief Act, 1877. The section
provides that specific performance of such contracts may be enforced when there
exists no standard for ascertaining the actual damage caused by the
non-performance of the act agreed to be done; or when the act agreed to be done
is such that compensation in money for its non-performance would not afford
adequate relief. In the case of a contract to transfer movable property,
normally specific performance is not granted except in circumstances specified
in the Explanation to section 10. One of the exceptions is where the property
is “of special value or interest to the plaintiff, or consists of goods which
are not easily obtainable in the market”. It has been held by a long line of
authority that shares in a private limited company would come within the phrase
“not easily obtainable in the market” (See: Jainarain Ram Lundia v. Surajmull
Sagarmull AIR 1949 F.C. 211). The Privy Council in Bank of India Ltd. v.
Jamsetji A.H. Chinoy AIR 1950 P.C. 90 said: “it is also the opinion of the
Board that, having regard to the nature of the company and the limited market
for its shares, damages would not be an adequate remedy” specific performance
of a contract for transfers of shares in a private limited company could be
granted.
24.11 In
1965, this Court while dealing with proceedings rising out of sections 397,
398, 402 and 403 of the Companies Act, 1956 in the case of S.P. Jain v. Kalinga
Tubes AIR 1965 SC 1535, had occasion to consider the effect of an agreement
relating to the issue of new shares in a company between two shareholders and
an outsider. It may be noted at the outset that there is a distinction between
the issue of new shares by a company and the transfer of shares already issued
by a shareholder. In the first case, it is the company which issues and allots
the new shares. In the second, the transaction is a private arrangement and the
company comes into the picture only for the purposes of recognition of the
transferee as the new shareholder. Therefore, while it is imperative that the
company should be a party to any agreement relating to the allotment of new
shares, before such an agreement can be enforced, it is not necessary for the
company to be a party in any agreement relating to the transfers of issued
shares for such agreement to be specifically enforced between the parties to
the transfer.
24.12 In S.P. Jain’s case (supra), the company was a private limited company
to begin with. An agreement was entered into between two shareholders and S.P.
Jain, who was not a member, which internally provided that S.P. Jain would be
allotted shares after the share capital of the company was increased equal to
those held by the said two shareholders. The company was not a party to it nor
were the other shareholders. In terms of the agreement there was an increase in
the share capital and shares were allotted to S.P. Jain. Some years later,
after the company had been converted into a public company, a decision was
taken by the company to issue fresh shares. The shares were not allotted to
S.P. Jain. Alleging oppression by the majority shareholders, S.P. Jain filed
proceedings in which it was contended that the subsequent allotment of the new
shares was in violation of the agreement between S.P. Jain and the two
shareholders. In this context, this Court rejected S.P. Jain’s plea on the
grounds that S.P. Jain was not a member of the company when the agreement was
entered into; the company was not a party to the agreement and was not bound by
its terms; there was no provision in the agreement as to what would happen if
and when the share capital was actually increased beyond the increase at the
time of the agreement. Therefore it was held that as far as the company was
concerned, it was free to dispose of shares as its directors or shareholders in
a general meeting considered proper without regard to the agreement.
The decision does not in any way hold that the
transfer of shares agreed to between shareholders inter se does not bind them
or cannot be enforced like any other agreement.
24.13 In
V.B. Rangaraj’s case (supra), relied upon by the respondents, an agreement was
entered into between the members of the family who were the only shareholders
of a private company. The agreement was that for all times to come each of the
branches of the family would always continue to hold equal number of shares and
that if any member in either of the branches wished to sell his share/shares,
he would give the first option of purchase to the members of that branch and
only if the offer so made was not accepted, the shares would be sold to others.
This was a blanket restriction on all the shareholders, present and future.
Contrary to the agreement, one of the shareholders of one branch sold his shares
to members of the second branch. Such sale was challenged in a suit as being
void and not binding on the other shareholders. This Court rejected the
challenge holding that the agreement imposed a restriction on shareholders’
rights to transfer shares which was contrary to the articles of association of
the company. It was therefore held that such a restriction was not binding on
the company or its shareholders. The decision is entirely distinguishable on
facts. There is no such restriction on the transferability of shares in the
Karar. It was an agreement between particular shareholders relating to the
transfer of specified shares, namely those inherited from the late Sukumaran
and Madhavi, inter se. It was unnecessary for the company or the other shareholders
to be a party to the agreement. As provided in clause 10 of the Karar, Exhibits
R-59 and R-60 did not obviate compliance with the Karar. Both Ex. R-59 and R-60
were executed on 15-7-1985 several months prior to the Karar. The parties who
had consciously entered into the agreement regarding the transfer of their
parents shares are therefore obliged to act in terms of the Karar. The defence
of
24.14 As far
as the question of consideration is concerned, we have already held that
parties can agree to subsequently determine the price at which the shares were
sold and section 9 of the Sale of Goods Act, 1930 expressly provides that such
contracts are perfectly legal. Besides, the Karar in terms does not call upon
parties to determine the consideration. All it says is that once the
consideration was determined by Madhusoodhanan and Mani, it would be made known
to the others. Since there was no such determination, there was no question of
informing anyone. The finding that there was no determination of the
consideration in respect of the inherited shares as a ground for holding that
the Karar was not specifically performable is similarly incorrect as the
determination of the price formed no part of the Karar.
24.15 Coming
to the reasoning of the Division Bench with regard to non-compliance with
section 16 of the Specific Relief Act, 1963. The section provides :
“16. Personal bars to relief.—Specific performance
of a contract cannot be enforced in favour of a person—
** ** **
(c) who
fails to aver and prove that he has performed or has always been ready and
willing to perform the essential terms of the contract which are to be
performed by him, other than terms of the performance of which has been
prevented or waived by the defendant.
Explanation.- For the purpose of clause (c),—
(i) where
a contract involves the payment of money, it is not essential for the plaintiff
to actually tender to the defendant or to deposit in court any money except
when so directed by the Court;
(ii) the
plaintiff must aver performance of, or readiness and willingness to perform,
the contract according to its true construction.”
24.16 We called
for the plaint filed by Madhusoodhanan in order to verify whether the Division
Bench was correct in coming to the conclusion that section 16 of the Specific
Relief Act had not been complied with. We found that paragraph 14 of the plaint
reads :
“the
plaintiff was always ready and willing to perform his part of the agreement and
is even now ready to perform his part of contract. The transfer of shares in
respect of other companies have already taken place in accordance with the
Karar dated 16-1-1986.”
In view of this clear averment, the finding of
the Division Bench regarding the contravention of section 16 of the Specific
Relief Act, was perverse.
24.17 On the
question of delay the cause of action arose when Madhavi died in December,
1987. It cannot reasonably be said that filing of the suit ten months later was
unreasonably delayed since some time must be given to see whether the parties
did what they were required to do under the Karar after Madhavi’s death.
24.18 Finally,
the exercise of discretion by the Division Bench purportedly under section 20
of the Specific Relief Act was contrary to the terms of the section itself.
Guidelines for the exercise of the Court’s discretion to decree specific
performance of an agreement have been statutorily laid down in sub-section (2).
The Division Bench appears to have relied on clause (a) of section 20(2) to
deny specific performance of the Karar by holding that Madhusoodhanan had
obtained an unfair advantage over others under the Karar because he had been allotted
the more ‘substantial’ companies. This logic flies in the face of clause (a) of
sub-section (2) to section 20 and the explanation thereto - which say :
“20. Discretion as to decreeing specific
performance.—
** ** **
(2) The
following are cases in which the court may properly exercise discretion not to
decree specific performance—
(a) where
the terms of the contract or the conduct of the parties at the time of entering
into the contract or the other circumstances under which the contract was
entered into are such that the contract, though not voidable, gives the
plaintiff an unfair advantage over the defendant;
** ** **
Explanation
1.—Mere inadequacy of consideration, or the mere fact that the contract is
onerous to the defendant or improvident in its nature, shall not be deemed to
constitute an unfair advantage within the meaning of clause (a) or hardship
within the meaning of clause (b).”
This section is an instance of such
legislative clarity that it needs no paraphrasing to highlight its intent. The
Division Bench was clearly wrong in its foray into the question of the value of
the assets allotted under the Karar. It has, despite Explanation 1 to section
20(2) refused specific performance of the Karar on one of the excluded grounds
viz., inade-quacy of consideration.
24.19 The
parties are at loggerheads and it is unlikely that they will mutually agree to
a price to be paid for the 390 transferred shares or the ‘inherited shares’ as
envisaged at the meeting held on 23rd April, 1985 [Ex. P.62(b)] or to a
mutually acceptable third party in terms of clause 11 of the Karar dated 16th
January, 1986 (Ex.P-3). The solution to this impasse is available under
sub-section 9(2) of the Sale of Goods Act, 1930 read with Art. 25 of the Articles
of Association of Kerala Kaumudi. Under the first if the price is not fixed in
the manner agreed to in the contract of sale, the buyer shall pay the seller a
reasonable price and what would be a reasonable price would be dependent on the
circumstances of the case. Article 24 of the Articles of Association of the
company speaks of the ‘fixed price’ and the ‘fair price’. Both of these relate
to the ostensible price shown on the transfer deeds. Nevertheless for the
purposes of this case, Article 25 which lays down guidelines for the resolution
of disputes between the transferor and transferee, may be relied on. It says :
“Article
25 - The fair value of a share shall be fixed by the Company by a resolution
passed by a majority of not less than three fourths of the holders of such
shares declaring the fair value. Such resolution shall remain in force for two
years from the date of its passing or until annulled whichever is earlier. If
at the time a transfer notice is given no resolution fixing the fair value is
in force: then any difference in regard thereto shall be referred to two
arbitrators, one to be appointed by each party and the provisions of the Indian
Arbitration Act, 1940, shall apply.”
Although the learned Single Judge in disposing
of CP 26/87 gave directions for the appointment of Arbitrators, to determine
the value of the shares, in our view it would be more appropriate to do so in
decreeing the suit for specific performance of the Karar. It is also not clear
from the material on record, in which of the brothers’ name 9 shares of the
late Sukumaran and the 3 shares of Madhavi now stand. Whoever is recorded as
the owner of the shares shall further transfer six of those shares to
Madhusoodhanan.
24.20 For all
these reasons, we have no hesitation in setting aside the decision of the
Appellate Court and restoring the decree as passed by the Trial Court as
modified below.
“Madhusoodhanan
will appoint one Arbitrator and Mani and his children, Sukumaran and
(a) What was the fair value of one share of
Kerala Kaumudi (P) Ltd. on 21-5-1985?
(b) What
amount was paid or adjusted by or on behalf of M.S. Madhusoodhanan to M.S. Mani
towards the value of shares ? What is the balance amount due from
Madhusoodhanan to Mani and his children in respect of the transfer of the 390
shares transferred to M.S. Madhusoodhanan.
(c) What would be the value of one share on
the date of Madhavi’s death ?
It
will be open to the parties entitled to the consideration as determined by the
Arbitrators to recover the sums due to them from Madhusoodhanan”.
Rectification of the Share
register of KIPL
25.1 The
application for the rectification of the share register of KIPL under section
155 of the Companies Act was filed by Mani’s wife and daughter - Kastoori and
Valsa respectively, Srinivasan’s wife - Laisa, and
25.2 According
to Madhusoodhanan, at the Board meeting held on 4th March, 1985, which was
attended by Geetha and Laisa, Laisa’s resignation was accepted and he was
appointed as additional director. At the same meeting, the Board approved the
transfer of shares by Laisa, Shylaja, Madhavi and Kasturi to Madhusoodhanan,
Ravi’s minor sons -Deepu and Darsan, Valsa (Mani’s daughter) and
Srinivasan so that the shareholding in KIPL became as follows :
|
Geetha |
250 |
shares |
|
Madhusoodhanan |
270 |
Shares |
|
Srinivasan |
160 |
shares |
|
Valsa |
160 |
shares |
|
Deepu Ravi |
80 |
shares |
|
Darsan Ravi |
80 |
shares |
25.3 According
to the four applicants for rectification, they had effected no such transfer.
Of the four, only Laisa came forward to give evidence in support of the case
for rectification of the share register of KIPL [Ex. P-123 (F)] by restoring
the position with regard to the shareholding as it existed prior to March 1985.
In her deposition Laisa admitted that she had signed the attendance register of
KIPL (Ex.P.-123) which showed that she had attended the Board Meeting on 4th
March, 1985. She also admitted that she had signed the minute books of the
company including the minutes of the meeting held on 4th March, 1985 as well as
blank share transfer forms . However she has come forward with this explanation
:
“I
have given blank share transfer forms and other papers signed when Sri
Madhusoodhanan brought them to me. I signed those blank transfer forms and
papers because Mr Madhusoodhanan was looking after the affairs of all sister
concerns and my husband told me to sign whatever papers be brought by Mr
Madhusoodhanan.”
25.4 The
learned Single Judge dismissed the application for rectification. He held that
the 4 brothers had admitted their signatures in Exhibit P-190 which is a record
of decisions taken at a meeting held on 29-11-1984 when one of the decisions
taken was to entrust separate concerns to each of the brothers, depending upon
who was taking an active interest in the company. The decision was implemented
by the share transfers in the sister concerns of Kerala Kaumudi and it was not
disputed that in respect of Laisa Publications, Srini Printers, Ravi Printers
etc., the respective brothers who were in control of those concerns were given
52 per cent shares. As far as KIPL was concerned it was decided :
“3(b).
In Kaumudi Investments and Kaumudi Exports 52 per cent of shares will be held
by Shri M.S. Madhusoodhanan and family and 16 per cent each of shares will be
held by Shri M.S. Mani and family, Sri M.S. Srinivasan and family and Sri M.S.
Ravi and family.”
This was effected as far as KIPL was concerned
on 4th March,1985. It was held that the evidence showed clearly that all the
necessary steps had been taken to effect the share transfers and that it was
immaterial that the petitioners were not parties to exhibit P-190 because the
share transfer deeds had been signed and the signatories were bound by that,
particularly when they had not established that they had signed the share
transfer documents under any misrepresentation, fraud or undue influence or
mistake.
25.5 The
Division Bench reversed the decision of the learned Single Judge in MFA No. 312
of 1990. It was held that since exhibit P-3, or the Karar, had not been
accepted as a valid document, “the projected basis of the transfer disappears”
and “the further recording in the minutes of the company would not be sufficient
to give legal efficacy to the transfer of shares”.
25.6 Since
we have held that the Karar was a valid agreement, this reason of the Division
Bench will not stand. Besides, as observed by the learned Single Judge, all the
necessary documents had been duly executed to effect the transfers of the
shareholding as approved in the meeting held in March 1985. In the annual
return of KIPL in respect of the year ending on 30th September, 1985, this
shareholding is reflected (Ex.P-212). Further this is in keeping not only with
the Karar but also with Ex.P-190 according to both of which Madhusoodhanan and
his group were to have 52 per cent shareholding in KIPL and the remaining three
brothers - 16 per cent each.
25.7 The
explanation given by Laisa that she used to sign whatever papers had been sent
by Madhusoodhanan is unbelievable. The Division Bench by relying upon a
narrative in a biography of Norman Birkett (The Life of Lord Birkett of
Ulverston by H. Montgomery Hyde) chose to accept it. According to Laisa
herself, she had been a director of the company, operated the banking accounts
and otherwise done whatever was necessary in the discharge of her duties as a
director since 1972. As we have noted earlier, differences between the 4
brothers had been simmering for a long time which manifested itself in 1984.
This was also noted by the Division Bench when it said, “in the year 1984,
differences became somewhat apparent”. In the circumstances, Laisa’s facile
explanation, that she signed every document in 1985 because of her faith and
trust in Madhusoodhanan is clearly false.
25.8 The
next reason given by the Division Bench for allowing the application for
rectification was that the original share transfer deeds had not been produced.
Madhusoodhanan had filed an application for production of the original share
transfer deeds. He said that he could not produce the share transfer deeds
because they were in the administrative office of KIPL and that he had been
prevented from entering that office. That the administrative office of KIPL is
within the Kerala Kaumudi premises in a separate room was also the finding of
the Division Bench. Madhusoodhanan and his group’s grievance that they were
being denied access to KIPL’s office since April, 1986 was not rejected by the
Division Bench as not genuine. But the Division Bench observed “A mere alibi of
inability to enter the office, cannot be accepted as a sufficiently strong
reason for their grievous omission”. This conclusion is as startling as it is
unreasonable. For the reasons given earlier in connection with transfer of
shares in Kerala Kaumudi, we are of the view that here also, the minutes and
the other records of the company, which prima facie raise a presumption of
their veracity, have not been sufficiently disproved by the evidence tendered
on behalf of the petitioners in the application for rectification.
25.9 Apart
from the provisions of the Companies Act, Article 41 of the Articles of
Association of KIPL (Ex. P-180) also provides :
“Where
minutes of the proceedings of any general meeting of the company or of any
meeting of the Board of Directors has been made and signed in accordance with
provisions contained in the preceding article 10 unless the contrary is proved,
the meeting shall be deemed to have been duly called and held and all
proceedings thereat to have duly taken place, and in particular, all
appointment of directors made at the meeting shall be deemed to be valid”.
The only evidence or “proof” to the contrary
in this case is Laisa’s unacceptable oral evidence. Therefore the minutes of
the meeting held on 4th March, 1985 must be taken to have correctly recorded
the transfer of shares resulting in the present shareholding, the appointment
of Madhusoodhanan as additional director and the resignation of Laisa as a
director of KIPL.
25.10 The
next reason given by the Division Bench for permitting rectification of the
share register of KIPL was that no price had been fixed for the shares and that
there were not even negotiations with parties regarding such fixation of price.
This is, for reasons already stated, an incorrect statement of the law.
Moreover in this case there is the additional factor which has persuaded us to
hold that the Division Bench was wrong, namely Article 16 of the Articles of
Association of KIPL which says :
“the
Board of Directors shall fix price at which the shares for the time being
forming part of the capital of the company may be purchased in pursuance of
transfer notice and the price thus fixed shall be known as the ‘fair value’.
Until the ‘fair value’ has been fixed as herein provided, a sum equal to the
capital paid up on any share shall be deemed to be the fair value of such
share.”
The Division Bench’s final conclusion that
there had been a non-compliance with section 108 of Companies Act because there
was no indication about any purchase of stamps or about the share transfer
deeds having been duly stamped, is an exercise in speculation. The Articles of
Association of KIPL themselves require compliance with section 108 before any
transfer can be effected. When the minutes recorded that share transfer deeds
had been placed before the Board, when the transfers were approved by the Board
in the presence of the only witness for the petitioners, and when none of the
documents which were duly maintained by the company recording the transfers of
the shares had been disproved, we cannot uphold a finding that the share
transfer deeds must have been improperly stamped or executed in violation of
the provisions of section 108 of Companies Act.
25.11 No
further reason has been given by the Division Bench for upholding the prayer
for rectification of the share register of KIPL. We have, therefore, no
compunction in setting aside the decision of the Division Bench and restoring
that of the learned Single Judge dismissing the application.
Rectification of the Share
Register of Kerala Kaumudi
26.1 The
next matter is the application for rectification of the Share Register of
Kerala Kaumudi filed by the minor son of Madhusoodhanan, Visakh (CP 11/87; MFA
No. 285/90; CA 3261/91). This appeal need not detain us as both the courts
below have concurrently held that the application had no merit.
26.2 In
keeping with the Karar, Mani and his family have the controlling interest in
the company. In June 1985, of the 500 issued shares, Mani and his family held
260, Madhusoodhanan and his children held 80 shares, Srinivasan and his
children held 80 shares and
26.3 We accordingly dismiss the
appeal being C.A. 3261/91 without any order as to costs.
Civil Suit No. 4 of 1989
27.1 This
brings us to the remaining appeal which arises from a decree passed in a suit
filed by KIPL. The suit was originally numbered as OS 1569/88 when it was filed
in the Munsiff’s court in
27.2 That
the administrative office of KIPL was in
27.3 Srinivasan
filed a written statement on behalf of Kerala Kaumudi in which it was denied
that KIPL had its administrative office in Kaumudi Buildings. According to
Srinivasan, Geetha used to sit in Madhu-soodhanan’s office when he was the
Managing Director of Kerala Kaumudi.
27.4 On
behalf of the plaintiffs, entries in the telephone directory (Ex.P-181),
notices and letters issued by the income tax office addressed to KIPL at
Kaumudi Buildings (Ex-P. 182, 184 and 185) as well as a letter from the
Commissioner of Income Tax (Ex.P. 183) similarly so addressed were proved by
Madhusoodhanan. Srinivasan has been unable to explain why the letters and
notices to KIPL by the concerned authorities should be addressed to Kaumudi
Buildings unless KIPL was functioning from that place. Additionally, Srinivasan
also said, in his evidence, “All the sister concerns of Kerala Kaumudi had post
box No. 99 and post office was instructed to put the correspondence addressed
to the sister concerns in that post box No.”. The post box number in question
was Kerala Kaumudi’s. He also said, “At the time when application for telephone
was given, applications were given in the name of all sister concerns as well
as Kerala Kaumudi, in order to get telephone easily. These telephones were
allotted. All the telephones are installed in Kerala Kaumudi Buildings” and
that for all the sister concerns the telex No. is the same. In view of all this
evidence, including the admission by Srinivasan, amply justifies the conclusion
reached by the Trial Court while decreeing the suit that KIPL had an office in
Kaumudi Buildings to which members of its management and staff have the right
of access.
27.5 A similar suit had been filed by Kaumudi Exports which was decreed by
the learned Single Judge on substantially the same evidence. (C. S. No 2 of
1989). The appeal from the decree was dismissed by the Division Bench (A S. No.
205 of 1990). No further appeal has been preferred by the respondents.
27.6 Logically,
the Division Bench should have also rejected the appeal preferred from the
decree in CS No. 4/49. However the Division Bench rejected the appeal on the
sole ground that although KIPL had been denied access in 1986, the suit had
been filed only in 1988. According to the Division Bench “The inaction for a
period of two years can be taken to have resulted in the extinction of the
present possession. If the plaintiff does not have present possession,
injunction could not be an available relief”. This strange piece of reasoning
appears to proceed on the basis that the period of limitation for extinction of
a possessory right is two years which it is not. Besides the claim of KIPL was that
it was being denied access. The denial was a continuous one. It was therefore
open to KIPL to file a suit while such denial continued by seeking to injunct
the obstructers from continuing with the obstruction. Srinivasan’s evidence and
the documents referred to hereinabove prove beyond a shadow of doubt, that the
administrative office of KIPL was in Kaumudi Buildings. That is also what the
Division Bench has held. Having come to this conclusion, the Division Bench
erred grievously in denying KIPL the relief it claimed only on the ground of
delay, as if what was being dealt with by the Division Bench were an
interlocutory application for interim relief.
27.7 This appeal, C. A. 3259/91, is
therefore allowed.
28. To
sum up: Civil Appeals 3253-58 of 1991 from M.F.A 330/90 are allowed, and the
decision of the Trial Court affirmed with the directions earlier specified.
Civil Appeals 3260 and 3261 of 1991 are dismissed. Civil Appeal No. 3259 of
1991 is also allowed . The decision of the Division Bench is set aside and the
decree of the Trial Court is restored.
29. Before concluding our judgment in all these appeals, we would like to record our displeasure in the manner in which the paper books have been prepared. Documents which are vital for decision on the several issues raised, continue to remain in Malayalam without being translated , several exhibits as well as the pleadings, such as plaints, written statements etc. are not on record. Therefore, although our decisions in these nine appeals, except for two, are in favour of Madhusoodhanan and his group, we make no order with regard to the costs to which the appellants would otherwise have been entitled.
[1970]
40 COMP. CAS. 819 (GUJ)
HIGH COURT OF
Maneckchowk
& Ahmedabad Mfg. Co. Ltd., In re
D.A. DESAI, J.
Company Application No. 23 of
1968 with Company Petition No. 8 of 1969
DECEMBER: 10, 1969
JUDGMENT
Messrs. Indequip Limited (hereinafter referred to as the
petitioner) has filed this petition under section 391(2) of the Companies Act,
1956, for sanctioning, a scheme of compromise and arrangement between the
creditors and members of Maneckchowk & Ahmedabad Manufacturing Company
Limited (hereinafter referred to as the company) and the compromise proposed by
the company in Company Application No. 23 of 1968 and approved by the creditors
and members of the company. The company was incorporated in the year 1892 and
it was manufacturing cotton yarn and cotton textiles. For that purpose the
company had set up textile mills divided into two units described as Unit No. I
and Unit No. II. Since 1913 one Hiralal Trikamlal was its managing agent.
Hiralal Trikamlal has three sons, Manubhai, Chandulal and Linubhai, and two
daughters, Shardaben and Shantaben, all of whom are very much concerned in this
petition. In 1957 the firm of Hiralal Trikamlal & Sons was appointed as
managing agents of the company. One Gopaldas P. Parikh was appointed as a
director of the company in the year 1959. Up to 1st January, 1966, Manubhai
Hiralal and Chandulal Hiralal as partners of Hiralal Trikamlal & Sons were
in active management of the affairs of the company and since that date Linubhai
Hiralal along with Gopaldas P Parikh took over the active management of the
company. It appears that since 1962 the company was in financial doldrums and
its losses were mounting up from year to year. The workers of the company went
on strike on 2nd April, 1968, as their wages for nearly two months were in
arrears with the result that the company was obliged to close the mills. The
first petition praying for winding up the company was filed in April, 1968. The
immovable properties of the company were attached by the Collector at the
instance of the Regional Provident Fund Commissioner and Employees' State
Insurance Corporation. The company filed Company Application No. 23 of 1968 on
27th June, 1968, under section 391(1) seeking directions for convening the
meeting of its creditors and members for considering and if thought fit for
approving with or without modifications a scheme of compromise and arrangement
proposed by it. Before the court gave directions on the aforementioned
application, one Chandulal Hiralal as power of attorney holder of Shardaben and
Shantaben and others filed Company Petition No.24 of 1968 on 4th July, 1968,
praying for an order for winding up the company. Two other petitions for the
same reliefs were fried on 12th July, 1968, being Company Petition No. 28 of
1968 by Ambica Dyes and Chemicals and Company Petition No. 29 of 1968 by
Popular Dyestuffs and Chemical Company. On the application filed by the company
under section 391(1), the court gave direction on 4th July, 1968, for convening
meetings. The petitioners in Company Petition No. 24 of 1968 filed Company
Petition No. 35 of 1968 on 29th July, 1968, for appointment of a provisional
liquidator which petition was granted by the court and the official liquidator
attached to this court was appointed as provisional liquidator of the company
and since then the provisional liquidator is in possession of the assets of the
company. The meetings of the unsecured creditors and members of the company
were held on 5th and 6th October, 1968, and final meeting of the secured
creditors was held on 9th December, 1968. The chairman appointed by the court
to preside over these meetings submitted his report on 16th December, 1968.
Thereafter the petitioner applied for and obtained leave in Company Application
No. 1 of 1969 on 13th January, 1969, to file substantive petition under section
391(2) of the Companies Act for sanctioning the scheme of compromise and
arrangement as approved by the creditors and members as provided by rule 79 of
the Companies (Court) Rules, 1959, because the company as represented by the
provisional liquidator was not willing to file the substantive petition. The
court granted leave to file this substantive petition, whereupon the petitioner
filed substantive petition on 1st February, 1969. The petition was admitted on
3rd February, 1969. The court gave directions for advertising the petition in
various newspapers and a notice was also directed to be issued to the Central
Government as envisaged by section 394-A of the Companies Act. In the
advertisement issued in the newspapers it was stated that the court would take
up this petition for hearing on 8th March, 1969, and anyone interested in the
company may come and appear either to oppose or support the petition. The
hearing of the petition had to be adjourned from time to time as the petitioner
had not submitted the latest financial position of the company as required by
the proviso to section 391(2) of the Companies Act. The petitioner experienced
difficulty in disclosing the latest financial position of the company because
the provisional liquidator was in charge of the company and it appears that the
books of accounts of the company were not written, as also the petitioner being
creditor had no access to the books of accounts of the company. On a judge's
summons taken out by the petitioner, the court gave certain directions and
appointed auditors to prepare the statement showing the latest financial
position of the company. After the auditors submitted detailed reports
disclosing the latest financial position of the company the petition was set
down for hearing.
At the hearing of the petition Mr. R.N. Oza appeared for
the Union Bank of India, a secured creditor of the company, Mr. B. R. Shah
appeared for the Employees' State Insurance Corporation, Mr. S. N. Shelat
appeared for two creditors, namely, M/s. Atul Cotton Traders and M/s. Amarshi
Damodar, Mr. C. C. Gandhi appeared for Indian Electro Chemical Limited, Mr.
R.M. Gandhi and Mr. R.P. Bhatt appeared for the Regional Provident Fund
Commissioner and Mr. S. B. Majumdar appeared for the Textile Labour Association
and they all supported the scheme. Mr. S. B. Vakil appeared for the creditors
who had filed Company Petition No. 24 of 1968 for winding up the company and
for Messrs. East India Company instructed by Messrs. Ambubhai Divanji and for
Asia Electric India Private Limited and opposed the scheme. Mr. B.J. Shelat
appeared for Ambica Chemicals and Dyes, petitioner in Petition No. 28 of 1968
and Popular Dyestuffs and Chemicals, petitioner in Company Petition No. 29 of
1968—both of whom are the creditors of the company—and opposed the scheme. Mr.
L.T. Shah appeared for the provisional liquidator who submitted to the orders
of the court.
The scheme as finally submitted to the court for its
sanction envisages reorganization of the share capital of the company which
includes reduction of the share capital by reducing the face value of the
ordinary share of Rs. 1000 fully paid to Rs. 250 fully paid, and preference
share of Rs. 100 fully paid to Rs. 25 fully paid. The scheme also envisages
increase of share capital by issue of shares to the unsecured creditors of the
company excluding the workers to the tune of 50% of the verified claim of each
unsecured creditor. The scheme envisages dismantling and scrapping of Unit No.
II of the mills of the company and the sale proceeds to be utilised towards the
payment to the secured creditors, namely, Union Bank of
Before the court accords its sanction to any scheme of
compromise and arrangement, it would normally expect to be satisfied about
three important matters, namely, (i) whether the statutory provisions have been
complied with or not; (ii) whether the class or classes have been fairly
represented; and (iii) whether the arrangement is such as a man of business
would reasonably approve. As the scheme was very vehemently contested and a
number of contentions have been raised by Mr. Vakil, these three aspects have
been vigorously debated and they will be considered while considering those
objections.
Mr. S. B. Vakil, who was the principal contender at the
hearing of this petition, contested the scheme on the following grounds:
(1) The
petitioner has not satisfied the requirement contained in the proviso to section
391(2) by not making necessary disclosures at the proper time and it being a
condition precedent to the court's exercise of jurisdiction under section
391(2), the present petition must fail.
(2) The
proposed scheme is not a proper alternative to an order for winding up the
company in view of the fact that the company is guilty of giving a number of
fraudulent preferences in favour of the Union Bank of India, the Regional
Provident Fund Commissioner and five other creditors which can only be
investigated and avoided in winding up proceedings.
(3) The
proposed scheme envisages scrapping of Unit No. II and part of Unit No, I of
the mills of the company and, in the absence of a permission for scrapping a
textile mill, it would be illegal to sanction the scheme.
(4) The
proposed scheme envisages reorganisation of the share capital of the company,
including reduction and increase of share capital, which cannot be done without
going through the whole gamut of the procedure prescribed for the same and as
it is an inseverable part of the scheme, it would be futile to sanction the
remainder of the scheme in its mutilated form.
(5) In the
absence of proper directions for convening separate meetings of different
classes of creditors and members of the company, appropriate meetings of
distinct classes of members and creditors were not held and therefore, it is
not possible to say that the proposed scheme has been approved by requisite
majority of different classes of creditors and members.
(6) A
proper statement as required by section 893(1) and as directed by the court's
order, dated 26th June, 1968, in Company Application No. 23 of 1968 was not
sent along with the notice convening the meetings of members and creditors of
the company.
(7) The
meetings of creditors and members were conducted in an irregular manner and,
therefore, the votes recorded at such meetings cannot be relied upon to show
that the scheme has been approved by the requisite majority of creditors and
members.
(8) Even if
it be held that the meetings were properly conducted, in fact the scheme is not
approved by a statutory majority of creditors and members; but assuming that
the other view is possible, the court on the analysis of votes recorded at the
meeting should not exercise its discretion in favour of the scheme so as to
impose it on the dissenting members and creditors.
(9) The
scheme is not commercially and economically viable or feasible and is in fact
unfair and unreasonable; the court should not exercise its discretion in favour
of such a scheme. These grounds will be dealt with in the order in which they
are set out.
Re. Ground No. 1. Section 391(1) and (2) reads as under:
"391.
Power to compromise or make arrangements with creditors and members.—(1) Where a compromise
or arrangement is proposed—
(a) between a company and its creditors or any
class of them; or
(b) between a company and its members or any
class of them;
the court may, on the application of the company or of any
creditor or member of the company, or, in the case of a company which is being
wound up, of the liquidator, order a meeting of the creditors or class of
creditors, or of the members or class of members, as the case may be, to be
called, held and conducted in such manner as the court directs.
(2) If a majority in number representing three-fourths in
value of the creditors, or class of creditors or members, or class of members,
as the case may be, present and voting either in person or, where proxies are
allowed under the rules made under section 643, by proxy, at the meeting, agree
to any compromise or arrangement, the compromise or arrangement shall, if
sanctioned by the court, be binding on all the creditors, all the creditors of
the class, all the members, or all the members of the class, as the case may
be, and also on the company, or, in the case of a company which is being wound
up, on the liquidator and contributories of the company.
Provided that no order sanctioning any compromise or
arrangement shall be made by the court unless the court is satisfied that the
company or any other person by whom an application has been made under
sub-section (1), has disclosed to the court, by affidavit or otherwise, all
material facts relating to the company, such as the latest financial position
of the company, the latest auditor's report on the accounts of the company, the
pendency of any investigation proceedings in relation to the company under
sections 235 to 251, and the like."
The contention is that before the court can proceed to consider
whether the scheme of compromise and arrangement should be sanctioned or not,
the party sponsoring the scheme must disclose to the court by an affidavit or
otherwise all material facts relating to the company, such as, the latest
financial position of the company, latest auditor's report on the accounts of
the company, the pendency of any investigation proceedings in relation to the
company under sections 235 to 251, and the like. It is undoubtedly true that
before the court can accord sanction to a proposed scheme of compromise and
arrangement, between the company and its creditors or any class of them; or
between the company and its members or any class of them, approved by a
majority in number representing three-fourths in value of the creditors or
class of creditors or members or class of members, as the case may be, present
and voting either in person or, where the proxies are allowed, by proxy, the
court must be satisfied amongst other things that company or the sponsor of the
scheme has disclosed all material facts relating to the company. The contention
is that this disclosure should be made at the time when the petition is filed
under section 391(1) and as that has not been done, the court should ignore
whatever is disclosed after the petition for sanctioning the scheme is filed
under section 392(2). Sections 391(1) and 391(2) refer to two distinct stages.
Whenever a compromise or arrangement is proposed between a company and its
creditors or any class of them or between a company and its members or any
class of them, the court on the application of the company or any creditor or
member of the company or in the case of the company which is being wound up, of
the liquidator, order a meeting of the creditors or members or any class of
them as the case may be. Such an application shall be moved by judge's summons
supported by affidavit to which the proposed scheme of compromise and
arrangement should be annexed. The judge's summons can be moved ex pate unless
the petition is by some one other than the company in which case, a notice to
the company has to be served. The court may give various directions at the
hearing of this summons set out in rule 69. Once these directions are given,
application under section 391(1) would be disposed of. Nothing further is
required to be done until after the meetings directed to be convened are held
and the chairman submits his report, whereafter a substantive petition for
sanctioning the scheme can be filed as envisaged by section 391(2) and rule 79.
Before the court can accord sanction to the scheme, the petitioner or the
company must disclose latest financial position of the company and the latest
auditor's report as required by the proviso to sub-section (2). Proviso is
annexed to sub-section (2) which envisages a distinct stage from sub-section
(1). The submission is that disclosures as required to be made by the proviso
should be made at the stage of seeking directions under sub-section (1) of
section 391. The submission would stand negatived apart from anything else by
the very language in which the proviso is cast and its' location in the scheme
of section 391. Firstly, the proviso is engrafted to sub-section (2) which
envisages a distinct stage from sub-section (1); secondly, the opening words of
the proviso: "provided no order sanctioning any compromise or arrangement
shall be made by the court unless .........." would manifestly indicate
the intention of the legislature that the disclosure is to be made at the stage
when the court is called upon to sanction the scheme. If the submission had any
merit in it, it was perfectly open to the legislature to engraft the proviso to
subsection (1) and in that event, the language would be "provided no
direction shall be given for convening meeting unless". Undoubtedly that
has not been done. If sub-sections (1) and (2) of section 391 envisage two
distinct stages, namely, (i) giving direction for convening the meeting for
considering the proposed scheme and (ii) the independent stage when the court
would be called upon to consider whether the scheme should or should not be
sanctioned and if the disclosure is to be made before the court at the time
when the court is called upon to sanction the scheme, it is not possible to
accept the submission that the disclosure ought to be made at the initial stage
when an application is made under section 391(1).
Mr. Vakil however urged that disclosure as envisaged by the
proviso has to be made either by the company or by any other person by whom
application has been made under sub-section (1) which gives strong indication
that the disclosure ought to be made at the initial stage when an application
is filed under section 391(1). But as the summons under subsection (1) is to be
moved ex parte, objection can be taken about the non-disclosure at the initial
stage only at the time when the court proceeds to accord sanction to the scheme
and, therefore, the proviso is engrafted to sub-section (2). It was urged that
an application under section 391(1) can be made by a creditor or member who may
not be in possession of the latest financial position of the company a notice
to the company is made obligatory under rule 68. This notice to the company is
made obligatory because only the company would be able to disclose the latest
financial position. It is no doubt true that a compromise or arrangement can be
proposed by either a creditor or a member of the company but it is essentially
a compromise or arrangement between the company and its creditors or between
the company and its members and if the application is made by some one other
than the company it was considered desirable that a notice should be given to
the company before direction for convening the meetings are given. Merely
because a notice is to be given to the company under rule 68 before directions
are given and because the advocate of the company has to file the form of
advertisement and statement accompanying the notice as required by Form No. 35
in which order convening the meetings has to be made, it cannot be said that
the disclosures ought to be made at that stage. Mr. Vakil however urged that in
this application under section 391(1), judge's summons for seeking directions
for convening the meeting to consider the proposed scheme of compromise and
arrangement would be moved ex parte and the court would not be able to give
proper directions in the absence of material disclosures as envisaged by the
proviso and, therefore, even though the language of the proviso and its
location may apparently indicate that the disclosure has to be made at the
stage when the court is called upon to consider the scheme, for very good
reasons, the court should interpret the proviso to mean that the disclosure
should and ought to be made at the initial stage. It was urged that when an ex
parte judge's summons is moved under sub-section (1) and the court is required
to give direction for convening the meeting, the court has to determine,
amongst other things, class or classes of creditors and class or classes of
members whose meetings have to be convened and has to determine the value of
the creditors and/or members or creditors or members of any class as the case
may be, and the court would not be able to do it unless the latest financial
position including the auditor's report is disclosed to the court. It was also
urged that in order to enable the court to give proper statement under section
393(1)(a) which must accompany the notice convening the meeting so as to give
those who are to attend the meeting, the necessary information to enable them
to cast their votes intelligently, it is absolutely necessary that the
aforementioned disclosures should be made at that stage. It was very vehemently
urged that the sanction of the court to the scheme is of secondary importance,
its approval by the creditors and members whose vital interest in the company
are really at stake is of primary importance; and unless the scheme is properly
considered by different classes of creditors and members, it cannot be taken up
for consideration by the court. Therefore, the distinct and homogeneous class
of creditors and members should be properly drawn up while giving directions
for convening meetings, and it would be impossible to do so in the absence of
disclosure about the latest financial position of the company, at that stage.
It was further urged that material facts which ought to be disclosed as
required by the proviso would include all the relevant facts which would go to
show that the company is liable to be wound up and that the compromise and
arrangement is fair and reasonable and is not mala fide and that it would be a
proper alternative to the winding up of the company the material facts required
to be disclosed would also include the information which would help the court
in determining the class of creditors or members whose separate meetings should
be convened and their values to be properly determined.
Affidavit in support of the judge's summons moved under
section 391(1) has to be drawn up in Form No. 34 —a perusal of which shows that
in the affidavit the party seeking the directions of the court which would of
necessity be either the company or its creditor or member, must set out the
circumstances that have necessitated the proposed compromise and arrangement,
the object sought to be achieved by it, the terms of the compromise and
arrangement, the effect if any of the compromise and arrangement on the
material interests of the directors managing director, managing agent,
secretaries and treasurers or manager of the company and when the compromise
and arrangement affects the interest of the debenture-holders its effect on the
material interests of the trustees of the debenture trust deed. It must further
be disclosed in affidavit that classes of creditors or members with whom the
compromise or arrangement is to be made and if the compromise and arrangement
is between the company and its members it should further be stated whether any
creditor or class of creditors are likely to be affected by it. The affidavit
must show that different kinds of meetings of different classes of persons are
required to be convened. It is obligatory upon the applicant under section
391(1) to set out the aforementioned facts in the affidavit in support of the
judge's summons. The aforementioned facts, if properly disclosed, would enable
the court to give proper directions as envisaged by rule 69 and the absence of
the latest financial position of the company or the latest auditor's reports
would not be handicap in the court giving proper directions. In my opinion, the
details required to be mentioned in the affidavit have been so prescribed to
enable the court to give proper directions and no disclosures are required to
be made as required by the proviso at that stage. The form in which the
affidavit is required to be made further strengthens the conclusion that the
proviso does not come into play when the court deals with the petition under
section 391(1) but it comes into play only at the later stage.
It was however urged that if the court is going to rely on
the affidavit in support of the judge's summons in Company Application No. 23
of 1968, for reaching a conclusion that relevant information was disclosed in
the affidavit, it would be necessary to consider in detail the affidavit of Mr.
B. I. Patel, the constituted attorney of the company who filed his affidavit in
support of the judge's summons. It was urged that the affidavit of Mr. Patel
did not disclose the fact that the company had suffered consent decrees and
charges were created on the properties of the company indicating that the
company was guilty of giving fraudulent preferences in favour of the creditors
in whom the then directors were vitally interested. It was urged that this
affidavit does not disclose the fact that various petitions praying for winding
up the company were presented and were pending; nor the fact that the company
had executed two mortgages, one in favour of the Union Bank of India in January
1968 and the other in favour of the Regional Provident Fund Commissioner in May
1968; and that the company had incurred losses in the last year to the tune of
Rs. 45 lakhs and odd. The affidavit of Mr. Patel is in the prescribed form and
it sets out various details necessary for giving proper directions. It may be
mentioned that Mr. Patel had annexed the latest balance-sheet of the company
upto 31st March, 1967, to the affidavit. He had also stated the dues of the
managing agents, Indequip group of companies and dues of the managing director
as well as the members of his family and the effect of the scheme on their
claims. Therefore, whatever was necessary at that stage was disclosed in the
affidavit and nothing further was required to be done at that stage.
Mr. Vakil further urged that the proposed scheme is to be
considered by the members and creditors of the company and when they are
considering the scheme, they should ordinarily have all the relevant
information about the financial position of the company so that they can bring
to bear upon the subject their independent (intelligent) commercial judgment as
to whether the scheme should or should not be approved. If the matter is viewed
from this angle, urged Mr. Vakil, it would indicate that disclosure should be
made at the stage when the application is filed under section 391(1) because
that information would be available to the creditors and members in their
meeting. It was contended that if the creditors and members are called upon to
vote upon the scheme without supplying them necesssary information which would
help them in judging the scheme in its proper perspective, their approval of
the scheme in sheer ignorance of the relevant facts would be of no avail. The
approval of the scheme by the creditors and members must be after bringing to
bear upon the subject their intelligent judgment based upon full disclosure as
to the existing stage of affairs of the company and its future which is sought
to be assured by the proposed scheme of compromise and arrangement. Mr. Vakil
referred to In re Travancore National & Quilon Bank Ltd.
An objection was raised before the court considerig the scheme that as the
scheme was not based upon correct information as to the affarirs of the company
and has not had the intelligent support of the body of creditors who are
supposed to have given assent to the scheme and there is no guarantee that the
realizations therein promised would be realised. Referring to two English cases
it has been observed that any scheme which is approved must prima facie appear
to be based on correct information and data. However, having thus observed the
court further proceeded to observe that this does not mean that the application
for sanctioning the scheme should be rejected on the ground that sufficient
information was not supplied at the meeting of the creditors when they approved
the scheme. This would not bear out the submission that the disclosure must be
made at the initial stage. Reference was also made to In re Calcutta Industrial
Bank Ltd.
wherein an objection was taken that the books of accounts of the company were
not available at the meeting of the creditors and that the creditors were
prevented from putting questions. Even though these grounds were considered, it
may be stated that on the facts found in the Chariman's report no weight was
attached to the aforementioned objections. Reference was also made to In re
Bharati Central Bank Ltd.
The question raised before the court was whether the creditors and members who
had unanimously approved the scheme had full information of all the aspects and
were acting honestly and in good faith at the meeting. After considering the
evidence in the case it was observed that it was impossible to say that the
creditors had full and fair knowledge of all the relevant facts on which they
could come to an intelligent decision or that they had applied their
independent mind to the scheme. In my opinion, no proposition of law can be
deduced from the aforementioned case as suggested by Mr. Vakil that the
disclosure ought to be made at the initial stage. It is always a question of
fact whether the creditors and members did consider the scheme in the various
meetings after getting the relevant information which would help in judging the
scheme on its merits. But it cannot be said that as discloures were not made at
the initial stage when the directions were given by the court the requirements
of the proviso were not complied with.
Looking to the language of the proviso especially its
opening words:
"Provided that no order sanctioning any compromise or
arrangement shall be made..." and the location of the proviso in the
scheme of section 391 and especially the fact that section 391(1) and section
391(2) envisage two distinct and independent stages when the court is called
upon to apply its mind to the proposed scheme of compromise and arrangement and
the contents of the affidavit required to be drawn up in prescribed form in
support of the judge's summons under section 391(1) it is not possible to
accept the submission of Mr. Vakil that disclosures as required by the proviso
shonld be made at the intial stage when the application is made under section
391(1). In my judgment, these disclosures are required to be made when a
petition is filed under section 391(2) for sanctioning the scheme and must be
available when the court proceeds to examine the scheme to find out whether
sanction should be accorded to it or not.
As a second limb of the argument, it was contended that
even if it be held that disclosures as required by the proviso are to be made
at the stage when the court is considering the petition for sanctioning the
scheme, in fact, no disclosures have been made in this case and therefore, the
court should not accord sanction to the scheme. It was argued that the proviso
being couched in the negative form is of a mandatory character and disclosures
being a condition precedent to the court's exercise of jurisdiction for
sanctioning the scheme, unless condition precedent is fully satisfied, the
court will have no jurisdiction to sanction the scheme. It is true that the
proviso is cast in the negative form. It is equally true that the court is
precluded from according sanction to the scheme unless the disclosure as
required by the proviso are made. As the proviso is prohibitory in character,
it is not possible to treat it as merely permissive (vide High Commissioner for
India and the High Commissioner for Pakistan v. I.M. Lall )
The proviso was introduced in the year 1965 and as it is prohibitory in
character and provides condition precedent to the court's exercise of
jurisdiction for sanctioning the scheme it definitely appears to be mandatory
in character and must be strictly complied with. The question is whether in
fact it has been complied with or not. When the present petition was filed, the
company was in charge of the provisional liquidator. The petitioner being a
creditor could not produce documents showing latest financial position of the
company. In order to make available latest financial position of the company
and latest auditor's report, the petitioners took out a judge's summons in
Company Application No. 11 of 1969 for a direction that the provisional
liquidator who is in charge of the company should supply the latest financial position
and all material facts pertaining to the said company. The court gave certain
directions as a result of which Mahendra M. Patel & Company, Chartered
Accountants, were appointed as auditors to prepare the latest financial
position of the company and to submit the auditor's report. It transpired that
the books of accounts for certain period were not written and under the
supervision of the provisional liquidator, the ex-directors of the company were
permitted to complete the books of accounts. Thereafter the chartered
accountants prepared the latest balance-sheet upto 29th July, 1968. Company
Application No. 23 of 1968, was filed under section 391(1) on 27th June, 1968.
The mills of the company are closed from 2nd April, 1968. Therefore, when the
books of accounts till 29th July, 1968, are prepared and auditors have audited
the books, it cannot be gainsaid that the latest financial position and latest
auditor's reports have been disclosed by the petitioner. The requirement of the
proviso has certainly been complied with. But Mr. Vakil urged that the auditors
did not get clarification on a number of points set out in the report under the
heading "Notes forming part of the accounts for the period 1st April,
1968, to 29th July, 1968." It was urged that, unless these points have
been clarified, it cannot be said that the latest financial position of the
company is made available to the court. It was also contended that looking to
what the auditors have stated in the report, the latest financial position of the
company is not capable of being ascertained at the present stage. It was also
contended that the dues of certain creditors have not been properly verified
and there is difference in the trial balance prepared by the auditors to the
tune of Rs. 18,214 which the auditors have debited to the suspense account. It
is undoubtedly true that the auditors have set out various queries in the
report, but these queries did not in any manner come in the way of proper
appreciation of the latest financial position of the company as disclosed in
their reports. There may be some difference here or there but that is not
material because the court is not examining the accounts of the company or any
allegation of embezzlement or defalcation. The court at this stage is concerned
with the financial position of the company in its broad outlines. In fact, the
court would primarily be concerned with the assets and liabilities of the
company and a few minor details here or there would not be of any consequence
while considering the scheme of compromise and arrangement. These details may.
be of importance when the claim of each creditor qua the company is being
considered; but while considering the scheme of compromise and arrangement, the
court, more particularly, is concerned with the assets and liabilities of the
company and they are admittedly set out in the reports submitted by the
auditors. It may be mentioned that the petitioner has filed the affidavit of
Gopaldas P. Parikh at page 506 of the record to which is annexed the clarifications
submitted by the directors to the queries raised by the auditors. However, it
is not necessary to go into them at this stage. Suffice it to say that proper
disclosures in their broad outlines have been made so as to comply with the
proviso to section 391(2). In my judgment, therefore, the first ground of
attack is without merits and must be negatived.
Reg. Ground No. 2.—Second ground of attack was that the
proposed scheme is not a proper alternative to an order for winding up the
company in view of the fact that the company is guilty of giving a number of
fraudulent preferences in favour of the Union Bank of India, the Regional
Provident Fund Commissioner and five other creditors, namely, (1) Indian
Electro Chemicals Ltd., (2) Dyestuffs and Chemicals Private Ltd., (3) Indequip
Ltd., (4) Amarshi Damodar, and (5) Messrs. Atul Cotton Traders, which can only
be investigated and avoided in winding up proceedings. The contention is that
the proposed scheme was put forth by the directors of the company in order to
shield themselves and to prevent investigation of their misdeeds, misfeasance
and non-feasance during their management of the affairs of the company. It was
very vehemently contended that if the petition for sanctioning the scheme is
rejected, the only alternative open to the court would be to wind up the
company. If the company is wound up the official liquidator would be able to
investigate the management carried on by the directors of the company. The
official liquidator would also be able to avoid fraudulent preference alleged
to have been granted by the directors of the company in favour of their chosen
creditors as also in favour of the Union Bank of India and the Regional
Provident Fund Commissioner and that neither this investigation could be made
nor fraudulent preferences could be avoided if the scheme is sanctioned. In
other words, it was urged that sanctioning of the scheme would provide a shield
to the ex-directors of the company to cover up their misdeeds which brought the
company to a state of complete ruination. The charge is rather very serious and
if prima facie it could have been shown that the ex-directors were guilty of
giving fraudulent preferences to their chosen creditors and further if these
fraudulent preferences could not have been avoided except on the pain of
winding up the company, I would have experienced considerable hesitation in
further considering the scheme.
The company was indebted to the tune of Rs. 2,63,129.92 to
Indian Electro Chemicals Ltd., Rs. 5,79,650 to Dyestuffs and Chemicals Private
Ltd., Rs. 33,14,783 to Indequip Ltd., Rs. 3,38,267.96 to Messrs. Amarshi
Damodar and Rs. l,86,225.50 to Messrs. Atul Cotton Traders. Gopaldas P. Parikh
is vitally interested in the first mentioned three creditors and one Manubhai
Amarshi, who carries on business under the name and style of Messrs. Amarshi
Damodar and Messrs. Atul Cotton Traders is a close friend of Gopaldas P.
Parikh. Manubhai Amarshi has supplied cotton to the company, Indian Electro
Chemicals Ltd., and Dyestuffs and Chemicals Private Ltd. had supplied goods and
stores to the company; Indequip Ltd. had not only supplied goods and stores but
also extended cash loans from its sharafi accounts to the company. Gopaldas P.
Parikh holds large blocks of shares in the Indequip Ltd. and is virtually the
owner of the Indian Electro Chemicals Ltd. and Dyestuffs and Chemicals Private
Ltd. Thus there is no room for doubt that Gopaldas Parikh was vitally
interested in the aforementioned five creditors. The first petition for an
order for winding up the company was filed in the year 1967 being Company
Petition No. 27 of 1967. That was withdrawn on 24th April, 1968. By that time,
another petition filed for winding up the company was pending. During the
pendency of this petition, it appears that the aforementioned five creditors
filed suits against the company which was then being managed by Anil Parikh,
son of Gopaldas P. Parikh, Surotam Hathising and Linubhai Banker. Undoubtedly,
Gopaldas P. Parikh was the boss of the whole show. Indian Electro Chemicals
Ltd. filed Summary Suit No. 789 of 1968. Dyestuffs and Chemicals Private Ltd.
filed Summary Suit No. 790 of 1968. Indequip Ltd. filed Summary Suit No. 791 of
1968, Messrs. Amarshi Damodar filed Summary Suit No. 768 of 1968 and Messrs.
Atul Cotton Traders filed Summary Suit No. 977. 1968 against the company for
recovering their respective claims as set out above. All these suits were filed
on 15th April, 1968. On the next day, the board of directors of the company
resolved to suffer consent decrees in all these suits. The company suffered
consent decrees for the full amounts claimed by each creditor. So far no
serious objection could have been taken; but the company over and above
suffering consent decrees without investigating the exact amount payable to
each of the creditors, the directors went further and created charges in favour
of each of the creditors for its respective claims over the movable and
immovable properties of the company. The suits were filed by Mr. B. A.
Kayastha, who, it was urged, is an associate of Messrs I. M. Nanavati &
Company Associates and Mr. I. M. Nanavati has been throughout appearing for the
company. In the suits Mr. Nanavati had not appeared for the company. Not only
the suits were not contested, but even the plaints drawn up show very sketchy
averments as to how the amounts were due. Apart from that, the company suffered
decrees and created charges in favour of each of the aforementioned creditors.
These decrees were suffered as stated earlier on 17th April, 1968, when winding
up petition was pending against it and the mills of the company had already
closed down. The creation of a charge on immovable property would be a transfer
of property which, in certain circumstances, either in winding up proceedings
or insolvency proceedings, can be attacked as fraudulent preference and if so
proved, the transfer can be declared to be void. The attempt of the then
directors of the company, which included one Anil Gopaldas Parikh, son of
Gopaldas P. Parikh, who was vitally interested in the creditors, was to give
benefit or preference to the aforementioned creditors to the detriment of the
other unsecured creditors of the company. On the face of it, the creation of
the charge was fraudulent preference and having given when the petition for
winding up was pending or having been given within a period of 6 months prior
to the presentation of these petitions for winding up the company, it would
certainly be fraudulent preference. The zeal evinced by the directors in these circumstances
in suffering decrees smacks of giving an unfair advantage to the creditors in
whom they were vitally interested and detrimental to the financial interest of
the company. This conduct is unbecoming of a responsible director of a company.
As between a company and director, it is fair to presume that there is a
fiduciary relationship and if that presumption is proper, the directors in
suffering decrees conducted themselves in a manner unbecoming a custodian of
the interest of the company. Their action in giving charges would very
adversely hit the other unsecured creditors. The directors preferred between
creditors and creditors and especially preferred those in whom they were
vitally interested and could certainly be stigmatized as guilty of giving
fraudulent preferences. Mr. Gandhi who appeared for the petitioner made no
attempt to defend this action of the directors in suffering decrees. One may
not take a very serious objection to the suffering of the decrees but for the
manner in which they were suffered; but the most undesirable part is of giving
charges in favour of select and chosen creditors. If these charges could not
have been avoided except in winding up proceedings as fraudulent preferences,
no alternative would have been left but to reject the scheme and wind up the
company. However, I would presently point out that charges created in favour of
the aforementioned creditors no more subsist.
After the charges were created in favour of the
aforementioned live creditors, an application was made to the Registrar of
Companies in each case for registering the charges as required by section 125
in Part V of the Companies Act. However, Gopaldas P. Parikh filed an affidavit
at page 590 of the record in which he has stated that, even though the applications
were made to the Registrar of Companies in respect of the charges created in
favour of the aforementioned five creditors, the said charges are not
registered. The Registrar of Companies was summoned to the court to find out
whether the charges were registered by him or not. The Registrar informed the
court in the presence of the parties at the hearing of this petition that
certain corrections had to be made in the form in which the applications were
made and he had informed the directors of the company to make necessary
corrections. But before these corrections could be made by the directors, a
provisional liquidator was appointed with the result that the corrections were
not made and charges were not registered; and unless the provisional liquidator
makes the necessary corrections, the charges cannot be registered and the
provisional liquidator informed the court that he does not wish to make
corrections. If the scheme is sanctioned and the company gets going, the
directors will be precluded from making corrections. If the corrections as
suggested by the Registrar are not made, the charges cannot be registered and
if the charges are not registered, they are void as provided in section 125 of
the Companies Act.
It must further be noticed that the aforementioned five
creditors have specifically given up their charges. Gopaldas P. Parikh as
director of Indequip Ltd. has filed an affidavit at page 499 of the record. He
has annexed the resolution of the Indequip Ltd. This resolution would show that
Indequip Ltd. has accepted the scheme and has agreed to accept 50 per cent, of
its dues in the form of shares and other 50 per cent, as provided by the
scheme, which I would point out at a later stage. Indequip Ltd. has agreed not
to claim and discharge the company from the liability of paying the amount if
the scheme is to be sanctioned. The resolution further shows that the charge
created in favour of Indequip Ltd. is relinquished and will not be enforced. In
the affidavit of Gopaldas P. Parikh at page 590, he has stated that Indequip
Ltd. would not pursue the application for registering the said charge and the
application should be deemed to have been withdrawn. There is also the
affidavit of Prabhakar L. Khale, Director of Dyestuffs and Chemicals Private
Ltd., at page 495 to which is annexed the resolution at page 497, which is to
the same effect. There is also an offer on behalf of Dyestuffs and Chemicals
Private Ltd. not to claim the remainder of its 50 per cent, dues if the scheme
is sanctioned. The charge in favour of Dyestuffs and Chemicals Private Ltd. is
relinquished. Further affidavit is filed by Mr. Khale in which he has stated
that the application for registration will not be pursued and he undertook to
intimate to the Registrar that the application for registration of the charge
is cancelled. Mr. S. N. Shelat, learned advocate who appeared for Messrs. Atul
Cotton Traders and Messrs. Amarshi Damodar, filed two statements of appearance
at pages 694 and 695 signed on behalf of the aforementioned two creditors
accepting the scheme and the charges in their favour stand cancelled. It may
also be mentioned that the aforementioned two creditors by their two letters
dated 15th October, 1969, at pages 533 and 534 of the record have informed the
court that they accept the scheme, which in terms means that the charge in
their favour would be ineffective and of no consequence. Then remains the case
of Indian Electro Chemicals Ltd. Mr. C. C. Gandhi, learned advocate appearing
for the Indian Electro Chemicals Ltd., at the earlier stage of hearing stated
that he would oppose the scheme on behalf of his clients. Subsequently, during
the course of hearing a statement signed by Mr. C. C. Gandhi, advocate for the
Indian Electro Chemicals Ltd., has been filed at page 702 of the record to
which is annexed a letter from the clients of Mr. Gandhi whereby they informed
the court that they do not oppose the scheme. Now, the scheme provides that 50
per cent, of the dues of the unsecured creditors of the Indian Electro
Chemicals Ltd. will be converted into share capital by issue of shares and 50
percent, will be paid in a certain manner after some period. Indian Electro
Chemicals Ltd. does not oppose the scheme, meaning thereby that it is prepared
to accept its dues in the manner provided in the scheme for payment to the
unsecured creditors. The scheme does not provide for payment to Indian Electro
Chemicals Ltd. as secured creditors. The scheme in fact treats Indian Electro
Chemicals Limited as a secured creditor. If Indian Electro Chemicals Limited
does not oppose the scheme it would only mean that it would accept the position
that it is not a secured creditor and that payment would be made to it in
accordance with the provisions for the payment to other unsecured creditors. It
would thus appear that all the five charges created by the decrees, which could
have been avoided as fraudulent preferences in the event of the winding of the
company, have been withdrawn, relinquished or cancelled and, at any rate, are
void for want of registration and of no consequence in law. The result which
Mr. Vakil seeks to achieve in winding up proceedings is achieved while
sanctioning the scheme.
Turning next to the mortgage in favour of the Union Bank
and Regional Provident Fund Commissioner, it may be mentioned that Mr. Vakil,
after perusing the documents produced by the bank with the affidavit of
Mansukhlal Hiralal Trivedi at page 601, did not suggest that the mortgage in
favour of the bank for Rs. 13,00,000 dated January 19, 1968, would be a fraudulent
preference. Suffice it to say that the bank had advanced cash loan of Rs. 13
lakhs on the security of the State Government to the company and the mortgage
security was given towards this cash loan of Rs. 13 lakhs. By no stretch of
imagination such a mortgage could be styled as a fraudulent preference.
It was next contended that the deed of mortgage executed by
the company in favour of the Central Board of Trustees for the Provident Fund
on May 21, 1968, would be a fraudulent preference given to the said trustees.
It appears that Rs. 15,05,418.37 were due and payable by the company in respect
of the provident fund contribution and Rs. 47,693.80 for administration charges
to the Regional Provident Fund Commissioner. It appears that the company had
committed default in payment of this amount and the properties of the company
were attached. Subsequently, on May 21, 1968, the company executed a mortgage
deed in favour of the Central Board of Trustees. It was urged that a petition
for winding up the company was pending when this mortgage deed was executed by
the company and that, in the absence of the mortgage, the Central Board of
Trustees for the Provident Fund would be unsecured creditors and they are given
fraudulent preference by executing the mortgage deed in their favour and that
would be a fraudulent preference. It is undoubtedly true that the mortgage deed
in favour of the Central Board of Trustees was executed on May 21, 1968, when
the petition for winding up the company was pending in the court. It is, at any
rate, executed within six months prior to the institution of the petition which
is now pending and in which prayer for winding up the company is made. If that
petition succeeds, investigation will have to be made whether the mortgage in
favour of the Central Board of Trustees would amount to a fraudulent preference
within the meaning of section 531 of the Companies Act. Mr. R. M. Gandhi,
learned advocate who appeared for the Regional Provident Fund Commissioner,
urged that the properties of the company were already attached by the revenue
authorities at the instance of the Central Board of Trustees right from the
year 1961-62 and the Central Board of Trustees gave further time to pay up the
amount on the company executing the mortgage deed in favour of the Central
Board of Trustees. Accordingly, the company executed the mortgage deed. Mr.
Gandhi, however, urged that, even apart from this, the circumstances in which
the mortgage deed came to be executed would themselves indicate that it could
not be avoided as a fraudulent preference. Mr. R. M. Gandhi referred to the
arguments of Mr. D. C. Gandhi in which he has stated that the directors of the
company were threatened with prosecution and under the threat of prosecution
they executed the mortgage deed. Mr. R. M. Gandhi, however, urged that,
assuming that this submission is factually correct, yet, execution of the
mortgage in favour of the Central Board of Trustees would not be. a fraudulent
preference. Mr. Gandhi urged that, in order to avoid a transfer of property by
a debtor in favour of the creditor on the ground of its being a fraudulent
preference, it must be shown that the debtor with intent to prefer the creditor
has transferred the property, and it must be a free and volitional act of the
party. It refers to the state of mind of the debtor and it must be shown that
the debtor intended to prefer the creditor or acted in a manner solely with a
view to prefer the creditor to the exclusion of others. If, therefore, it could
be shown that the debtor acted under an apprehension that he would be
prosecuted or under a threat of prosecu tion, the transfer of property by him
could not be said to be a free volitional act of the debtor disclosing an
intention to prefer the creditor but it would appear that he has acted under
the compulsion of the circumstances, may be of his own creation. Reference in
this connection may be made to Sharp (Official Receiver) v.
Recalling now the submission of Mr. Vakil that the company
has been guilty of giving a number of fraudulent preferences they could not be
investigated except in a winding up proceedings and, therefore, the scheme is
not a proper alternative to winding up, does not carry conviction. The charges
created by the decrees in favour of the five aforementioned creditors, which
certainly call for investigation, have been set aside without having taken
recourse to the proceeding in winding up and two mortgages one in favour of the
Union Bank of India and the other in favour of the Central Board of Trustees of
Provident Fund have prima facie no tinge of fraudulent preference. Therefore,
it is not possible to accept the submission of Mr. Vakil that the fraudulent
preferences given by the company would go unchallenged and uninvestigated, if
the scheme is sanctioned.
Mr. Vakil further urged that apart from this fraudulent
preference given by the directors there are several acts of mismanagement
pointed out by the auditors in their report which cannot be investigated and
brought to light except in winding up proceedings. The accounts of the company
were not written from December, 1967, and they were completed during the course
of the proceedings in the court. They have been audited by Messrs. Mahendra
Patel & Company, Chartered Accountants, and their detailed report is placed
on record. It is true that the auditors have stated that in view of the state
of accounts they are not in a position to express opinion whether the accounts
give a fair view in respect of the balance-sheet as on 31st March, 1968, and
29th July, 1968, and profit and loss accounts. They have also stated that they
were not able to obtain all the information and the explanation which was
necessary. They have also stated that the books of accounts have not been kept
as required by law. They have also set out certain queries in their report.
Those queries will have to be complied with by the Board of Directors that may
come into existence if the scheme is sanctioned. But Mr. Vakil could not point
out to me any specific case of either embezzlement or of fraud. A very general
statement was made that there are several acts of mismanagement which must be
investigated in winding up proceedings. Such an allegation is rather vague and devoid
of details. On such a vague allegation, the scheme cannot be rejected. But it
was urged that even the debt which the company owes to the aforementioned five
creditors requires to be verified and checked up; and that also cannot be done,
unless the official liquidator in winding up proceedings proceeds to verify the
claims lodged with him by the creditor. In order to ascertain and verify the
debts owed by the company to the aforementioned five creditors, one need not
resort to the extreme provision of the winding up of the company. Those debts
can be verified by an order of this court by the official liquidator as court
officer, and such a direction can be given while sanctioning the scheme. As for
the vehemence with which a grievance was made that there are several acts of
mismanagement and misfeasance committed by the directors of the company that
for the commercial morality and purity of administration of such a public
company it is best to pass an order for winding up the company and investigate
its affairs, it must be said that the last board of directors against whom Mr.
Vakil with a very facile tongue and vituperative language made serious
allegation came into the management of the affairs on 1st January, 1966, and
prior thereto Mr. Chandulal Hiralal Banker, the constituted attorney of Mr.
Vakil's client, was in active management of the company and even during that
period the losses had mounted up to a considerable extent and a land deal in
favour of one Bansidhar Private Limited prima facie appeared to be shady. The
attitude adopted on behalf of Mr. Chandulal Banker totally fails to carry
conviction in the matter and investigation, if need be made, should be made for
a period much prior to 1st January, 1966, when Chandulal and Manubhai were in
active management of the company. But these are hardly considerations on which
it can be said that the scheme approved by a statutory majority is not a proper
alternative to winding up. It is not possible, therefore, to accept the
submission of Mr. Vakil that this scheme is a cloak put forth to cover the
misdeeds of the directors because the cloak, if any, extends to the period when
Chandulal and Manubhai were in active management of the company. It is true
that if the court comes to the conclusion that the scheme is a cloak to cover
the misdeeds of the company or is put forth with a view to shield the directors
against the investigation into their mismanagement of the affairs of the
company, the scheme cannot be accepted, only on the ground that it has been approved
by the creditors and members. Reference in this connection may be made to In re
Calcutta Industrial Bank Ltd.,
wherein it is observed that the creditors, left to themselves, do not
appreciate the importance of many things unless it is brought to their notice.
The object of having the affairs of the company investigated by an independent
auditor was to bring all material facts relating to the management as well as the
present financial position of the company to the notice of the creditors so as
to enable them to make up their minds whether they should at all enter into any
arrangement with such a company. Reference was also made to Pioneer Dyeing
House Ltd. v. Dr. Shankar Vishnu Marathe.One
of the grounds for opposing the scheme in that case was that the object of the
scheme was to cover the deeds of the delinquent directors. It was observed that
if the scheme is sanctioned, the winding up order will stand set aside, the
liquidators will be discharged, there will be none to prosecute the misfeasance
summons against the erring directors and the assets of the company will once again
fall into the hands of persons whose rectitude is under a cloud; and that
cannot be permitted under the cloak of a scheme of reconstruction. It would
undoubtedly be so if the scheme is put forth as a cloak to cover the misdeeds
of the directors. (But it will be a question of fact in each case as to whether
it is so). In the aforementioned case the first scheme proposed was rejected
and after a lapse of a period of ten years after the order for winding up was
made another scheme was proposed which when examined disclosed a number of
defects. In the facts and circumstances of this case, it does not appear that
the scheme is put forth with a view to shield the directors of the company.
When it comes to choosing between a scheme for reconstruction and an order for
winding up after keeping all the circumstances of the case as also the question
of commercial morality in view and if the scheme appears to be feasible and
workable, it should be preferred to compulsory liquidation. The second
contention of Mr. Vakil, therefore, cannot be accepted.
Re. Ground No. 3.—The third ground of attack was that the
scheme proposes scrapping of Unit No. II and part of Unit No. I of the mill of
the company and in the absence of a permission for scrapping a textile mills,
it would be illegal to sanction the scheme. The scheme envisages scrapping of
Unit No. II of the mills of the company. The mills of the company are divided
into two units described as Unit No. I and Unit No. II. There are 501 looms and
13,488 spindles in Unit No. I and there are 308 looms and 23,160 spindles in
Unit No. II. The scheme proposes that Unit No. I with 400 looms and 15,000
spindles should be restored and Unit No. II comprising the rest of looms &
spindles and machinery should be scrapped. Scrapping of Unit No. II is an
integral and inseverable part of the scheme because by scrapping the company
hopes to realise Rs. 14 lakhs which would go towards the discharge of debts of
the bank and the central board of trustees of the provident fund. Mr. Vakil
urged that a textile mill cannot be scrapped without the permission of the
Central Government. No provision or statute was pointed out to the court which
would show that textile mills cannot be scrapped without the permission of the
Central Government. But it was common ground that such a permission is
essential before a textile mill can be scrapped. Mr. D. C. Gandhi for the
petitioner urged that the company has obtained such a permission while Mr.
Vakil strongly urged that there is no such permission. The company applied for
such a permission and the letter of the Government of India, Ministry of
Commerce, dated l/4th October, 1966, at page 175 of the record shows that such
a permission was granted. It is stated in the letter that the Government of
It is, therefore, not possible to accept the submission of
Mr. Vakil that there is no valid permission for scrapping Unit No. II and
scrapping of Unit No. II being an integral part of the scheme, the scheme
cannot be sanctioned.
Re. Ground No. 4.—The next ground of attack of Mr. Vakil is
that the proposed scheme envisages reorganization of the share capital of the
company including reduction and increase of share capital, which cannot be done
without going through the whole gamut of the procedure prescribed for the same
and, as it is an inseverable part of the scheme, it would be futile to sanction
the remainder of the scheme in its mutilated form. It is undoubtedly true that
the scheme envisages reorganization of the share capital of the company. The
share capital of the company is at present divided into 788 ordinary shares of
each of Rs. 1,000 and 1,050 preference shares each of Rs. 100 fully paid. The
scheme envisages reduction of share capital by REDUCING the face value of the
ordinary shares of Rs. 1,000 to Rs. 250 and preference shares of Rs. 100 to Rs.
25. The scheme also envisages fresh issue of share capital by converting 50 per
cent, of the claim of the creditors by issue of fresh shares. As a necessary
corollary the authorised, issued and subscribed share capital of the company
would be increased. Thus the scheme envisages reorganization of the share
capital of the company. There are certain specific provisions in the Companies
Act which prescribe the procedure for the reduction of the share capital and
for increase of the share capital. The issue of fresh share capital is governed
by the Capital Issues (Control) Act, 1947. The contention of Mr. Vakil is that,
as part of the scheme it is not open to the court to sanction reorganization of
the share capital which includes reduction, increase and issue of fresh
capital. It was urged that if the scheme of compromise and arrangement
envisages reorganization of share capital, it cannot be sanctioned as part of
the scheme and the provision of the Companies Act which prescribe the procedure
for reduction of share capital and increase of share capital and issue of fresh
capital must be specifically and strictly complied with. On the other hand, it
was urged by Mr. Gandhi that section 391 provides a complete code for the
reconstruction of the company which may include reorganization of its capital
as part of the scheme of compromise and arrangement. In other words, it was
urged that if the scheme of compromise and arrangement includes in its ambit
reorganization of the share capital then it can be carried out as part of the
scheme of compromise and arrangement and it is not at all necessary to go
through the whole gamut of the procedure prescribed for the reduction of share
capital and for issue of fresh capital. There seems to be considerable force in
the contention of Mr. Gandhi that section 391 is a complete code. It provides
for a scheme of reconstruction and amalgamation of companies. The scheme of
reconstruction of a company may also include a compromise and arrangement
between the company and its creditors or any class of them or between the
company and its members or any class of them. Section 390(b) provides that the
expression "arrangement" as used in sections 391 and 393 includes a
reorganization of the share capital of the company by the consolidation of
shares of different classes or by the division of shares into shares of
different classes or by both those methods. It is an inclusive definition. It
was attempted to be urged that the arrangement herein defined does not include
increase of share capital, so also it does not include reduction of share
capital even though a specific provision is made as to what procedure would be
gone through when the scheme of compromise and arrangement provides for
reduction of share capital. Rule 85 of the Companies (Court) Rules, 1959,
provides that where a proposed compromise or arrangement involves a reduction
of capital of the company, the procedure prescribed by the Act and the Rules
relating to the reduction of capital and the requirements of the Act and these
Rules in relation thereto shall be complied with, before the compromise or
arrangement, so far as it relates to reduction of capital, is sanctioned. If
section 391 were not to be treated as complete code and if it is intended that
various things that can be done by way of a scheme of compromise and
arrangement, if they were to fall under different provisions of the Companies
Act which prescribe certain procedure for doing the same and that procedure has
to be gone through, it was not necessary to provide specifically that if the
scheme of compromise and arrangement includes reduction of capital special
procedure in respect of reduction of capital must be gone through before it
could be sanctioned as part of the scheme of compromise and arrangement. There
seems to be good reason for making such a provision in rule 85. A scheme of
compromise and arrangement may be between company and creditors or between the
company and members. If the proposed scheme offers compromise or arrangement
between the company and its members only and it envisages reducti6n of share
capital which can be carried out as part of the scheme under section 391
without going through the procedure prescribed under section 100 onwards, it
may be that reduction of share capital in a given case may adversely affect the
creditors and the creditors would have no chance to object to the same. It is
manifestly clear that reduction of share capital in certain circumstances may
adversely affect the creditors but if reduction of share capital is brought
about as part of the scheme of compromise and arrangement between the company
and its members yet as this prescribed procedure for affecting reduction of
share capital has to be gone through even though it forms part of a scheme of
compromise and arrangement, the creditors will have a chance to object to the
same if it adversely affects them. Such would not be the case where the capital
is increased or the rights of various classes of shareholders are altered or
changed. The reorganization of capital as envisaged in section 390 would
certainly include increase and reduction of share capital, but reduction of
share capital can be brought about by arrangement between the company and
members yet it will have direct impact on the creditors and therefore a
specific provision is made in rule 85 that even if reduction of share capital
is to be effected as part of the scheme of compromise and arrangement, the
procedure prescribed for reduction of share capital in the Companies Act and
the Rules must be gone through before the scheme is sanctioned. This specific
provision would indicate that other things such as increase of share capital
simpliciter when sought to be carried must be done according to procedure
prescribed for the same. It can also be done as part of a scheme of compromise
and arrangement and the result can be achieved by following the procedure
prescribed in section 391. Section 391 provides a complete code of putting
through a scheme of compromise and arrangement which may even include
reorganisation of share capital subject to the well recognized exception that
if reorganization of share capital included reduction of share capital, the
prescribed procedure for effecting the same must be gone through in view of
rule 85 before the scheme could be sanctioned. If rule 85 were not enacted, obviously,
reduction of share capital could have been effected as part of the scheme of
compromise and arrangement without going through the procedure prescribed in
section 100 onwards. The very fact that a specific rule had to be enacted for
this purpose indicates that section 391 is a complete code providing for all
those things which can be included in a scheme of compromise and arrangement
and all those things can be brought about by the procedure prescribed in
section 391 onwards. The nature of compromise that can be entered into under
section 391 is not defined. The definition of reorganization of capital is an
inclusive definition which would not exclude reduction of share capital or
increase of share capital which would also be a kind of reorganization of the
share capital of a company. If section 391 was subject to other provisions of
the Act every time the scheme of compromise and arrangement is put forth for
the sanction of the court, if it includes things for which specific provisions
are made and that will have to be gone through before the scheme is sanctioned,
it would result in unnecessary duplication of procedure and would be
cumbersome. On the contrary, it appears that if the creditors and members of
the company arrive at a certain compromise which the court considers fair, it
can be sanctioned under section 391 despite the fact that for some of those
things included in the compromise another procedure is prescribed in the
Companies Act and which has not been carried out. It, therefore, appears that
section 391 is a complete code which provides for sanctioning of the scheme of
compromise and arrangement. If such a scheme of compromise and arrangement
includes increase of share capital, it can be done as a part of the
reorganization of the share capital, which would be part of the arrangement
that would be brought about between the company and its members. In case of
reduction of share capital, in view of rule 85, the procedure prescribed under
section 100 and onwards will have to be gone through. Looking at the matter
from a slightly different angle, it appears that section 391 is a special
provision for sanction of a scheme of reconstruction of companies, of
amalgamation of companies and for a scheme of compromise and arrangement. The
scheme of compromise and arrangement, or for that matter even the scheme of
amalgamation of two companies, may envisage reorganisation of share capital of
one or the other company. The Companies Act no doubt makes provision for
reduction of share capital simpliciter, increase of share capital simpliciter,
or fresh issue of capital simpliciter without its being part of any scheme of
compromise and arrangement. The scheme of compromise and arrangement can be
brought about only between the company which is liable to be wound up under the
Companies Act and its members or creditors. The special provision contained in
section 391. namely, sanction of the scheme of compromise and arrangement would
in my opinion exclude general provisions for reduction of share capital or for
issue of fresh capital. It is well settled that a special provision should be
given effect to the extent of its scope, leaving the general provision to
control cases where the special provision does not apply: vide South India
Corporation (P.) Ltd. v. Secretary Board of Revenue
and C. Rajagopalachari v. Corporation of Madras,
Therefore, it appears that the provisions contained in section 391 is a
complete code. As a necessary corollary, if the scheme of compromise and
arrangement includes reorganization of share capital except reduction of share
capital, it can be sanctioned as a part of the scheme of compromise and
arrangement. In the case of reduction of share capital as part of the scheme of
compromise and arrangement, rule 85 will have to be given full effect. The
scheme has been approved by a statutory majority as will be presently pointed
out and if the scheme is to be sanctioned as part of such a scheme,
reorganization of the share capital except the reduction of share capita] can
be sanctioned. It will, of course, be necessary to find out whether the
procedure prescribed for effecting reduction of share capital has been gone
through or not.
The reorganization of the share capital sought to be
effected by the scheme involves reduction of share capital, issue of fresh
share capital and increase of share capital. It will be proper to dispose of
first the question with regard to increase and issue of fresh capital. The
memorandum of association of the company shows that the issued and subscribed
capital of the company consisted of 788 ordinary shares each of Rs. 1,000 and
1,050 redeemable cumulative preference shares of Rs. 100 each. Thus the total
issued and subscribed capital was Rs. 8,93,000. The preference shares were
redeemable cumulative preference shares. Article 10 of the company's articles
of association provides that the company may by ordinary resolution in general
meeting alter the conditions of its memorandum by increase of its share
capital, by such amount as it thinks expedient by issuing new shares as may be
necessary. The company can also divide and consolidate its shares. Thus the
company has reserved powers to itself to increase the share capital by ordinary
resolution in a general meeting. Now, when share capital is increased and fresh
shares are issued, such issue would be governed by section 81. Section 81
provides that such fresh issues should be offered to persons who, at the date
of the offer, are holders of the equity shares of the company, in proportion,
as nearly as circumstances admit, to the capital paid up on those shares at
that date. The procedure for making the offer is also set out in section 81(1).
It was urged that even if it be assumed that the company has power to increase
the share capital, fresh share capital can be issued only to the existing
shareholders in proportion to the capital paid up on those shares on that date.
The scheme envisages increase of share capital by converting 50 per cent, of
the claim of the unsecured creditors into paid up share capital at the reduced
value of shares. It is no doubt a fresh issue of capital to persons other than
existing shareholders and it would also result in increase of capital; the
company having power to increase its capital can further issue capital but it
is urged that it can be done in the manner provided in section 81(1) and, if
the scheme is sanctioned, it would result in contravention of section 81(1).
Sub-section (i A) of section 81 provides as under:
"81. (1A) Notwithstanding anything contained in
sub-section (1), the further shares aforesaid may be offered to any persons
(whether or not those persons include the persons referred to in clause (a) of
sub-section (1)) in any manner, whatsoever—
(a) if a special resolution to that effect is
passed by the company in general meeting, or
(b) where no such
special resolution is passed, if the votes cast (whether on a show of hands, or
on a poll, as the case may be) in favour of the proposal contained in the
resolution moved in that general meeting (including the casting vote, if any,
of the chairman) by members who, being entitled so to do, vote in person, or
where proxies arc allowed, by proxy, exceed the votes, if any, cast against the
proposal by members so entitled and voting and the Central Government is
satisfied, on an application made by the board of directors in this behalf,
that the proposal is most beneficial to the company."
There is a similar provision in article 15 of the articles
of association of the company. It would appear that sub-section (1A) permits
issue of further shares to persons other than the existing ordinary
shareholders of the company. It cannot, therefore, be said that issue of
further shares to the persons other than the existing shareholders of the
company is wholly barred. It would only require special resolution to that
effect passed by the company in the general meeting. If, therefore, a special
resolution for issue of further shares after increasing the capital to persons
other than the existing shareholders of the company is passed in a general
meeting of the company, section 81 would not be contravened. In the present
case, the scheme provides for issue of further shares and these further shares
are to be issued to the persons other than the existing shareholders of the
company. The further shares are to be issued to the creditors of the company in
satisfaction of the 50 per cent, of their claims. Mr. Vakil urged that before
sub-section (1A) of section 81 can come into play, it must be shown that the
special resolution has been passed in the general meeting of the company. Mr.
Vakil urged that the meeting of the company to be a general meeting must be of
all the members of the company entitled to attend and vote and the resolution
to be a special resolution must satisfy all the requirements of section 189 of
the Companies Act. It was urged that if the members of the company did not meet
together at one place to consider the resolution but divided themselves and met
in two separate meetings, it cannot be said that the proposal for further issue
of shares was considered in the general meeting of the company. There are two classes
of members of the company. They are: (1) holders of ordinary shares; and (2)
holders of redeemable cumulative preference shares. Article 5(b) of the
articles of association of the company provides that the cumulative preference
shares shall not entitle the holders thereof to be present at or to vote either
in person or by proxy at any general meeting of the company unless a resolution
is to be passed affecting their rights or privileges. Further issue of ordinary
shares would not affect the rights or privileges of the holders of the
preference shares. Therefore, if article 5(b) were to apply, the holders of the
cumulative preference shares had no right to attend and vote at any general
meeting. The general meeting of the company would be a meeting of ordinary
shareholders of the company. Indisputably, such a meeting has been held and
therein the scheme has been voted upon which includes issue of further shares.
But it was urged that as the interest for more than two years payable on
redeemable cumulative preference shares is in arrears, section 87(2)(b)(i) and
article 119(b)(i) of the articles of association of the company would come into
play and they would have a right to attend and vote at every general meeting.
That of course is true. The question then is if the holders of the preference
shares met in a meeting separate from the meeting of the ordinary shareholders
and in each meeting the proposal for further issue of shares was considered and
voted upon by a majority of 75 per cent, of members present and voting, could
it be said that special resolution has been adopted? It was very vehemently
urged that the concept of a general meeting connotes consensus or meeting of
minds and joint deliberation and that would be lacking in group or class meetings.
It was urged that to interpret the concept of general meeting otherwise would
permit the company to consult each individual shareholder to consider the
proposal denying the benefit of joint deliberations and even if all
shareholders agree to the proposal it cannot be said that there was a meeting
of the minds which is of the essence of a general meeting. It was, therefore,
urged that the meeting of a class of members and general meeting of all members
are two distinct things. In my opinion, what is of the essence of the matter is
that the persons affected must have an opportunity to consider the proposal and
deliberate together. If the deliberations are carried on by two distinct
classes having distinct interests separately it cannot be said that the proposal
has not been considered in a general meeting. A too narrow and strict view may
necessitate first convening the meeting of two classes together and then for
the purpose of the scheme separate meetings of each class. It, in my opinion,
would be an idle formality. It would be more so on the facts of this case
because preference shareholders were not ordinarily entitled to attend and vote
at the meeting but for the eventuality that the interest payable on preference
shares is in arrears. Therefore, in my opinion, it cannot be said that the
resolution adopted was not adopted at a general meeting. Even if it be said
that joint deliberation of all those who are entitled to participate in the
meeting is of the essence of a general meeting, it cannot be said that two
classes of persons one of whom in ordinary circumstances was not entitled to
attend the meeting deliberated in a different meeting and both adopted the same
resolution, there was no joint deliberation. In fact when one class of members
are likely to overwhelm the other class, to safeguard the interest of the other
class, deliberations are held in separate meetings, but a common resolution is
adopted by both the meetings and in each meeting it was passed with statutory
majority. It can never be said that the resolution was not adopted at a general
meeting. Reference was made to Sharp v. Dawes.
In that case a meeting was called by the secretary and only one shareholder
attended, where a resolution was adopted making a call on the share and
pursuant to this resolution a call was made which was challenged. It was held
that one shareholder cannot constitute a meeting. I fail to see how this
observation is of any use in the present case.
The question then is whether the requirements of a special
resolution are satisfied. Section 189 of the Companies Act provides as to which
resolution could be said to be a special resolution and in what manner it
should be passed. Sub-section (2) thereof provides that the special resolution
could be said to have been passed when the votes cast in favour of the
resolution are three times the number of votes, if any, cast against the
resolution— meaning thereby that it must be passed by 75 per cent, majority of
the members present and voting. The notice convening the meeting at which the
resolution is passed should be given 21 clear days before the date of the
meeting as required by section 171. In the notice convening the meeting,
intention to move the resolution as a special resolution should be specifically
set out and explanatory note should be annexed thereto. In order to be a
special resolution, the aforementioned conditions have to be complied with. The
notice convening the meeting was issued on 3rd September, 1968, and the meeting
was to be held on 5th and 6th October, 1968. The proposed scheme of compromise
and arrangement in respect of the company was annexed to the notice and it was
specifically set out in the scheme that the face value of the ordinary shares
will be reduced from Rs. 1,000 to Rs. 250 and of the preference shares from Rs.
100 to Rs. 25 and thereafter 50 per cent, of the claim of the unsecured
creditors will be coveted into share capital by issue of further shares to unsecured
creditors. In the notice convening the meeting it was stated that the meeting
is specifically convened to consider the proposed scheme and to approve the
same with or without modification. The production programme after the mill is
restarted along with the production estimate and cash flow statements were also
annexed to the notice convening the meeting. Thus the notice convening the
meeting gave information to the members that the meeting is being convened for
considering the proposed scheme which included both reduction and increase of
share capital. The votes cast in favour of the resolution approving the scheme
were more than three times the votes cast against it. Therefore, sub-clauses
(b) and (c) of sub-section (2) of section 189 are strictly complied with. It
was, however, urged that clause (a) is not properly complied with inasmuch as
in the notice convening the meeting, intention to move the resolution as a
special resolution was not set out. Taking a very strict view of sub-section
(2)(a) of section 189, it might appear that the requirement therein contained
is not properly complied with. The question then is whether clause (a) is
mandatory in terms or it is merely directory. If it is mandatory, different
considerations might arise. If it is held to be directory, the doctrine of
substantial compliance would come into play. It is not inconceivable that part
of the section may be directory and part of the section may be mandatory. It
cannot be gainsaid that clauses (b) and (c) of sub-section (2) are certainly
mandatory. The notice of certain duration must be given and resolution must be
adopted by a statutory majority. This requirement could, by no stretch of
imagination, be said to be directory; otherwise sub-section (2) may lose all
its significance. Even giving of notice may be said to be mandatory. But the
question is whether failure to set out in the notice convening the meeting to
move a particular resolution as a special resolution could be said to be
mandatory. There is no general rule for determining whether particular
provision in a statute is a mandatory or directory. The court must look at the
purpose for which the provision is made, its nature and intention of the
legislature in making the provision, to find out whether it is directory or
mandatory. The use of the word 'shall' is not decisive of the matter. In Raja
Buland Sugar Co. Ltd. v. Municipal Board,
"The question whether a particular provision of a
statute which on the face of it appears mandatory—inasmuch as it uses the word
'shall' as in the present case—or is merely directory cannot be resolved by
laying down any general rule and depends upon the facts of each case and for
that purpose the object of the statute in making the provision is the
determining factor. The purpose for which the provision has been made and its
nature, the intention of the legislature in making the provision, the serious
general inconvenience or injustice to persons resulting from whether the
provision is read one way or the other, the relation of the particular
provision to other provisions dealing with the same subject and other
considerations which may arise on the facts of a particular case including the
language of the provision, have all to be taken into account in arriving at the
conclusion whether a particular provision is mandatory or directory."
In that case section 131(3) of the U. P. Municipalities Act
came up for consideration. Section 131(3) is divided into two parts. The first
part lays down that the Board shall publish proposals and draft rules along
with a notice inviting objections to the proposals or the draft rules so
published within a fortnight from the publication of the notice. The second
part provides for the manner of publication and that manner is according to
section 94(3). The condition of prior publication is always held to be
mandatory. Yet, while considering the question of non-compliance with the
manner of publication as provided in section 94(3), the Supreme Court observed
that the requirement of publication is mandatory but the manner of publication
appears to be directory and, so long it is substantially complied with, that
would be enough for the purpose of providing the taxpayers a reasonable
opportunity of making their objections. It would thus appear that part of
section 131(3) was held to be mandatory while part of it was held to be
directory. Approaching the subject from this angle, it would appear that clause
(a) of sub-section (2) appears to be directory and not mandatory. The purpose
behind making this provision appears to be to convey definite information about
matters to be considered at the ensuing meeting. The explanatory note to be
annexed will enable members to understand and appreciate the object behind the
proposed resolution. The intention being a state of mind in this case the state
of mind of a corporate body is required to be set out for the benefit of the
members of the corporate body. The question then is whether the requirement of
setting out this intention in the notice could be said to be such mandatory
requirement, the failure to comply with it would invalidate the resolution. The
purpose behind enacting this provision and its nature and the intention of the
legislature and the general inconvenience that the failure to observe it is
likely to cause to members all go to show that the requirement to set out the
intention to move a resolution as special resolution could not be mandatory.
The resolution ought to be adopted as special resolution and that requirement
is mandatory. But the setting out of the requisite intention in the notice
convening the meeting could not be mandatory but only directory. The absence of
requisite intention in the notice was not likely to cause serious inconvenience
to the members. Considering the provision in juxtaposition with clauses (b) and
(c), it appears that the provision contained in clause (a) is directory and it
is sufficient if it is substantially complied with.
The notice convening the meeting to which the proposed
scheme was annexed and various statements including the statement under section
393 (1)(a) annexed to it would give sufficient information to the members that
they have to consider both increase and reduction in share capital. That, in my
opinion, would be substantial compliance with the provisions contained in
sub-section (2)(a) and provisions contained in sub-sections (2)(b) and (2)(c)
are strictly complied with. Therefore, the resolution adopted will have all the
trimmings of a special resolution and it can be said with reasonable certainty
that a special resolution at a general meeting as envisaged by clause (1A) of
section 81 has been adopted. If such a resolution is adopted further issue of
shares to persons other than the members of the company would be legal and
valid even though it's done in contravention of the provisions contained in
section 81(1).
Incidentally it was contended that even if the special
resolution was adopted at a general meeting as provided by section 81(1A), yet
notice of that meeting was not given to the auditors as required by section
172(2)(iii) and the explanatory note as provided under section 173(2) was not
annexed to the notice and, therefore, the resolution could not be said to have
been adopted as a special resolution. Sub-section (3) of section 172 provides
that the accidental omission to give notice to, or the non-receipt of notice
by, any member or other person to whom it should be given shall not invalidate
the proceedings at the meeting. Non-issue of the notice to the auditors, in my
opinion, would be covered by sub-section (3) of section 172. As for the
explanatory note as envisaged by section 173(2) it must be stated that the
whole scheme annexed to the notice and production and cash flow statement and
statement under section 393(1) would provide sufficient material as to be an
adequate substitute for explanatory statement as envisaged by section 173(2)
and, therefore, also, the proceedings of the meeting would not be invalid or
proceedings would not be vitiated.
The above discussion would establish that the resolution
for increasing the share capital of the company has been adopted in a general
meeting of the members of the company and the resolution satisfies all the
requisites of a special resolution. It would appear that the requirements of
section 81(1A) of the Companies Act are fully satisfied and it would be lawful
for the company to issue further ordinary shares as part of the scheme to both
holders of ordinary shares and persons other than present holders of ordinary
shares of the company but all of whom should be unsecured creditors of the
company and further shares should be issued only in satisfaction of 50 per
cent, of the claim of each unsecured creditor.
It was next contended that the issued and subscribed
capital of the company would be raised by roughly Rs. 39 lakhs by converting 50
per cent, of the claims of the unsecured creditors into share capital and that
would be in contravention of section 3 of the Capital Issues (Control) Act,
1947. It is indeed true that fresh capital cannot be issued without the
permission of the Controller of Capital Issues as provided by section 3 of the
said Act. The scheme envisages increase of capital by roughly Rs. 39 lakhs.
Permission for issue of fresh capital is not obtained from the Controller of
Capital Issues. However, that should not come in the way of the court
considering the scheme because that part of the scheme can come into operation
after obtaining the permission of the Controller of Capital Issues. That was
the view taken by me in a similar situation in In re New Commercial Mills Co.
Ltd.
and I am informed that necessary permission by the Controller of Capital Issues
was obtained soon after the scheme was sanctioned by the court.
The second ground of attack of Mr. Vakil under the head of
reorganization of share capital is that the company would be issuing fresh
shares at a discount in contravention of section 79 and the court should not,
therefore, sanction the scheme. The contention is entirely without merits.
Section 79 provides that a company shall not issue shares at a discount except
as provided in sub-section (2) thereof. Sub-section (2) provides that a company
may issue shares at a discount if the issue is authorised by a resolution
passed by the company in general meeting and sanctioned by the court and the
resolution specifies the maximum rate of discount (not exceeding 10%, or such
higher percentage as the Central Government may permit in any special case) at
which the shares are to be issued and not less than one year has at the date of
the issue elapsed since the date on which the company was entitled to commence
business and the shares should be issued within two months after the date on
which the issue is sanctioned by the court. Mr. Vakil urged that 50 per cent,
of the claims of the unsecured creditors are to be converted into shares; in
other words, 50 per cent, of the claims of the unsecured creditors will be paid
in the form of shares. Mr. Vakil had twofold objection to the issue of shares
in this manner. The first limb of the argument was that, even according to the
company, if the company is wound up, the unsecured creditors are likely to get
nothing and their claims are merely chose-in-action which are entirely
worthless in respect of which shares of Rs. 250 fully paid up will be issued in
proportion to the claims and the shares would thus be issued at a discount. The
other limb of the argument was that the shares are issued otherwise than for
cash because they would be in payment of claims which cannot be realized.
Reliance was placed on a statement in the affidavit of the petitioner that in
the event of the winding up the unsecured creditors are not likely to get
anything looking to the assets and liabilities of the company and the claim of
the secured creditors and preferential creditors. Undoubtedly there is a
statement to that effect in the affidavit of the petitioner. Does it
necessarily imply that if the shares are issued against the claim of the
unsecured creditors, the issue is either at a discount or for no consideration?
It will be presently pointed out that in order to write off the loss of capital
the share capital is being reduced by reducing the face value of ordinary
shares of Rs. 1,000 fully paid up to Rs. 250 fully paid up and cumulative
redeemable preference shares of Rs. 100 fully paid up to Rs. 25 fully paid up.
After the reduction of the face value, the shares will be allotted and issued
to the unsecured creditors in satisfaction of 50 per cent, of their claims. For
every ordinary share of Rs. 250 issued, the claim of the unsecured creditors
exactly to that extent will be wiped out. Unless an idle formality of the
company paying Rs. 250 cash towards discharge of the liability of the unsecured
creditor and then every unsecured creditor buying the shares of the company is
to be insisted upon, it can never be said that the issue is either at a
discount or for no consideration or for consideration otherwise than cash. In
fact for every ordinary share of Rs. 250 issued, the liability of the company
to the unsecured creditor would be proportionately decreased and wiped out. In
other words, the company will get Rs. 250 for a share of Rs. 250. But it was
urged that even a share of Rs. 250 of this company would not fetch anything in
the market and when it is issued for a consideration of Rs. 250 to unsecured
creditors the issue is based on misrepresentation. There again, I see no
substance. A majority of unsecured creditors of the company, except very few
represented by Mr. Vakil, have approved the scheme and thereby agreed to accept
the ordinary share of this company of Rs. 250 as against his claim of Rs. 250.
There is no misrepresentation involved in such a transaction. The statement of
the petitioner that in the event of the company being wound up the unsecured
creditor is not likely to realise anything cannot be the foundation for a
submission that as the claim is merely a chose-in-action and entirely worthless
it cannot provide consideration for issuance of the shares of the company nor
could it be the foundation for a submission that the shares are issued for a
consideration otherwise than cash or for no consideration. In this connection,
it was lastly urged that, even though new ordinary shares issued at Rs. 250
would be fully paid up share, yet, in the event of the company being wound up,
the liquidator would certainly inquire if anything was paid by the holder
towards the share of Rs. 250 and in that event if his finding that the claim
that was set off against the issue of shares was entirely worthless or of no
value it would be open to the liquidator to treat such shareholder as
contributory and to insist upon his contributing Rs. 250 into the assets of the
company. Reliance in this connection was placed on In re Anglo-Moravian
Hungarian Junction Railway Company
In that case one Dent, a subscriber to the memorandum of association of a
limited company, subscribed for 100 shares. The articles of association recited
that Even, who assigned the concession to the company, had agreed to cause
fully paid up shares to be allotted to all the persons subscribing the
memorandum. Subsequently Ł 4,000 fully paid up shares were issued to Even for
work done by him for the company and Even requested the company to allot 100 shares
out of the same to Dent. Subsequently the company was ordered to be wound up
and the official liquidator placed Dent on the list of contributories for 100
shares and made calls upon him to pay the amount. The contention of Dent was
that the shares allotted to him were fully paid up shares and, therefore, he
was not liable to pay anything as contributory. His further contention was that
even though he had subscribed for 100 shares, as the shares were allotted to
him at the instance of Even and that the shares were fully paid up shares, he
was not liable to pay as a contributory. Negativing this contention it was held
as under:
"........ where a man, by subscribing to the
memorandum of association
contracts a liability to pay to the company the full amount
of his shares, and by another contract agrees to receive a certain number of
paid-up shares, so that he is to have two sets of shares, one on which he is to
be liable, and one on which he is not to be liable, he cannot extinguish his
liability on the shares for which he has subscribed by setting off against it
that which, although it might be valuable to him, would not increase the
capital of the company and cannot therefore be assumed to be an equivalent, in
money's worth, to the payment of his shares."
In fact the present case is simpler in which the company
proposes to issue shares to unsecured creditors in satisfaction of its
liability. Issue of one share of Rs. 250 fully paid-up to an unsecured creditor
would go to discharge an equivalent amount of debt owed by the company to the
unsecured creditors. Such an arrangement brought about between the company and
its creditors and members cannot be contested on hypothetical submission that
the share has no value in the market nor the claim could ever be realised in
the event of winding up. In fact the arrangement as proposed here is quite
legal and valid and that also becomes evident from the further observations
from the judgment quoted above. The relevant observation is as under:
"The previous agreements between Even and the company
are all before the court, and I find that in the particular agreement referred
to, which is dated the 19th September, 1865, certain persons who are
subscribers to the memorandum of association, being creditors of the contractor
for work and labour done, or money advanced for preliminary expenses in respect
of which he had a claim upon the company, are to be paid what is due from him
to them in paid-up shares of the company; and I do not say that the court would
not give effect to such an arrangement. I must not be understood as deciding,
to the prejudice of any of those persons, that if they were really creditors of
the contractor for matters for which he was entitled to be paid by the company,
they might not receive under those documents their payment in paid-up shares,
and have those shares attributed to their subscription to the memorandum of
association; the effect being, to discharge" the company from an
equivalent amount of debt, due from the company to the contractor."
This is exactly the position in the case before me. For
each share issued to the unsecured creditor the liability of the company for
the amount equivalent to the face value of the share would stand discharged or
the company would be discharged from equivalent amount of debt due from the
company to the unsecured creditor. Such arrangement, in my opinion, is quite
legitimate and can be the subject-matter of compromise and arrangement between
the company and its members and creditors and, if it is otherwise reasonable
and fair, must be given effect to At any rate, it cannot be thrown out on the
ground that on the one hand the share would fetch no price if it is sold in the
market and the claim of the creditor being a chose-in-action has a debatable
value or is of no value. Reference in this connection may be made to the
Ooregum Gold Mining Co. of India Ltd. v. George Roper and Charles Henry
Wallroth.
At page 136, their Lordships have observed that a company is free to contract
with an applicant for its shares; and when he pays in cash the nominal amount
of the shares allotted to him, the company may at once return the money in
satisfaction of its legal indebtedness for goods supplied or services rendered
by him. That circuitous process is not essential. It has been decided that
under the Act of 1862, share may be lawfully issued as fully paid up for
consideration which the company has agreed to accept as representing in money's
worth the nominal value of the shares. At another stage, it has been observed
that not only may a share be allotted as fully paid up in respect of property,
goods or services received by the company, but the courts will not inquire into
the adequacy of the consideration, and certainly have not required it to be
proved that the consideration given was equivalent in cash value to the nominal
amount of the shares. Reference may also be made to Hilder v. Dexter.
In that case, the company raised necessary working capital by issue of one-half
of the share capital for cash, the other half being used for the purpose of
payment in shares credited as fully paid up for the concessions to be purchased
by the company. Of course, after referring to the sections of the English
Companies Act, the court reached a conclusion that a transaction of this nature
is not prohibited; but the important observation was that in such a transaction
the shares so issued could not be said to have been issued either at a discount
or for consideration other than cash. Reference was also made to Madanlal
Fakirchand Dudhedia v. Shree Changdeo Sugar Mills Ltd.
The subject-matter of dispute in that appeal before the Supreme Court was with
regard to the agreement between the promoters and the company for paying them certain
commission out of the net profits of the company. I fail to see how any portion
of that judgment helps in deciding the controversy in the present case.
In view of the aforesaid discussion, in my opinion, the
further issue of shares to unsecured creditors in satisfaction of their claims
as provided in the scheme cannot be said to be issue of shares either at a
discount or on misrepresentation or for no consideration or for consideration
other than cash.
That takes me to the last attack under the head
"reorganization of share capital", namely, that the scheme envisages
reduction of share capital and that cannot be done without following the
procedure as prescribed in section 100 onwards of the Companies Act, even if it
be done as part of the scheme. I have already pointed out above that
reorganization of the share capital can be carried out as a part of a scheme of
compromise and arrangement under section 391 without following the whole gamut
of the procedure prescribed for the same in other parts of the Companies Act.
However, rule 85 makes a special departure in case of reduction of share
capital when it is to be carried out as part of the scheme of compromise and
arrangement. Rule 85 which I have already referred to earlier, provides that
when reduction of share capital is to be effected as part of a scheme of
compromise and arrangement, procedure prescribed for the same in the Companies
Act and Rules should be carried out as stated earlier. This provision is made
for very good reasons. It unmistakably indicates that reorganization of share
capital can be brought about as part of the scheme of compromise and
arrangement. But even if it is to be done as part of the scheme of compromise
and arrangement this special provision in rule 85 enjoins a duty to carry out
the procedure contained in section 100 onwards of the Companies Act.
Ordinarily, reduction of share capital affects members of the company and it
can be brought about by a compromise or arrangement between the company and its
members ignoring the creditors. Now, if reduction of share capital involves
repayment of a part of paid up capital or extinguish or reduce the liability on
any of the shares in respect of unpaid share capital it would adversely affect
the creditors. Yet the creditors would have no voice in the matter. If the
procedure as provided in section 100 onwards has got to be carried out the
court could not sanction reduction of share capital unless the creditors are
heard and provision is made for the creditors who object to the reduction.
However, if the reduction of share capital does not involve either diminution
of liability in respect of unpaid share capital or payment to any shareholder
of any paid up capital, the court can sanction the same without reference to
the creditors. The creditors in such a case would not even be entitled to
object to the proposed reduction as provided in section 102. In the instant
case, admittedly, the reduction of share capital is by way of cancellation of
share capital which is lost or is unrepresented by available assets. In such a
case, creditors, even in a reduction simpliciter, are not entitled to object
and it makes no difference if reduction is brought about by following the
procedure prescribed in section 100 onwards or by way of a scheme of compromise
and arrangement. Thus, if it can be done in a given set of circumstances as
part of a scheme of compromise and arrangement, it has been properly done in
this case and while sanctioning the scheme ipso facto the reduction of share
capital ought to be confirmed.
I am however prepared to proceed on the assumption that
even if the proposed scheme of compromise and arrangement envisages reduction
of share capital which is lost or is unrepresented by available assets the same
cannot be done except by following the procedure specifically prescribed in
section 100 onwards of the Companies Act. It is, therefore, necessary to find
out whether the procedure therein prescribed has been carried out by the
company or not. There is nothing objectionable in the company proposing a
scheme of compromise and arrangement simultaneously proposing reduction of
share capital and both can be considered and approved simultaneously. This is
borne out by the observations in In re Tata Iron and Steel Co. Ltd.
In that case it was contended that the scheme which effects alteration in the
memorandum or articles of association without proceedings having been taken
under the Act in the manner laid down by the Act for the purpose of effecting
such an alteration cannot be sanctioned unless separate proceedings are taken
for alteration in the memorandum and articles of association. Negativing this
contention, it was held that where the Act lays down express procedure for
altering the memorandum it is doubtful whether it is not necessary to follow
that procedure before applying for sanction under section 120, but where that
is not so, the court can under section 120 sanction the scheme which alters the
memorandum. In In re Katni Cement and Industrial Co. Ltd.
a scheme of amalgamation was proposed between the said company and merger of
all the cement companies to be named as Associated Cement Companies Ltd. Before
this merger could be made it became necessary to reorganize the share capital
and alter the rights conferred by the memorandum of association upon different
classes of shareholders in the capital of the said company. This was proposed
as a part of the scheme of amalgamation under section 153 of the Companies Act,
1913, which is pari materia with section 191 of the Companies Act, 1956. It is
observed that the court under section 153 can sanction a scheme, even though it
involves acts which, apart from such provisions, would be ultra vires the
company; but this rule is subject to the limitation that if the Companies Act
contains express provision enabling the doing of any act in a particular way,
the provisions of the enabling section, and not those of section 153, must be
followed. Relying on this observation, it was urged that if there is provision
for effecting' reduction of share capital, it must be followed to the exclusion
of section 391. Reference was also made to Bengal Bank Ltd. v. Suresh
Chakvavarthy,
wherein it has been observed that a scheme involving reduction of capital must
be carried out in accordance with the statutory provisions relating to
reduction. Reference was also made to In re Bharati Central Bank Ltd.
wherein it has been observed as under:
"....where the Act expressly prescribes a special
procedure for reduction of capital, e.g., by section 55 and the several
sections following it, a scheme involving a reduction of capital, such as the
one now before me does, cannot be sanctioned unless the procedure for reduction
of capital has also been followed. Form No. 774 in Palmer's Company Precedents,
15th edition, Part I, page 1264, shows that the reduction of capital and scheme
may be considered by the shareholders at one and the same meeting and separate
meetings are not necessary and that the court may, by one and the same order,
sanction a scheme in conjunction with reduction of capital, that is to say,
under section 55 confirm the special resolution for reduction of capital, and,
under section 153, sanction the scheme. If, however, the requirements of
section 55 and other sections have not been complied with, the court may direct
the application for sanction to stand over in order to enable the company to
advertise the petition and otherwise comply with the requirements of the Act
for reduction of capital, as was done in In re Cooper ."
It does appear well settled that where the scheme of
compromise and arrangement comprises within its ambit reduction of share
capital, the procedure for reduction must be gone through but if it is shown
that the procedure prescribed under section 100 onwards has been carried out
simultaneously while submitting the scheme for approval of the creditors and
members, the court can, while sanctioning the scheme, sanction reduction of
share capital. The important thing to find out would be whether the procedure
for reduction of share capital wherever it is mandatory has been strictly
carried out and wherever it is directory has been substantially complied with.
Before one can find out as to what exact procedure should
be followed for effecting reduction in share capital in a given case, it must
be found out how the company proposes to reduce the share capital. The share
capital of a company can be reduced in three distinct ways as set out in
section 100. The. company for effecting reduction of share capital may
extinguish or reduce the liability of any of its shares in respect of share
capital not paid up; either with or without extinguishing or reducing liability
on any of its shares cancel any paid up share capital which is lost, or is
unrepresented by available assets; or with or without extinguishing or reducing
liability on any of its shares, pay off any paid-up share capital which is in
excess of the wants of the company. The reduction of the share capital can be
effected by a special resolution at a general meeting which must be sanctioned
by the court. Section 101 provides that, if the proposed reduction of share
capital involves either diminution of liability in respect of unpaid share
capital or payment to any shareholder of any paid up share capital, the
provisions therein prescribed shall have effect, subject to the powers of the
court having regard to the special circumstances in the case to direct that the
provisions of sub-section (2) shall not apply as regards any class or classes
of creditors.
In the present case the share capital is not reduced by
extinguishing or reducing the liability of any of the shares of the company, in
respect of the capital not paid up or by paying off any paid up share capital
which is in excess of the wants of the company. The reduction is effected by
cancelling the paid up capital which is lost or is unrepresented by available
assets. When the capital is reduced by cancelling any paid up share capital
which is lost or is otherwise unrepresented by available assets, it is not
mandatory to follow the procedure prescribed in sub-section (2) of section 101
unless the court so directs. The procedure prescribed under sub-section (2) of
section 101 requires service of the notice of the petition filed for confirming
the reduction of capital on every creditor of the company affected by reduction
and who is entitled to object to the reduction. The procedure goes so far as to
make provision by order of the court for payment to the dissenting creditors.
That procedure is mandatory, where the proposed reduction involves diminution
of liability in respect of unpaid share capital or payment to any shareholder
of any paid up share capital. That is not the case here. It is common ground
that reduction is by way of cancellation of the paid up share capital which is
lost or is unrepresented by available assets. Unless, therefore, the court otherwise
directs, the procedure prescribed under sub-section (2) of section 101 is not
mandatory in this case. Therefore, in order to effect reduction of share
capital by way of cancellation of paid up share capital which is lost or is
unrepresented by the available assets, the company will have to adopt a special
resolution to be styled as resolution for reducing the share capital in a
general meeting and then apply for confirmation of the reduction of share
capital. For the reasons hereinbefore mentioned, I will hold that the company
has given notice of 21 days' duration and the notice convening the meeting
served upon the members disclosed the resolution that, while approving the
scheme, the members should approve the reduction of share capital. Resolution
approving the scheme has been passed with statutory majority. The only question
would be whether the intention to move the resolution as special resolution in
a general meeting to be attended by the ordinary shareholders and preference
shareholders is set out in the notice convening the meeting or meetings. The
reasons set out above while considering the case of issue and allotment of
further share and the provision contained in section 81(1) and 81(1A) would
mutatis mutandis apply here. I would, therefore, hold that the members of the
company in a general meeting approved reduction of share capital by a special
resolution which has been passed by statutory majority and while approving the
scheme the members simultaneously approved reduction of share capital by a
special resolution. Therefore, the procedure prescribed in sections 100 and 101
has been carried out by the company and section' 102 would not be attracted and
therefore while sanctioning the scheme the court can sanction the reduction of
share capital. I would, therefore, hold that the mandatory procedure prescribed
for reduction of the share capital has been strictly complied with. Therefore,
the company has carried out the procedure prescribed for reduction of share
capital and the same can be simultaneously confirmed while sanctioning the
scheme which I hereby propose to do.
I may notice the last submission of Mr. Vakil under the
head of "reorganization of share capital". A very feeble attempt was
made to urge that the company cannot reduce preference share capital. Mr. Vakil
approached the problem from a number of angles such as that by reduction of
preference share capital without wholly extinguishing the ordinary share
capital, the holders of preference shares who are entitled to preferential payment
from the assets of the company in winding up are relegated to the extent of
cancellation of part of preference share capital behind the ordinary
shareholders which can never be done. It was also urged that an ordinary
shareholder would be paid Rs. 250 from the assets of the company in winding up
without paying full amount of Rs. 100 to the preference shareholders which
holder of the preference shares would be entitled to receive in the
distribution of the assets of the company. In my opinion, there is no substance
in this contention. The provision in the Companies Act at the relevant time
showed that the company could have two kinds of share capital— ordinary share
capital and preference share capital. Section 100 provides that subject to the
confirmation by the court, a company limited by shares, may if so authorised,
by its articles by a special resolution reduce its share capital in any way.
Section 100, therefore, enables the company to reduce its share capital. The
word "share capital" is a genus of which "equity and preference
share capital" are species. If the company has power to reduce its share
capital as provided in its articles of association, it is implicit therein that
it can reduce both ordinary share capital as well as preference share capital
unless specific provision to the contrary is made. Article 10 permits the
company to increase its share capital and article 7 authorises the company to
reduce its share capital by special resolution subject to confirmation by court
and subject to the provisions of sections 100 to 104 of the Companies Act.
Therefore, this company has retained to itself powers to reduce its share
capital—meaning thereby that it can reduce both its ordinary and preference
share capital—and there is no express provision to the contrary which says that
the preference share capital cannot be reduced till the whole of the ordinary
share capital is extinguished. Therefore, there is no substance in the
contention that preference share capital can never be reduced.
Considering the matter from all the aspects, there is no
substance in the contention that the reorganization of share capital as
contained in the proposed scheme of compromise and arrangement cannot be given
effect to. In my opinion, the company has complied with the provisions of law
and reorganization of share capital can be confirmed as part of the scheme.
Re. Ground No. 5—The next ground of attack of Mr. Vakil was
that in the absence of proper directions for convening separate meetings of
different classes of creditors and members of the company, appropriate meetings
of distinct classes of members and creditors were not held and, therefore, it
is not possible to say that the proposed scheme has been approved by requisite
majority of different classes of creditors and members. When a scheme of
compromise and arrangement is proposed between the company and its creditors or
any class of them; or between the company and its members or any class of them,
the party sponsoring the. scheme must move the court for proper directions by
the judge's summons under section 391 for convening the meetings of different
classes of creditors and members. It is at this stage that proper
classification of members and creditors must be made. There is little
difficulty in defining different classes of members. A formidable difficulty
arises in deciding and defining different classes of creditors.
When the judge's summons is taken out for seeking
directions for convening meetings a duty is cast on the company to put proper
materials before the court so that the court may give proper directions for
separate meetings of different classes of creditors and members. If the
creditors and members are not properly classified and if the meeting of the
proper class of creditors and members is not separately held, the scheme
approved at such meeting cannot be sanctioned, vide Court Practice Note in
(1934) Weekly Notes 142. The responsibility for determining what creditors are
to be summoned to any meeting as constituting a class is of the applicant
company and if meetings are incorrectly convened or constituted or an objection
is taken to the presence of any particular creditor as having interests
competing with the others such objection if successfully taken at the hearing
of the petition for sanctioning the scheme the company must take the risk of
having it dismissed.
It is always a moot question what constitutes a class.
Buckley on the Companies Ads, 13th edition, page 406, has observed that it is a
formidable difficulty to say what constitutes a "class" of creditors.
The creditors composing the different classes must have different interests.
When one finds a different state of fact existing among different creditors
which may differently affect their minds and their judgment, they must be divided
into different classes. "Class" must be confined to those persons
whose rights are not so dissimilar as to make it impossible for them to consult
together with a view to their common interest (vide Sovereign Life Assurance
Co. v. Dodd).
Speaking very generally, in order to constitute a class, members belonging to
the class must form a homogeneous group with commonality of interest. If people
with heterogeneous interests are combined in a class, naturally the majority
having common interest may ride rough shod over the minority representing a
distinct interest. One test that can be applied with reasonable certainty is as
to the nature of compromise offered to different groups or classes. The company
will ordinarily be expected to offer an identical compromise to persons
belonging to one class, otherwise it may be discriminatory. At any rate, those
who are offered substantially different compromises each will form a different
class. Even if there are different groups within a class the interests of which
are different from the rest of the class or who are to be treated differently
in the scheme, such groups must be treated as separate classes for the purpose
of the scheme. Broadly speaking, a group of persons would constitute one class
when it is shown that they have conveyed all interest and their claims are
capable of being ascertained by any common system of valuation. The group
styled as a class should ordinarily be homogeneous and must have commonality of
interest and the compromise offered to them must be identical. This will
provide rational indicia for determining the peripheral boundaries of
classification. The test as stated earlier would be that a class must be
confined to those persons whose rights are not so similar as to make it
impossible for them to consult together with a view to their common interest.
In this case, the court gave directions on the judge's
summons taken out under section 391(1). The directions were to the effect that
separate meetings of ordinary shareholders, preference shareholders, secured
creditors and unsecured creditors of the company should be called on the dates
mentioned in the notice. The court, thus at the instance of the company,
directed four separate meetings to be held. The ordinary shareholders
themselves will form one class; so also the preference shareholders will form
one class. In the case of each of them the compromise offered to each member
belonging to the class is identical. Similarly, the meeting of the secured
creditors is also properly directed to be held. The real difficulty arose with
regard to the meeting of the unsecured creditors. Of course, Mr. Vakil has
attempted to urge that even in respect of the meeting of preference
shareholders, directions are not proper. But I do not see much substance in it
for the reasons to be presently mentioned. So also, I do not see much substance
with regard to the directions given for holding the meeting of secured
creditors. It was very vehemently urged that there was a conglomeration of
persons with heterogeneous interest who were grouped together in the class of
unsecured creditors. Generally speaking the creditors of the company should be
divided into three different classes, viz., secured creditors, preferential
creditors and unsecured creditors. The workers of the company each to the
extent of the first Rs. 1,000 of his claim in winding up, would be a
preferential creditor and indisputably they would form a separate and distinct
class. They were grouped together with other unsecured creditors. I shall
separately deal with the objection in respect of each meeting raised by Mr.
Vakil.
As per the directions given by the court, a separate
meeting of ordinary shareholders of the company was convened. In my opinion,
equity or ordinary shareholders each holding fully paid shares of the company
will form a separate class by themselves. They will also form a separate class
in view of the identical compromise offered to them. It was however urged that
there might be some creditors who may also be shareholders and their interest
will conflict with the interest of shareholders who are not creditors and they
should form a separate class. It was also urged that the managing director,
Linubhai Banker, and ex-director, Gopaldas P. Parikh, should, form a separate
class as also Indequip group of companies should also form a separate class. At
page 244 of the affidavit in reply, the shareholding of Linubhai and his
relation, Gopaldas P. Parikh, and the company in which Gopaldas P. Parikh is
interested has been set out and it is stated that out of the total of 788
ordinary shares, 424 are held by these persons and they form a separate group.
It is difficult to understand how the interest of these shareholders is
different from the other shareholders. But it was urged that Indequip group of
companies are very big creditors of the company and they will be supporting the
proposal for converting half of their claim in the share capital so as to clamp
down their octopus hold on the company and therefore they would be vitally
interested in supporting the scheme and should form a separate class. Again, I
see no substance in this contention. The compromise offered to the ordinary
shareholders, whether creditor or not, is the same as any other shareholder.
Therefore, in my opinion, the ordinary shareholder will form a separate class
and proper directions in this behalf are given.
For the reasons which are mentioned above, in my opinion,
there is no substance in the contention that all the preference shareholders
will not form a class by themselves. In fact all the preference shareholders of
the company would form a separate and independent class and their meeting is
properly convened.
The Union Bank of
That takes me to the meeting of unsecured creditors
convened under the directions of the court. Mr. Vakil took serious exception to
grouping together all the workmen of the company and other unsecured creditors
some of whom may be suppliers of goods and some of whom may be depositors or
persons who had advanced cash loan to the company, in one class. There is
considerable force in this contention of Mr. Vakil. In the affidavit filed by
Chandulal Hiralal Banker, at page 208 he has stated that in the context of a
scheme of compromise or arrangement between the company and its creditors, the
creditors of a company can be divided into at least three broad classes—secured
creditors, unsecured creditors and preferential creditors. In Palmer's Company
Law, 21st edition, at page 700, it is observed that creditors can be divided
into three categories (which may themselves overlap) of preferential creditors,
secured creditors and unsecured creditors. It is further observed that unsecured
creditors will normally form a single class except where some of them are to be
treated in a manner different from the rest and have different interests which
might conflict. It is unfortunate that the company did not take proper
directions with regard to the convening of the meeting of unsecured creditors.
In the class of the unsecured creditors, the workers of the company who, as
stated earlier, would be preferential creditors, have been grouped together
with other unsecured creditors. The only defect appears to be in grouping
together the workers who are preferential creditors of the company with other
unsecured creditors. In respect of the workers different compromise is offered
while to the remaining unsecured creditors a distinct compromise is offered.
That will also make them two distinct and separate classes. If the meeting is
not properly convened, the scheme approved at such meeting cannot be
sanctioned. If two distinct classes of creditors are grouped together in one
class and if there is no material for finding out who belonged to one class and
what was the result of their voting and who belonged to the different and
distinct class and what was their voting, the only course open to the court
would be to direct separate meetings of those two classes. But if the report of
the chairman provides ample material for finding out the number of preferential
creditors who attended the meeting of unsecured creditors and what was the
number and value of their votes then it can be separated from the number and
value of the votes of the remaining unsecured creditors and the court may
proceed to examine the result of the voting as if two separate meetings are
called. A view was taken by me in the case of Anant Mills Ltd.
If any creditor present at the said meeting would have said that the presence
of the distinct class of creditors was either oppressive or not conducive to
their deliberations all such objections could have been examined on merits. No
such objection is raised. The defect as far as the meeting of unsecured
creditors is concerned, appears to be that the preferential and other unsecured
creditors have been grouped together. The workers are preferential creditors in
winding up but not otherwise who would form a separate class. Instead of
remitting the scheme to separate meetings of unsecured and preferential
creditors in my opinion, there is ample material in the report of the Chairman
from which the votes in number and value representing the preferential
creditors can be separated from the votes and value of the votes representing
the other unsecured creditors. As this is quite possible and which would be
worked out while considering the ground of attack that the scheme is not
approved by a statutory majority in each class, it is not necessary to direct a
separate meeting of preferential creditors and other unsecured creditors.
Mr. Vakil, however, urged that in fact there should have
been seven separate meetings of persons who were grouped together in the
meeting of unsecured creditors, viz, (a) workers of the company who would be
preferential creditors; (b) Linubhai Banker & members of his family; (c)
Indequip group of companies; (d) Manubhai Banker & members of his family;
(e) depositors and persons who have advanced cash loan and supplied stores and
cotton to the company; (f) Asia Electric Company and (g) shareholders who are
also creditors and those who are not. It is undoubtedly true that the workers
of the company as preferential creditors would form a distinct and separate
class. But the depositors who had supplied goods and cotton to the company on
credit would not form a separate and distinct class. This is so because
identical compromise is offered to them. Similarly, Linubhai Banker who was the
managing director and members of his family and Manubhai and members of his
family who was in active management prior to January 1, 1966, who are creditors
of the company, would not form a separate and distinct class. The compromise
offered to them is identical with the other unsecured creditors. Asia Electric
Company need not form a class because no compromise is offered to it. The Union
Bank of
Re. Ground No. 6.—The next ground of attack is that a
proper statement as required by section 393(1) and as directed by the court's
order dated 26th June, 1968, in Company Application No. 23 of 1968 was not sent
along with the notice convening the meetings of members and creditors of the
company.
Section 393 reads as under:
"393. Information as to compromises or arrangements
with creditors and members.—
(1) Where a meeting
of creditors or any class of creditors, or of members or any class of members
is called under section 391,—
(a) with every
notice calling the meeting which is sent to a creditor or member, there shall
be sent also a statement setting forth the terms of the compromise or
arrangement and explaining its effect; and in particular, stating any material
interests of the directors, managing director, managing agent, secretaries and
treasurers or manager of the company, whether in their capacity as such or as
members or creditors of the company or other wise, and the effect on those
interests, of the compromise or arrangement, if, and in so far as, it is
different from the effect on the like interests of other persons; and
(b) in every
notice calling the meeting which is given by advertisement, there shall be
included either such a statement as aforesaid or a notification of the place at
which and the manner in which creditors or members entitled to attend the
meeting may obtain copies of such a statement as aforesaid.
(2) Where the
compromise or arrangement affects the rights of debenture-holders of the
company, the said statement shall give the like information and explanation as
respects the trustees of any deed for securing the issue of the debentures as
it is required to give as respects the company's directors.
(3) Where a notice
given by advertisement includes a notification that copies of a statement
setting forth the terms of the compromise or arrangement proposed and explaining
its effect can be obtained by creditors or members entitled to attend the
meeting, every creditor or member so entitled shall on making an application in
the manner indicated by the notice, be furnished by the company, free of
charge, with a copy of the statement.
(4) Where default
is made in complying with any of the requirements of this section, the company,
and every officer of the company who is in default, shall be punishable with
fine which may extend to five thousand rupees; and for the purpose of this
sub-section any liquidator of the company and any trustee of a deed for
securing the issue of debentures of the company shall be deemed to be an
officer of the company:
Provided
that a person shall not be punishable under this sub-section if he shows that
the default was due to the refusal of any other person, being a director,
managing director, managing agent, secretaries and treasurers, manager or
trustee for debenture-holders, to supply the necessary particulars as to his
material interests.
(5) Every director,
managing director, managing agent, secretaries and treasurers or manager of the
company, and every trustee for debenture-holders of the company, shall give
notice to the company of such matters relating to himself as may be necessary
for the purposes of this section; and if he fails to do so, he shall be
punishable with fine which may extend to five hundred rupees."
One of the directions which the court gave while giving directions
for convening meetings in Company Application No. 23 of 1968, was that the
advocate for the company should file in the court within five days a form of
advertisement, notice and the statement required by section 393 to accompany
the notice to be addressed to members and creditors of the company. The first
question is what should be the contents of the statements required by section
393. The statement under section 393 must contain the terms of the compromise
and arrangement simultaneously explaining its effect on certain interests. It
must particularly contain any material interests of the directors, managing
director, managing agent, secretaries and treasurers or manager of the company
whether in their capacity as such or as members or creditors of the company or
otherwise, and the effect on those interests of the compromise or arrangement
if, and in so far as, it is different from the effect on the like interests of
other persons. The whole of the scheme of compromise and arrangement was annexed
to the notice convening the meeting. The statement as required by section 393
annexed to the notice, does explain its effect on the interest of the creditors
and members. At the relevant time, there were no managing agent, secretary,
treasurer or manager of the company. Therefore, the company was obliged to
disclose material interests of the directors and managing director in their
capacity both as director and managing director and also as member or creditor
of the company and the effect of the scheme on their interests only in so far
as that effect is different from the effect on the like interests of other
persons. The scheme directly did not have any effect on the interests of the
directors either as director or as a member or creditor in a manner different
from the manner in which the scheme would have effect on the interest of other
creditors and members. The interest of the managing director as creditor of the
company is set out in paragraph 7 of the statement and it may be stated that
the effect of the scheme on his interests is identical as the effect on the
interest of other creditors and members of the company, if the scheme is
sanctioned. Therefore, a mere perusal of the statement annexed to the notice
would show that it conforms with the requirement set out in section 393(1)(a).
The essential requirement is that the creditors and members who are to assemble
in the meeting should have advance information of the proposed scheme of
compromise and arrangement and its effect on their interest as members and
creditors. As the whole of the proposed scheme was annexed to the notice,
anyone having a bare perusal of the scheme would be able to find out what was
intended to be done by the scheme of compromise and arrangement and what would
be its effect on his interest as creditor or member of the company. Therefore,
the first part of clause (a) of section 393(1) is fully complied with. In
respect of the latter part of clause (a), it must be stated that the material
interest of director and managing director in their capacity as such or as a
creditor or a member of the company will have to be stated in the statement;
but the effect of the scheme on their interest will have to be disclosed to the
extent that effect differs from the effect on the like interest of other
creditor and member that would be made by the scheme. If there is no
difference, it is not essential that the effect of the scheme on the interest
of director and managing director and others need be set out in the statement.
In order that the statement accompanying the notice may conform to the
requirement of section 393, what should be its content has been considered by
Miabhoy J. (as he then was) in In re Sidhpur Mills Co. Ltd.
It has been observed in this connection as under:
"In my judgment, the true legal position is that it is
the duty of every officer of the company and the company to acquaint himself or
itself with the material interests of every other concerned person, such as the
director, managing partner or manager of the company, and to mention that
interest and to explain its effect in the statement. That is the primary duty
which has been cast upon the concerned persons....... In my judgment, therefore,
the true construction of clause (a) to section 393 of the Indian Companies Act
is that it requires the material interests which every person concerned
possesses, not only in the company, but also in the scheme, to be stated by all
the other persons concerned and if the latter part of clause (a) applies, then,
the effect thereof must also be mentioned."
After referring to the aforementioned observations Mr.
Vakil raised four-fold objection to the statement which was annexed to the
notice. Before I refer to these objections, the recitals made in the statement
may be briefly referred to. In paragraph (1) it is mentioned that the copy of
the scheme of compromise and arrangement is annexed to the notice. In paragraph
(2) it is stated that the company is in serious financial difficulties and as
against the total assets of Rs. 1,26,54,147 its present liabilities are to the
tune of Rs. 1,30,89,493. In paragraph (3) it is stated that several winding up
petitions are filed in the High Court and as the company is unable to meet with
its liabilities, the court in all probability may direct the winding up of the
company. In paragraph 4 it is stated that if the company is ordered to be wound
up and is sold as a running concern, it may not fetch more than 17 to 20 lakhs
of rupees, as disclosed by the experience of selling Anant Mills of Ahmedabad
and Rajratna Mills. It is further stated that prior to the present management,
the company was being managed by the managing agency firm of Hiralal Trikamlal
& Sons and when the board of directors took over the management of the
company, there were accumulated losses of Rs. 62.43 lakhs. It is also stated
that the machinery of the company is old and worn out and requires renovation
and looking to the heavy losses, it is not possible to carry out renovation. In
paragraph (5) it is stated that, in the circumstances, the board of directors
have proposed a scheme of compromise and arrangement. In paragraph 6 it is
stated that the share capital of the company is to be reduced and portion of
dues of the creditors is to be converted into share capital and balance is to
be frozen for a period of two years, whereafter it would be paid by instalments
and, by this process, the company would be able to pay up its dues by 1970. In
paragraph 7 it is stated that the managing director is a creditor of the
company to the extent of Rs. 3,00,000 and he has agreed to convert 50 per cent,
of his dues into share capital and has agreed to the payment of the balance by
yearly instalment of Rs. 38,000 after 1972. In the last paragraph it is stated
that the company proposes to scrap Unit No. II and the price realised on the
sale of the scrap would provide some working capital and also enable the
company to pay partly some of the dues of the creditors as detailed in the
scheme. This statement is signed by Mr. R.L. Dave, in his capacity as Chairman
appointed for the meeting, and Additional Registrar, High Court of Gujarat,
Ahmedabad.
The first objection of Mr. Vakil to this statement is that
the statement is not settled by the Registrar as required by the order of this
court dated 28th June, 1968. The order on the judge's summons seeking
directions for convening meetings under section 393(1) is to be drawn up in
Form No. 35. The order in fact is drawn up in Form No. 35 and one of the
directions thereby given is that the advocate for the company should file in
the court within the prescribed time, the draft form of advertisement, notice
and statement to accompany the notice and the same should be settled by the Registrar
of the court. It was urged that the statement may have been submitted by the
company but it is not settled by the Registrar. It was urged that specific
contention has been raised in the affidavit in reply that the statement is not
settled by the Registrar and there is no denial thereof and that the perusal of
the statement would show that, at any rate, it is not settled by the Registrar.
There is no substance in this contention. Rule 2(11) of the Companies (Court)
Rules, 1959, defines "Registrar" to mean, in the the High Court, the
Registrar of the High Court, and includes among others such other officer as
may be authorised by the Chief Justice to perform all or any of the duties
assigned to the Registrar under the Rules. The Honourable Chief Justice has
authorised the Additional Registrar of this High Court to perform all or any of
the duties assigned to the Registrar under the Rules. Therefore, the Additional
Registrar will have all powers conferred on the Registrar under the Rules. In
this case Mr. R.L. Dave who was appointed Chairman of the meeting is Additional
Registrar of the High Court and to whom the work under the Companies Act is
assigned by the Honourable Chief Justice and, therefore, the Additional
Registrar would have to perform the functions of the Registrar and, therefore,
he would have to settle the statement. When the statement is signed by the
Additional Registrar in his said capacity, it can be said that he has settled
the same. Mr. Vakil, however, urged that the statement appears to have been
prepared by the company and the Additional Registrar has not applied his mind
to the contents of the statement with the result that false and misleading
statements have crept into the statement and it is a case of non-application of
mind. In fact direction given by the court shows that the statement in the
first instance has to be furnished by the advocate of the company and there is
nothing on the record to show that it was not furnished by the advocate of the
company. The Additional Registrar having signed it would mean that he has
settled the same. Therefore, the direction has been properly complied with.
The next objection of Mr. Vakil was that this statement
under section 393 ought not to have been signed by the Additional Registrar as Chairman
of the meeting, because the Additional Registrar is an officer of the court and
the statement issued under his signature was likely to convey a wrong
impression to the members and creditors that the factual averments made in the
statement had the sanction of the court. It is true that the Additional
Registrar was not well advised in signing this statement. When a statement
containing factual averments is signed by an officer of the court judgment of
the recipient of the statement was likely to be influenced by the fact that the
factual averments made in the statement have been sanctioned by the court.
Therefore, such a statement ought not to have been signed by the Additional
Registrar. But the mischief which was likely to be perpetrated by this statement
having been signed by the Additional Registrar has been nullified by the
direction given by the court in Company Application No. 55 of 1968 filed by
Chandulal Hiralal Banker on behalf of his principals praying for a direction
that the Additional Registrar and Chairman appointed to preside over the
meetings should withdraw the statement issued under his signature and to send a
fresh statement as required by section 393. A further prayer was made that till
the said company application is disposed of the Chairman may be restrained from
holding meetings. While rejecting this application Mehta J. on 30th September,
1968, gave an oral direction that the Chairman at the inception of each meeting
should inform the creditors and members as the case may be present and
attending the meeting that even though the statement sent to them is signed by
him he does not vouchsafe the truth of the factual averments made therein and
no inference should be drawn from the fact that the statement is signed by the
officer of the court. He was further directed to explain that contents of the
statement were not either true to his own knowledge or were not the view of the
court; but they were factual averments made and view expressed by the sponsors
of the scheme. Under the directions of Mehta J. the Chairman made this
clarification at the inception of each meeting. He has so stated in his report
submitted to the court. Therefore, no damage is done by the error committed by
the court officer in signing the statement annexed to the notice convening the
meeting.
It was next contended that this statement contained various
false and misleading statements and further contained some averments and
recitals for carrying on propaganda in favour of the scheme. It was urged that
while complying with the statutory requirements, the company utilised the
opportunity and the forum for carrying on propaganda in favour of the scheme so
as to prejudicially influence the judgment and decision of the creditors and
members who were to attend the meetings. It was urged that material facts were
suppressed with ulterior end in view of obtaining approval of the scheme by the
members and creditors. Mr. Vakil took serious exception to the averments in the
statement that Anant Mills and Rajratna Mills of Petlad have been sold for an
amount varying from 12.50 lakhs to Rs. 20 lakhs. I fail to see how exception
can be taken to these averments because it is not suggested that these facts
are untrue. It was further contended that the averments in the statement that the
previous management was responsible for the loss suffered by the company to the
tune of Rs. 62.43 lakhs (sic). Even Mr. Vakil could not urge that the statement
as a fact is not true. In fact there is good evidence to show that the company
had suffered loss to that extent till January 1, 1966, when the management
changed. But it was urged that further loss suffered by the new management when
they came to power from January 1, 1966, ought to have been set out. The
omission to make certain statement, not required by law to be made, could not
vitiate the statement nor the maker of the statement could be charged with
making false or misleading statement on that account. It was then urged that
the interest of family members of the managing director in the company as well
as the effect on such interest of the scheme have not been set out in the
statement. Section 393 only requires that the statement should contain material
interest of the managing director and others set out in the section and not of
the friends and relations of the managing directors and the other concerned
persons: vide In re Sidhpur Mills Co. Ltd.
But Mr. Vakil took a very serious exception to
the averment contained in the last para. of the statement that the price
realised on the sale of the scrap of Unit II of the mills would provide some
working capital. It was very vehemently urged that the cash-flow statement
annexed to the scheme shows that the company expects to realise Rs. 14 lakhs by
sale of the scrap of Unit No. II of the company's mills and it further shows
that Rs. 14 lakhs are to be forthwith paid to the secured creditors of the
company, namely, Union Bank of
The
last objection of Mr. Vakil under this head of attack is that the effect of the
scheme on the material interests of directors and managing director has not
been clearly set out in the statement. It was strenuously urged that annexing
of the statement as required under section 293 of the notice convening meeting
is obligatory and absence of it would vitiate the proceedings of the meeting.
It was further urged that the statement must contain in clear and unambiguous
terms the effect of the provisions of the scheme on the interest of the
directors and managing director so that the members and creditors may have full
information about the change that would be brought about by approving the
scheme, and which change may influence their judgment in the matter. It is
undoubtedly true that the company is under an obligation to set out the
interest of the directors and managing director in the company and the effect
on their interest by the scheme—more particularly when the effect is likely to
be different from the effect on the interest of like nature on other creditors
and shareholders. The question then is whether the interest of the directors
and managing director in the company and the effect of the scheme on such
interest has been set out in the statement or not. It may at once be stated
that the interest of
the directors and managing director in the company has been set out in the
statement. The latter part of clause (h) of section 393(1) is required to be
complied with only if the effect of the scheme on the interest of the directors
and managing director is likely to be different from the effect of the scheme
on the like interest of members and creditors in the company. If the effect is
to be the same in respect of both categories of persons, in my opinion, it is
not obligatory on the company to set out the effect in the statement. But it
was urged that, in this case, the effect of the scheme on the interest of the
directors and managing director; is going to be of such a revolutionary
character that it should have been set out in the statement. To illustrate this
point, it was urged that Gopaldas P. Parikh is virtually the owner of the
companies, namely, Indequip Ltd., Indian Electro Chemicals Private Ltd.,
Dyestuffs and Chemicals Private Ltd. and these three companies are creditors of
the mills company to the tune of more than Rs. 42 lakhs. It was then pointed
out that under the scheme 50 per cent, of their claim would be converted into
share capital. Therefore, the effect of the scheme in the words of Mr. Vakil
would be that Gopaldas P. Parikh as virtual owner of the three aforesaid
companies would have shareholding in the mills company to the tune of Rs. 20
lakhs and, therefore, thereby Gopaldas P. Parikh would establish his octopus
hold on the mills company to the detriment of other creditors and shareholders.
It was urged that the interest of Gopaldas P. Parikh should have been set out
in the statement. But I am afraid, the argument has its genesis in the
obsession of the contesting creditors with Gopaldas P. Parikh which never
remained concealed throughout the hearing of this petition. At the relevant
time when the scheme was sponsored, Gopaldas P. Parikh was not the director of
the company. He had long ceased to be director of the mills company. ' If he
was neither the director nor managing director, his interest was not required
to be disclosed in the statement. But it was urged that Anil Gopaldas Parikh,
son of Gopaldas P. Parikh, was a director of the company at the relevant time.
That, of course, is true. But Anil Gopaldas is merely a director and he had no
other interest in the mills company and, therefore, there was nothing to be
disclosed in respect of his interest and the effect of the scheme on his
interest. The interest of the managing director, Linubhai Banker, is disclosed
and the effect of the scheme on his interest is also disclosed and it can be
said with reasonable certainty that the effect on his interest is in no way
different from the effect of the scheme on the interest of other creditors and
members. Therefore, there is no substance in the allegation that necessary
disclosure as required by section 393(1)(a), later part, has not been made.
As a second limb of the argument, it was urged that the
production programme, annexed with the estimated production statement, and cash
flow statement, annexed to the scheme, contained misleading and incorrect
information. I need not dilate upon it because I would have to advert to this
submission when I consider the feasibility of the scheme.
The statement under section 393 should be drawn up as to
convey to the members and creditors sufficient information so that they may be
able to bring to bear upon the scheme their intelligent judgment. They must
have information which would help in considering the scheme on its own merits.
In my opinion, in this case, the scheme as a whole as was annexed to the notice
along with various statements and statement under section 393 gave the
necessary information to the creditors and members so that they may be able to
intelligently deliberate upon the scheme keeping in view the commercial
feasibility of the scheme and on the material supplied they were in a position
to decide intelligently whether the scheme should or should not be approved. It
is of course true that some further information was sought at the meeting and Mr.
Surottam Hatheesing, the Chairman of the company, till the date of the
appointment of the provisional liquidator, was unable to furnish that
information. But the information sought was not of such a vital character that
non-availability of it would have come in the way of the creditors and members
deliberating upon the scheme. Therefore, considering the matter from all the
aspects, in my opinion, the statement as required by section 393 was annexed to
the notice convening the meetings and the provisions of section 393 have been
duly complied with.
Re. Ground No. 7. —The next ground of attack was that the
meetings of creditors and members were conducted in an irregular manner and,
therefore, the votes recorded at such meetings cannot be relied upon to show that
the scheme has been approved by the requisite majority of creditors and
members. In Company Application No. 23 of 1968, the court gave directions for
convening separate meetings of ordinary and preference shareholders and secured
and unsecured creditors. The court also gave a direction that the notice of the
meeting should be advertised and a notice convening meeting showing time, place
of meeting, together with the copy of the proposed scheme of compromise and
arrangement and statement required under section 303 and form of proxy, should
be served by a pre-paid letter under certificate of posting to each ordinary
and preference shareholder and individual notice to the creditors whose debts
exceeded Rs. 1,000. Individual notices to the creditors having a claim of less
than Rs. 1,000 was dispensed with. These directions have been complied with and
an affidavit to that effect has been filed by the chairman who presided over
the meetings. Requirements for convening proper meetings are contained in rules
69, 70, 73, 74, 75 and 76. The requirements of these rules appear to have been
properly complied with. Mr. Vakil had a four-fold objection to the procedure
adopted by the chairman at various meetings. The first objection is that the
management failed to furnish relevant information to the creditors and members
at the meeting with the result that the creditors and members had not enough
information to intelligently deliberate upon the proposed scheme. It was urged
that the chairman did not insist upon the management to furnish relevant
information sought for by the members and creditors and, in the absence of the
information, it cannot be said that the creditors and members were fully
apprised of the various ramifications of the scheme and brought to bear upon the
subject their intelligent judgment. At the meeting of the ordinary shareholders
of the company the question was put to Mr. Surottam Hatheesing as to who were
the directors of the company who had sponsored the scheme to which reply was
given that the scheme was sponsored by the board of directors consisting of
L.H. Banker, S.P. Hatheesing, P.H. Raval and Shri N.M. Soparkar, the last two
being Government-nominated directors. Thereafter, further questions were put by
the members relating to the working of the company and particularly as to the
assets and liabilities of the company. Mr. Hatheesing gave replies generally
dealing with the topic but he further stated that detailed figures could not be
given as the provisional liquidator is in charge of the company. Thereafter
some questions were put in writing and the chairman then requested Mr.
Hatheesing to give replies to these questions. Mr. Hatheesing disclosed his
inability to reply to the questions for want of detailed information.
Unfortunately questions given in writing are not annexed to the report of the
chairman. It is, therefore, difficult to find out what were the questions put
and what would be the effect of the failure of the chairman of the company to
give replies to the same. However, no objection appears to have been taken by
the ordinary shareholders that, in the absence of information sought for, they
would not be able to consider the scheme in its various aspects. Exactly
similar thing happened at the meeting of the unsecured creditors. The question
is whether the information sought for both by the ordinary shareholders and
unsecured creditors was of such a vital nature as to affect the deliberations
of the ordinary shareholders and creditors on the merits of the scheme. The
first information sought was as to the assets and liabilities of the company
and the exact figures have been set out in the statement annexed to the notice.
Therefore, the information in this respect is certainly given both to the
members and creditors. In respect of the other information sought, it is
unfortunate that the exact nature of the information sought is not available
and, therefore, it is not possible to come to the conclusion that in the
absence of such information the creditors and members were unable to deliberate
upon the scheme. The creditors and members attending did not consider the
information vital enough in the absence of which they could not consider the
scheme on merits. If that was the situation, they would have declined to
approve the scheme. The scheme is approved except by very few creditors whose
opposition is grounded on factors entirely irrelevant to the merits of the
scheme and to which I would refer at a later stage. It is undoubtedly true that
the creditors and members called upon to deliberate upon the scheme of
compromise and arrangement should have full and fair knowledge of all the
relevant facts on which they can come to an intelligent decision (vide In re
Bharati Central Bank Ltd.).
But, in my opinion, in the facts and circumstances of this case, it is not
possible to accept that the members and creditors could not bring to bear upon
the scheme an intelligent judgment for want of relevant information. The second
limb of the argument was that the amendments which had been proposed to the
original scheme by the secured creditors, namely, Union Bank of India and
Central Board of Trustees of the Provident Fund, have not been adopted
according to the correct legal procedure. The scheme as originally proposed
offered a compromise to the Union Bank of India— secured creditor of the
company—undertaking to pay arrears of provident fund dues to the Central Board
of Trustees—the other secured creditor—by monthly instalments of s. 40,000. At
the meeting of the secured creditors, the compromise offered to both of them
have undergone a change. The bank agreed to accept the scheme on its own terms
as suggested in the annexure to its letter dated 8th October, 1968. It must be
confessed that there is a radical change with regard to the mode of payment to
the bank. The amendments proposed by the bank are at page 154 of the record and
the amendments proposed by the Central Board of Trustees are at page 160 of the
record. The adjourned meeting of the secured creditors was held on 8th
December, 1968. At this meeting, the amendments proposed by the bank were
considered by the sponsors and they were accepted. The amendments proposed by
the Central Board of Trustees for Provident Fund have been accepted both by the
bank as well as the sponsors and they have been incorporated in the final
scheme submitted to the court for its sanction. The contention of Mr. Vakil is
that unsecured creditors and members approved the scheme as originally proposed
and the amendments made in the scheme in respect of the compromise offered to
the secured creditors have not been considered by the unsecured creditors as
well as by the members of the company. According to Mr. Vakil if a
comprehensive scheme of compromise and arrangement is offered to various
classes of members and creditors and if some class of members and creditors
approved the comprehensive scheme and if subsequently in respect of one other
class the scheme is modified at the suggestion of the other class, the modified
scheme should again be submitted to the remaining class of creditors and
shareholders. This approach to the problem ignores the very structure of
section 391 of the Companies Act. Section 391 permits the company or anyone
proposing the scheme to offer compromise between the company and its members or
any class of them, and between the company and its creditors or any class of
them. In other words, there can be a compromise between a company and one class
of its creditors or members and that compromise can be arrived at as between
the company and that class of members or creditors only and it need not be
approved or ratified by other class of members or creditors not affected by the
same. The compromise has to be considered by the class which is to be affected
by the compromise and to which the compromise is offered. Requirements of
section 391 do not imply that every compromise between a company and one of its
class of creditors or members should be approved and ratified by all other
class before it can be sanctioned by the court. It is implicit in section 391
that the company may offer compromise to one of its class of members or
creditors and approval by statutory majority of that class alone is necessary
before it can be submitted for sanction of the court. The court while according
its sanction to such a scheme may consider whether this compromise affects any
one other than the class to which it is offered. If it does not, it is not at
all necessary that such a compromise should be ratified and approved by a
statutory majority by other class of creditors and members. If this is the
correct interpretation of section 391, in my opinion, it furnishes a complete
reply to the contention of Mr. Vakil. The company in this case has two classes
of members and three classes of creditors. They are: ordinary and preference
shareholders and secured creditors, preferential creditors and unsecured
creditors. The company has offered compromise to each class and, in my opinion,
even though the compromise is incorporated in a comprehensive scheme, in fact,
each class will have particularly to consider and if thought fit to approve
that part of the compromise which is offered to it. In the process that class
may deliberate upon the entire comprehensive scheme of compromise and
arrangement, then it would be open to that particular class to reject the
compromise offered to it, if it felt that in comparison to other class of
creditors and members it has not been given a fair deal or in view of the compromise
offered to other class of creditors and members it may consider the compromise
offered to it as unfair and disapprove the same. But even if the comprehensive
scheme of compromise and arrangement is offered for consideration to various
classes of creditors and members each class will have to consider and
deliberate upon the compromise offered to it though in the process it may
consider the feasibility of the whole scheme. But the requirements of law will
be satisfied if each class deliberated upon and approved that part of the
compromise of offered to it. In the present case, ordinary shareholders were
offered a compromise by which the nominal value of the ordinary share was to be
reduced and the same was the case with regard to the preference shareholders.
Excluding the preferential creditors, namely, workers of the company, other
unsecured creditors were offered a compromise that 50 per cent of their claim
will be converted into share capital with the reduced nominal value of the
share and the balance of 50 per cent, would be paid by instalments after a
period of 2 years. Therefore, this would show that each class is offered a
distinct separate compromise. The secured creditors were offered a compromise
that they would be paid in full but the mode of payment would be by
instalments. This aspect was before the mind of the unsecured creditors and
members. If the mode of payment with regard to secured creditors as suggested
in the proposed scheme is altered at the instance of the secured creditors, in
my opinion, it is not necessary that before the scheme can be submitted to the
court for its sanction, the amended compromise offered to the secured creditors
should be ratified and approved by the unsecured creditors, preferential
creditors and members of the company. Even though an all-pervasive scheme of
compromise and arrangement comprising within its folds various different
compromises offered to different class of creditors and members is offered for
approval, in effect every class will have to consider the compromise offered to
it and its judgment disclosed by its voting will have to be considered in
respect of that part of the compromise affecting it. Viewed from this angle,
there is no force in the contention of Mr. Vakil that the amendments which had
been passed at the meeting of the secured creditors have not been passed
according to the correct legal procedure. In this connection, Mr. Vakil had
also contended that the amendment proposed at the meeting of the unsecured
creditors were also not properly adopted. Three amendments were proposed at the
meeting of unsecured creditors and members of the company relating to the
payment to the Employees' State Insurance Corporation; payment to Indequip
group of companies to be deferred till cotton merchants and suppliers of stores
referred to in clauses 2(e) and 2(f) are paid their dues and deletion of clause
2(g) from the scheme. Clause 2(g) provides that the payment of arrears of wages
and retrenchment compensation to the workers be deferred for a period of two years.
These amendments were undoubtedly proposed at the meeting but it was urged that
they were not properly proposed and seconded. There is no substance in this
contention because the resolution passed at the meeting shows that the scheme
was approved after incorporating the aforementioned amendments. Therefore, the
contention of Mr. Vakil under this sub-head must be negatived.
The third limb of the argument was that Indequip group of
companies and two other creditors participated in the meetings of both secured
creditors and unsecured creditors and this by no canon of construction of
section 391 would be permissible. This aspect has already been considered while
disposing of ground No. 5. Suffice it to say that Indequip group of companies
and two other creditors were not allowed to vote at the meeting of the secured
creditors. In fact, except the bank and provident fund authorities the other
five secured creditors having now given up their charge and charges created in
their favour having now been relinquished or were void from their very
inception for want of registration under section 125 they would be unsecured
creditors and, therefore, the value of their vote should not be taken into
consideration while considering whether the scheme has been approved by a
statutory majority of the secured creditors. It may be mentioned that after the
aforementioned five creditors are excluded from the category of secured
creditors, only two secured creditors remain, namely, the bank and the
provident fund authorities and both of them have approved the scheme and,
therefore, no illegality attaches to the proceedings of the meeting of the
secured creditors where the aforementioned five creditors initially attended
the meeting. It must be distinctly made clear that Indequip group of companies
and two other creditors were not permitted to vote at the meeting of the
secured creditors and in final analysis the votes of the remaining creditors,
namely, M/s. Amarshi Damodar and Atul Cotton Traders, have been excluded while
computing the voting at the meeting of the secured creditors.
The last limb of the argument under this sub-head is that
those creditors who are companies within the meaning of the Companies Act
should have lodged their resolution and proxy as required by section 187 before
they could attend and vote at the meeting. Section 187 of the Companies Act
reads as under:
"187.
Representation of corporations at meetings of companies and of creditors.—(1) A body corporate
(whether a company within the meaning of this Act or not) may—
(a) if it is a
member of a company within the meaning of this Act, by resolution of its board
of directors or other governing body, authorise such person as it thinks fit to
act as its representative at any meeting of the company, or at any meeting of
any class of members of the company;
(b) if it
is a creditor (including a holder of debentures) of a company within the
meaning of this Act, by resolution of its directors or other governing body,
authorise such person as it thinks fit to act as its representative at any
meeting of any creditors of the company held in pursuance of this Act or of any
rules made thereunder, or in pursuance of the provisions contained in any
debenture or trust deed, as the case may be.
(2) 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."
It would appear from the language of section 187 that if a
company is a creditor of another company within the meaning of the Companies
Act, it may authorise by resolution of its board of directors any person as it
thinks fit to act as its representative at any meeting of the creditors or at
any meeting of members of the company held in pursuance of the provisions of
the Companies Act and such a person authorised by the resolution would be
entitled to attend in person and by his presence, the company as creditor would
be attending the meeting in person. Such a person authorised by the resolution
to represent the company would also be entitled to vote by proxy. A proxy by
such a person properly lodged would be a proxy on behalf of the company. It
would thus appear that where a person authorised by the resolution of a board
of directors of a company attends in person it is not necessary that he should
also hold a proxy properly lodged for and on behalf of the company. On a true
interpretation of section 187 it appears that where a company is a creditor of
another company, the first company by resolution of the board of directors may
authorise any person to attend the meeting of the creditors of the other company
of which it is a creditor. In such circumstances, the authority conferred by
the resolution would enable the person so authorised to attend the meeting on
behalf of the creditor company. Such appearance of the person so authorised
would indicate the presence of the company as creditor in person looking to the
language of section 187. Such a person need not hold proxy on behalf of the
company. In fact he himself can nominate a representative to vote by proxy and
his vote by proxy would bind the company by whose resolution he is authorised
to attend the meetings. Mr. Vakil, however, urged that even if there is a
resolution authorising the person to attend a meeting of the creditors of the
debtor company on behalf of the creditor company, he should not only be authorised
by a resolution but he should also lodge proxy on behalf of the creditor
company. In my opinion, this is not borne out by the language of section 187.
Mr. Vakil, however, referred to Arun prasad v. Shantilal Shankarlal Shah.
The question that arose for consideration of the Supreme Court was as to the
manner in which the creditor company can validly cast its vote at the meeting
of the creditors held under the provisions of section 153 of the Companies Act
of 1913. It would appear that the case is decided under the provisions of the
Companies Act of 1913, Undoubtedly, in that case it is held that, though the
person who was authorised by the directors of the creditor company to represent
the said company at the meeting was present in person at the meeting, the
company could not be regarded as having been present at the meeting in person,
within the meaning of section 153, and, as that person was also not a proxy,
the vote cast by him at the meeting was void. But in this very case the effect
of the provisions contained in section 187(2) is left open. It is observed that
in the Companies Act of 1956 a provision has been introduced under which a
company which is a creditor of another company may by resolution of its
directors authorise such person as it thinks fit to act as its representative
at any meeting of the creditors of the company held in pursuance of the Act and
a person authorised in this manner shall be entitled to exercise the same
rights and powers (including the right to vote by proxy) on behalf of the
company. Such a provision was not to be found in the Companies Act of 1913 and,
therefore, this decision is not an authority for the proposition that a person
authorised by a resolution of the board, before he can represent the company
should also hold a proxy, especially after the introduction of section 187, and
particularly subsection (2) of section 187 of the Companies Act. In my opinion,
the provision contained in sub-section (2) is a complete answer to the
contention of Mr. Vakil and it must stand negatived. Thus, there is no force in
the contention that the meetings of the creditors and members were conducted in
an irregular manner.
Re. Ground No. 8.—The next ground of attack is that even if
it be held that the meetings were properly conducted, in fact, the scheme is
not approved by a statutory majority. There was also an alternative submission
that, assuming that the other view is possible, the court on an analysis of
votes recorded at the meeting should not exercise its discretion in favour of
the scheme so as to impose it on the dissenting creditors and members. I will
first examine the first part of the submission that the scheme is not approved
by the statutory majority of the creditors and members. Before the court can
accord sanction to the scheme of compromise and arrangement, it must be
approved by a majority in number representing 3/4ths in value of the creditors
or class of creditors or members or a class of members, as the case may be,
present and voting, either in person or where proxies are allowed by proxy. The
submission is that neither the creditor nor the members have approved the
scheme of compromise and arrangement by majority in number representing 3/4ths
in value. Ordinary and plain meaning of section 391(2) is that the scheme of
compromise and arrangement must be approved by a majority in number of each
class of creditors and each class of members and the affirmative votes must
represent 3/4ths in value of the shares or debt represented by the person
attending the meeting either in person or by proxy.
The issued and subscribed capital of the company consists
of 788 ordinary shares each of Rs. 1,000 fully paid and 1,050 redeemable cumulative
preference shares each of Rs. 100. In all 117 ordinary shareholders holding 597
ordinary shares attended the meeting of the ordinary shareholders by person or
proxy. Eighty-one shareholders holding 522 equity shares voted in favour of the
scheme and 34 ordinary shareholders holding 72 ordinary shares voted against
the scheme. The validity of votes of the two ordinary shareholders holding
three shares was considered doubtful. Excluding the doubtful votes the analysis
would show that 80 ordinary shareholders holding 5/8 ordinary shares cast valid
votes in favour of the scheme and 32 ordinary shareholders holding ordinary
shares cast valid votes against the scheme. It would immediately appear that
the valid votes cast in favour of the scheme were majority in number
representing 3/4ths in value of the total shares represented at the meeting by
the members attending the meeting by person or proxy. Obviously, therefore, the
scheme is approved by a statutory majority in the meeting of ordinary
shareholders.
The meeting of the preference shareholders was attended by
71 preference shareholders either in person or by proxy holding 544 preference
shares. Out of the aforementioned 71 preference shareholders present in person
or by proxy 55 shareholders holding 456 preference shares voted in favour of
the scheme while 16 shareholders holding 88 shares voted against the scheme. It
would immediately appear that the valid votes cast in favour of the scheme were
majority in number representing 3/4ths in value of the total shares represented
at the meeting by the members attending the meeting by person or proxy.
Doubtful votes were not taken into consideration. Obviously, therefore, the
scheme is approved by a statutory majority in the meeting of preference
shareholders.
The meeting of the secured creditors of the company was
convened first on October 6, 1968, and was adjourned to various other days. The
Union Bank of India and the Central Board of Trustees of the Provident Fund
were the only secured creditors of the company and both of them have voted in
favour of the scheme subject to the modifications suggested by them in respect
of the compromise offered to each of them and the same has been accepted by the
sponsors of the scheme and, therefore, the final scheme submitted to the court
is approved by both the secured creditors which would indicate that the same
has been approved by a statutory majority. It may be mentioned here that Asia
Electrical India Pvt. Ltd. Company holds a charge for the price of the blading
system supplied by it to the company. The said creditor claims to be the
creditor of the company to the tune of Rs. 1,48,471.20 and has filed a suit to
recover the said amount in the High Court of Maharashtra against the company. A
representative of the said creditor attended the first meeting of the secured
creditors but did not attend the subsequent meetings when the secured creditors
finally voted upon the scheme. It may however, be mentioned that under the
scheme Unit II of the mills of the company is to be scrapped and sold and the
realization therefrom is to be shared by the Union Bank of India and the
Central Board of Trustees of the Provident Fund. The scrapping of Unit No. II
includes scrapping of the blading system which is part of the power plant of
the company. Therefore, blading system will also be sold. Out of the price
realised by the sale of the blading system the Union Bank has agreed to pay the
amount payable to Asia Electric India Pvt. Ltd. Company. At any rate, it cannot
be said that Asia Electric Company claiming to be secured creditor of the
company has voted against the scheme. Indian Electro Chemicals Ltd., Dyestuffs
and Chemicals Private Ltd., Indequip Ltd., Messrs. Amarshi Damodar and Messrs.
Atul Cotton Traders had at one stage claimed to be the secured creditors. They
were not recognised as such and they were not permitted to vote at the meeting
of the secured creditors. In fact the charge created by the bank in their
favour having not been registered by the Registrar of Companies on the date of
the meeting or subsequent thereto and they having specifically relinquished the
charges in their favour could by no stretch of imagination be said to be
secured creditors and, therefore, they were rightly not permitted to vote at
the meeting of the secured creditors. Even if they are considered to be secured
creditors, they having approved and consented to the scheme, there is no
negative vote at the meeting of secured creditors. It can, therefore, be said
with reasonable certainty that the scheme has been approved by the secured
creditors of the company by more than the statutory majority.
That takes me to the meeting of unsecured creditors. As
stated earlier, the meeting of unsecured creditors was attended by the
creditors who were suppliers of stores and cotton, workmen of the company and
the depositors. The depositors are relations and members of the family and a
few friends of the managing director, Linubhai Hiralal Banker. The total value
of the debt represented by the creditors attending the meeting was to the tune
of Rs. 1,11,05,004. The creditors representing the claim in the value of Rs.
94,94,502 voted in favour of the scheme. If the meeting of the unsecured
creditors as a class is held to be valid, it would appear that as against the
creditors representing the debts of the company to the tune of Rs. 94,94,502
who voted in favour of the scheme, only creditors representing debts to the
tune of Rs. 9,52,185 voted against the scheme. Therefore, it would prima facie
appear that majority of the unsecured creditors representing 3/4ths in value
approved the scheme.
It was very vehemently contended that preferential
creditors and unsecured creditors were grouped together in one class and,
therefore, the votes cast at such an illegal meeting approving the scheme
cannot be taken into consideration by the court. As stated earlier, the workers
of the company would be preferential creditors; so also, the Employees' State
Insurance Corporation would be a preferential creditor of the company and they
should not have been grouped together with the other unsecured creditors. For
the reasons stated hereinabove, the creditors of the company would fall broadly
into three distinct classes, namely, secured creditors, preferential creditor
of the company and they should not have been grouped together with the other
unsecured creditors. For the reasons stated hereinabove, the creditors of the
company would fall broadly into three distinct classes, namely, secured
creditors, preferential creditors and other unsecured creditors. Separate
meeting of secured creditors has been convened and they have approved the
scheme. The error appears to have been committed in convening the joint meeting
of preferential and unsecured creditors. But the report of the Chairman would
help in finding out the debts represented by the preferential creditors and the
debts represented by other unsecured creditors in the meeting of unsecured
creditors. The report of the Chairman would show that out of 1955 creditors
including both preferential and unsecured creditors, who attended the meeting,
1055 creditors inclusive of both the classes representing Rs. 94,91,502 voted
in favour of the scheme. It would further appear from the report that the
workmen of the company forming a class of preferential creditors who attended
the meeting represented their claim to the tune of Rs. 36.33,400. The claim of
the Employees' State Insurance Corporation against the company on that date was
to the tune of Rs. 6,27,346. The workmen and Employees' State Insurance Corporation,
being the preferential creditors, would form one class. It may be that as the
compromise offered to the Employees' State Insurance Corporation is slightly
different from the compromise offered to the workmen of the company, the
workmen and the Employees' State Insurance Corporation may each form a distinct
class. The remaining unsecured creditors would comprise suppliers of cotton and
stores and depositors. An entirely identical compromise is offered to the
suppliers of cotton, stores and depositors and, therefore, they can be
conveniently grouped together in one class. Their rights are not so dissimilar
as to make it impossible for them to consult each other for their own interest.
Thus, the workers being preferential creditors would form one distinct class.
Employees' State Insurance Corporation would form another class. The remaining
unsecured creditors would form a class by themselves. The next thing is to find
out the votes and value of votes cast in each class to ascertain whether in
each class the scheme is approved by statutory majority. It is very easy from
the report of the Chairman to find out the total number of workers present and
the value of their votes. It is equally easy to find out the value of the vote
of Employees' State Insurance Corporation. The composite value of the
affirmative votes cast in favour of the scheme at the meeting according to the
report was Rs. 94,94,502. This is inclusive of the claim of workers as
preferential creditors which was to the tune of Rs. 36,33,400. If the votes of
the workmen representing in value the claim to the tune of Rs. 38,33,400 is
deducted from the votes representing the debt of other unsecured creditors to
the tune of Rs. 94,94,502 the balance would be Rs. 58,61,202 out of which vote
representing the value of the claim of the Employees' State Insurance
Corporation to the tune of Rs. 6,27,346 should be deducted which would leave a
balance of Rs. 52,33,756. The unsecured creditors being suppliers of stores and
cotton and depositors and excluding preferential creditors who attended the
meeting and voted in favour of the scheme represented the debt in the value of
Rs. 52,33,756. The value of the claim of the creditors who voted against the
scheme was Rs. 9,82,185. It would immediately appear that the unsecured
creditors excluding the preferential creditors, namely, the workmen and
Employees' State Insurance Corporation have approved the scheme by more than
the statutory majority.
The workmen of the company who attended the meeting
unanimously voted in favour of the scheme, and the value of their claim was Rs.
36,33,400. Similarly, Employees' State Insurance Corporation whose claim was in
the amount of Rs. 6,27,346 has accepted the scheme. Thus the workmen of the
company who would be preferential creditors forming a distinct class of
creditors of the company have approved the scheme by more than a statutory
majority. So also, the Employees' State Insurance Corporation who would be a
distinct class of creditor of the company has accepted the scheme. It thus becomes
crystal clear that the preferential creditors of the company have approved the
scheme by more than the statutory majority.
At this stage one submission of Mr. Vakil may be noticed.
It was very vehemently urged that if the preferential creditors and unsecured
creditors each form a distinct class, separate meetings of each class ought to
have been convened and it is not open to the court to analyze the votes at a
meeting attended by such heterogeneous creditors as unsecured creditors,
preferential creditors and Employees' State Insurance Corporation and arrive at
a positive finding. It was further urged that it would not be possible to find
out how the judgment of each class of creditors must have been affected or
influenced by deliberation in such a meeting of heterogeneous creditors and it
was further contended that the workers who are vitally interested in the
restarting of the mills of the company must have caused an over-powering
influence on the deliberations at the meeting and the judgment of other
creditors would be adversely affected. The submission was that if once an error
is committed in convening the meetings, nothing further can be done and either
the court should ignore the decision arrived at such a meeting or at best fresh
meeting with proper clarification should be convened and consideration of the
scheme should be postponed till such meeting is convened and result is notified
to the court. It is undoubtedly true that at the stage of giving directions
under section 391 it is the bounden duty of the sponsors of the scheme to place
proper materials before the court so that the court can give accurate
directions for convening separate meetings of distinct class of creditors and
members. It must be confessed that such a case was not taken by the company
when direction for convening the meeting of unsecured creditors was given and
which included within its fold grouping together of such heterogeneous
creditors as preferential creditors, Employees' State Insurance Corporation and
other unsecured creditors. It would have been well and good if such distinct
and separate meetings were convened in respect of each class of distinct
creditors. But if error was committed yet the voting at the meeting can be
properly analysed to find out which was the distinct class whose separate
meeting could have been called and votes of each class can be ascertained, in
my opinion, such an error would not be fatal. There is absolutely no allegation
that one class of creditors imposed themselves on the other class or that the
majority coerced the minority into acceptance of the scheme. In the absence of
slightest allegation to that effect and in the absence of any allegation that
there were no free, frank and fair deliberations, in my opinion, it is not
necessary to order a fresh meeting of the distinct class of creditors. If there
was the slightest doubt in my mind that one class of creditors, namely,
preferential creditors, by their sheer majority imposed themselves on the
minority or the minority were coerced into approving the scheme, I would have
certainly ordered separate meetings of preferential creditors and unsecured
creditors. But the analysis of the votes would show that except the principals
of Chandulal Hiralal Banker who is practically the only contesting creditor and
whose stubborn opposition to the scheme is attributable not to inherent
demerits of the scheme but to the personal feuds and vengeance and no other
unsecured creditor representing any substantial interest opposed the scheme in
the meetings of unsecured creditors, framing or the hearing of their petition,
it is not necessary to order. In these circumstances, in my opinion, the
analysis of the vote at the unsecured creditors' meeting after separating the
preferential creditors from other unsecured creditors should be taken into
consideration to find out whether the preferential creditors as a class have
approved the scheme and whether other unsecured creditors as a class have
approved the scheme. As stated above, the workers as being preferential creditors,
the Employees' State Insurance Corporation and other unsecured creditors each
as a class has approved the scheme by statutory majority and, therefore, there
is no substance in the contention that the scheme is not approved by statutory
majority.
The alternative submission of Mr. Vakil may now be
considered. It was urged that even if it be held that the scheme has been
approved by different classes of creditors and members in their respective
meetings by statutory majority, the court on an appropriate analysis of voting
would not impose such a scheme on the dissentient members and creditors. The
submission was that the scheme is so designed as to help Gopaldas Parikh and
his protege, Linubhai Banker, to cover their misdeeds and to give them unfair advantage
by which they would have an octopus hold on the company. It was urged that if
the scheme is approved, three companies in which Gopaldas Parikh has a
controlling interest, namely, Indian Electro Chemicals Limited, Dyestuffs &
Chemicals Private Limited and Indequip Limited, would be able to obtain
ordinary shares of the company worth Rs. 20 lakhs and thereby they would have
such a controlling voice in the affairs of the company that their misdeeds
could not be brought to light and they would be able to ride rough shod over
the other shareholders. It was also urged that Shardaben, Shantaben and
Chandulal Banker who are contestants would be left to the tender mercy of
Gopaldas Parikh and Linubhai Banker. In fact, even at the present stage,
Indequip group of companies along with Linubhai Banker, and the members of his
family hold 422 shares out of the total number of 738 ordinary shares of the
company. If the scheme is sanctioned Indequip group of companies would be able
to get allotment of shares worth Rs. 20 lakhs by conversion of their 50 per
cent, claim against the company. It is not likely to tilt the balance in a
different way. It cannot be said, therefore, that the scheme is designed for
obtaining a controlling voice in the affairs of the company. On the contrary,
if the scheme is sanctioned, number of other creditors would become holders of
shares and would be able to influence the management in the affairs of the
company. Therefore, on this account, the scheme cannot be rejected. Even at the
cost of repetition, it must be mentioned that the scheme is opposed by a very
few creditors and an infinitesimally small number of shareholders. The fact
that the scheme has been approved by a requisite majority of shareholders is
undoubtedly a strong argument in its favour, unless it is shown that their
approval was not obtained fairly and the terms of the scheme are not such as a
reasonable man may accept. The approval of a scheme by statutory majority of
creditors and members is not decisive of the matter. But it is equally true
that due weight should be attached to the choice indicated by the creditors and
members who are vitally interested in the company and the scheme affecting the
company. Further, on the analysis of the votes cast at the meeting, the salient
feature that comes out to the surface is that the scheme was opposed especially
by those who, apart from the merits of the scheme, are personally opposed to
Gopaldas Parikh and Linubhai Banker. The feud appears to be more between the
blood relations rather than between the creditors and members who have offered
their best commercial judgment to the scheme on its merits. It is an
inescapable conclusion that Chandulal Banker as a power of attorney holder of
Shardaben, and Shantaben who is the principal contender, opposed the scheme
tooth and nail not because he had the interest either of the company or
creditors and members at heart but because he had to leave the active
management when Gopaldas Parikh and Linubhai Banker stepped in and because of
his personal vendetta against both of them. In this view of the matter it is
not possible to accept the submission of Mr. Vakil that the scheme should not
be imposed upon dissentient members.
Re. Ground No. 9.—The last ground of attack was that the
scheme is not commercially and economically viable or feasible and is in fact
unfair and unreasonable. Before I proceed to consider this contention on
merits, the approach to the scheme of compromise and arrangement by the court
should be made clear. How should the court approach a scheme of compromise and
arrangement submitted for its sanction which is shown to have been approved by
a statutory majority of creditors and members who are directly affected by the
scheme. The burden, of course, of showing that the scheme is a fair and
reasonable one initially lies on the petitioner. The petitioner must prima
facie show that the scheme is pre-eminently fair and reasonable as a prudent
and reasonable shareholder would approve of and not object to. In order to show
prima facie that the scheme is fair and reasonable, it is open to the
petitioner to submit that due weight must be accorded to the fact that the
majority has recorded a decision in favour of the scheme and the court must not
lightly ignore or set aside that decision. In In re Sidhpur Mills Co. Ltd.
Miabhoy J. (as he then was), in this connection, observed as under:
"Therefore the scheme has not got to be scrutinised by
the court with that much care with which an expert will scrutinise it, nor will
it approach it in a carping spirit with a view to pick holes in it. If the
majority is acting in a bona fide and honest manner and in the interests of the
class that it purports to represent, then, if the scheme is such as a
fair-minded person, reasonably acquainted with the facts of the case, as
prevailing at the time when the scheme was sponsored and approved, can regard
it as beneficial for those whom the majority seeks to represent, then, unless
there are some strong and cogent grounds to show that the scheme was conceived,
designed or calculated to cause injury to others, the court will ordinarily
sanction it, rather than reject it."
This must be the approach of the court while examining the
scheme and the court should, keeping in view all the aspects of the matter,
prefer a living scheme to compulsory liquidation bringing about an end to a
company. Reference may be made to Lawrence Dawson v. j. Hormasji
Cunliffe J. has observed as under:
"The court is of course not a mere machine for
registration. It will look into the proposed scheme much as a court of appeal
will canvass, if asked to do so, the decision of a jury, to ascertain if there
was reasonable evidence to support their verdict; but it will, I think, always
also prefer a living scheme to a compulsory liquidation bringing about an end
to a company, and usually without any hope of payment in full."
The court in exercising its discretion under section 321(2)
must treat it as cardinal that its function does not extend to usurping the
view of the members or creditors. It must look at the scheme to see that it is
a reasonable one and while so doing, the court will be strongly influenced by a
big majority vote and the reasons which actuated the contesting creditors in
opposing the scheme. None the less it is essential that the scheme must be a
fair and equitable one though it is none of the business of the court to judge
upon the commercial merits which in fact is the function of the creditors and
members.
Approaching the scheme from this angle, let me find out
whether it is feasible and workable. It is not necessary to bring to bear upon
the subject the expertise of textile magnates. The court must be prima facie
satisfied that the scheme in its broad outlines is a reasonable and fair one
and that it is feasible and workable. The first objection was that the estimate
of receipts and outgoings made in the cash flow statement annexed to the scheme
is factually incorrect and cannot be conceived even in the realm of
possibility. The estimate of rent of godowns to be constructed on the land that
will be vacated by scrapping of Unit II was considered exaggerated. Except
making a statement in affidavit in reply that the estimate is exaggerated, no
material is placed on record to reach the conclusion that the estimate is
exaggerated. It was also urged that, in the year 1963, Rs. 3 lakhs will be
received by way of deposits from the intending lessors and acceptance of
deposit from the intending lessee would result in contravention of section 18
of the Bombay Rents, Hotel & Lodging House Rates Control Act, 1947
(hereinafter referred to as the "Rent Act"), which prohibits a
landlord from receiving any fine, premium or other like sum or deposit or any
consideration other than the standard rent or the permitted increases, in
respect of the grant, renewal or continuance of a lease of any premises. It was
also urged that acceptance of deposit from the intending lessee by the landlord
for granting lease would be a penal offence. It is unnecessary to decide this
point in this case because it does not directly arise for consideration. Prima
facie, however, it may be pointed out that Explanation I to section 18 of the
Rent Act would show that receipt of rent in advance for premises let out for
the purpose other than residence would not come within the mischief envisaged
in section 18. If the premises let out are for the purpose other than
residence, advance rent can be taken by the landlord and if the lease is for a
longer period, it would be open for the landlord to contract that the advance
rent taken would be given credit for for the period which is just preceding the
expiry of the lease. Such an agreement, if entered into between the landlord
and tenant in respect of the premises leased for a purpose other than
residence, would enable the landlord to take advance rent and also continue to
recover the rent for the initial period of the lease. Therefore, even though
what is styled as rent deposit-, it in effect appears to be advance rent to be
taken from the intending lessee and prima facie it does not appear that such an
action would be in contravention of section 18. It was also contended that Rs.
25,000 are expected to be received by sundry receipts, but there is no source
disclosed. The amount is not very large and a textile mill can hope to get it
by way of sundry receipts. It was, however, urged that there is no cash capital
with the company and initially a large cash amount would be required for
restarting the mill and if the realisation from the scrap of Unit No. II is to
be paid straightaway to the secured creditors, there would be no cash capital
with the company to start Unit No. I and unless the Unit No. I starts no income
can be expected. In this connection, I would like to point out that Gopaldas
Parikh has filed his affidavit at page 500 of the record in which he has stated
that he is connected with about 24 companies and he would be in a position to
arrange finances to the extent of Rs. 10 lakhs for restarting Unit No. I of the
mills of the company. There is a similar affidavit of Surotam Hatheesing at
page 498 who is connected with two mills and live other companies. He is also a
managing director of Arvind Mills Ltd. It is nowhere suggested that these
persons would not be able to provide finances as indicated by them in their
respective affidavits. It is also proper to refer at this stage to another
affidavit of Gopaldas Parikh in which he has stated that he would be able to
arrange liquid finance to the tune of Rs. 10 lakhs for the working of the mills
for two years from the date of sanctioning the scheme and that he is prepared
to provide finance from his own resources and personal guarantees to be
furnished by him subject to a condition that whatever additional funds are
brought by him within the said period of 2 years from his resources or on his
personal guarantees they should be secured against the block of the company and
will have first preference of payment after the dues of the present secured
creditors are paid off. At no stage, the ability of Gopaldas Parikh to provide
additional finances was in any way seriously disputed before me. Looking to his
connection with different companies and looking to the fact that various
creditors have extended credit to the company to the tune of Rs. 74 lakhs on
the personal guarantee of Gopaldas Parikh, it would be reasonable to believe
that he would be able to procure finances as promised by him in his affidavit.
It was next contended that production programme annexure
and estimate production statement annexed to the same are based on exaggerated
action of the efficiency of the machinery of the mills and the management. It
was urged that the textile machinery of the company is very old and completely
worn out and would not work at the expected efficiency and the estimated
production cannot be obtained. Reference in this connection was made to the
observations made by the court of inquiry appointed to inquire into the closure
of the mills in Inquiry Case (IC.I/67) wherein it is observed that the mills is
very old with equally old machinery and that there is no other alternative but
to scrap the mill. It is true that the machinery is very old; and it is also
true that when both the units worked the company suffered loss and, therefore,
apparently, it would appear that when one of the two units is to be scrapped
the other unit could not be profitably worked. But it appears that uneconomic
working of the two units apart from being the result of depreciation in the
textile industry was to a considerable extent attributable to the division of
the mills into two units in two separate sheds which raised labour ratio to an
uneconomic level. Once Unit No. II is scrapped the other Unit can be profitably
worked. An expert like Chandraprasad Desai, general manager of Arvind Group of
Mills, was one of the opinion that Unit No. I can be profitably worked and
estimated production can be obtained. Gopaldas Parikh consulted Chandraprasad
Desai and a reply received from Chandraprasad Desai is at page 503. Annexed
thereto are the monthly working of the mills and estimated production
statement. Mr. Vakil compared these two statements with statements annexed to
the scheme submitted to the creditors and members and tried to point out
discrepancies between the two. There are some discrepancies but they are not of
material nature. After all two experts are bound to differ in their estimates
and unless the difference is of an unbridgeable character, it is not the
function of the court to examine the scheme like that of an expert in the
textile industry. Suffice it to say that Chandraprasad Desai, whose claim as an
expert was not very seriously disputed and cannot be disputed, has expressed an
opinion that Unit No. I can be profitably worked and that, in my opinion, along
with the fact of approval by creditors and members, would be sufficient to come
to the conclusion to say that the scheme is workable and feasible.
The next question is whether the scheme is a reasonable and
a fair one. The scheme offers compromise of an equitable character to the
members and unsecured creditors. But it was urged that the Union Bank and the
Central Board of Trustees of the Provident Fund have been given an unfair
advantage and they are net expected to make any sacrifice which other
interested persons are called upon to make in the scheme. It was urged that the
bank does not agree to reduce its claim and insists upon continuance of its
security and no relief is sought to be given even in payment of interest. It
was also urged that the amount to be realised from the scrap of Unit No. II
would be wholly appropriated towards the payments of the dues of the Union Bank
and the Central Board of Trustees of the Provident Fund. That of course is
true. It must, however, not be forgotten that the Union Bank of India is a
secured creditor and can remain outside winding up and prima facie it appears
that if it does realise its security, nothing would be left for other creditors
and members. The Central Board of Trustees of the Provident Fund have given
concession inasmuch as they have agreed to give up damages payable by the
company on its failure to pay the provident fund contribution and that is an
important concession. Further, both the secured creditors agreed to accept
payment by instalments spread out over a long period. It, therefore, cannot be
said that the bank and the Central Board of Trustees of the Provident Fund are
given unfair advantage in the scheme to the detriment of the interests of the
other unsecured creditors and members. Now, if the scheme is sanctioned, the
company is likely to be enormously benefited and obtain substantial benefit to
which I would presently refer. It must be distinctly understood that the
advantages sought to be extended and concession sought to be granted are
subject to an important reservation that the proposed advantages and
concessions would be extended or made if and only it the scheme is sanctioned. Considering
all these aspects, in my opinion, the scheme is a reasonable and fair one and,
on the present material, it can be said that it is commercially sound and
economically viable. Therefore, it is not possible to accept the contention of
Mr. Vakil that the scheme is neither fair nor reasonable nor workable.
I should like now to dwell upon the important aspect why
the scheme should be approved. There are two alternatives before the court: (1)
to sanction the scheme, or (2) to reject the scheme and as a necessary
corollary to wind up the company by passing appropriate orders on three winding
up petitions which are pending before the court. If the scheme is to be
rejected the only alternative is to wind up the company; and it was urged with
utmost vehemence that for an insolvant company, winding up is its inevitable
fate and natural corollary. The company can at this stage be undoubtedly said
to be commercially insolvent and in respect of such a commercially insolvent
company, the creditor would be entitled to an order for winding up the company
ex debito instias. But when in respect of such a company, a scheme of
compromise and arrangement is offered, the court should, in my opinion,
evaluate the position—firstly of creditors and secondly of members in winding
up and in the scheme and should weigh the advantages that may accrue in either
course to be adopted by the court and find out which way the balance tilts. If
the matter is approached from this angle, in my opinion, the conclusion in this
case is inescapable. If the company is ordered to be wound up, the liquidator
would dispose of the assets of the company and will have to apply first the
receipts for discharging the dues of the secured creditors and then
preferential creditors and thereafter unsecured creditors; and if there is any
balance, there would be pro rata distribution to the members. The present
liabilities of the company are in the aggregate amount of Rs. 1,64,54,117. The
company is indebted to the bank to the tune of Rs. 40 lakhs and roughly Rs. 22
lakhs are payable to the Central Board of Trustees of the Provident Fund. The
company has to pay Rs. 8 lakhs to the Employees State Insurance Corporation and
the preferential claim of the workers would come to Rs. 20 lakhs. Indequip
Group of companies are creditors to the tune of Rs. 40 lakhs and there are
other unsecured creditors to the tune of Rs. 15 lakhs. The remainder is the
claim of the workers representing their non-preferential claim. If the assets
of the company are sold, taking the best view of the matter, Rs. 28 lakhs may
be realised by the sale of the machinery and the land may fetch, at the best
available price, Rs. 35 lakhs. I have worked out the figure of Rs. 28 lakhs of
the machinery on the basis that the company hopes to realise Rs. 14 lakhs by
sale of the machinery after scrapping Unit No. II only. The company is the
owner of the land admeasuring about 59,000 sq. yds. These are approximate
estimates. It would immediately appear that the claim of the secured creditors
and preferential creditors would not be paid in full by the sale of the assets
of the company at the market price. After satisfying the claim of secured
creditors and preferential creditors there will be no residue and the unsecured
creditors are not likely to get a farthing, and even a part of the claim of the
preferential creditors, in my opinion, would remain unsatisfied. Therefore,
there is no vestige of a chance for the unsecured creditors to get anything towards
their claim in the event the company is ordered to be wound up. Even Mr. Vakil
could not by any logic work out the figures to show that looking to the present
liabilities of the company towards the secured creditors and preferential
creditors in the event of winding up, unsecured creditors were not likely to
get even a fraction of one per cent, towards their dues. In the event of
winding up the mills will be closed down and would be disposed of and, if they
are disposed of by scrapping the machinery, there is no question of restarting
the mill even by the purchaser. As a necessay consequence the workers would be
unemployed and starvation would be their only lot. The company would be
dissolved and would come to a dead end. This consequence would generally follow
in the event of an order of winding up the company being made and taken to its
logical end.
If, on the other hand, the scheme is sanctioned, the
secured creditors and preferential creditors would be paid in full. The
unsecured creditors would get 50 per cent. of their claim in the shape of
ordinary shares of the company and the balance of 50 per cent. would be paid by
instalments commencing after a period of two years after restarting of all the
departments of Unit No. I. Unit No. I would be restarted under the scheme and
would provide employment to roughly 1,000 workers. These aspects cannot be lost
sight of even on a humanitarian ground. The company would be resuscitated. The
debt liability of the company would be considerably reduced because the
Indequip Ltd., which is the biggest unsecured creditor roughly to the tune of
Rs. 40 lakhs, has agreed under a compelling necessity and not out of altruistic
motive to forgo balance of 50 per cent. of its dues after recovering 50 per
cent in the shape of ordinary shares of the company. This concession is made in
the affidavit of Gopaldas Parikh. There is a similar concession made by Mr.
Khale on behalf of Dyestuffs and Chemicals Private Ltd. which would reduce the
liability of the company by another 3 lakhs of rupees. Thus the debt liability
of the company would be roughly reduced by Rs. 23 lakhs. These concessions are
made on behalf of Indequip Ltd. and Dyestuffs & Chemicals Pvt. Ltd. on the
condition that the court sanctions the scheme. It the company is resuscitated,
the members may also hope to earn dividend after a lapse of a few years. Now it
must be confessed that the concession made by Gopaldas Parikh on behalf of the
Indequip Ltd. and by Mr. Khale on behalf of the Dyestuffs and Chemicals Private
Ltd. is not actuated by any altruistic motive because it is absolutely certain
that in the event of the scheme being rejected and an order for winding up the
company is being made, they as unsecured creditors are not likely to recover a
farthing out of their total claim of nearly Rs. 46 lakhs. Their aporoach
appears to be that when everything is likely to be lost part of it may be
recovered by forgoing the other part of it. This concession is not by way of
gift or as an inducement to the court to sanction the scheme. They are actuated
by their approach as a man of business of sound commercial instinct. They may
get 50 per cent. by agreeing to the scheme while they would lose everything if
the scheme is rejected. It is under a compelling necessity that they have made
this offer. Nonetheless it would be beneficial to the company. When thus the
consequence that would follow in the event of sanctioning the scheme or in the
event of winding up order being made directly affecting the creditors and
members, undoubtedly, the balance in favour of the scheme considerably tilts
and that should be a very important circumstance which would influence the
court's decision while considering the scheme on its own merits.
It must also be pointed out that if the scheme is not sanctioned
and an order for winding up is made, the secured creditors, namely, the Union
Bank of India and the Central Board of Trustees of the Provident Fund, have
declared their unequivocal intention to remain outside the winding up and they
would insist on realising their security in full and, in that event, nothing
would be left because the experience of this court, while considering the
offers for purchase of a textile mill in this city for the last one year, shows
that the price realised is hardly attractive. If the scheme is sanctioned the
secured creditors have agreed to be bound by the scheme, while in the winding
up, they have expressed in no uncertain terms that they would remain outside
the winding up and realise their security in full. If they come under the
scheme which they have agreed to do they could be paid by instalments and
keeping in view some of the conditions which I propose to impose while
sanctioning the scheme, the liability of the company to pay running interest
may be reduced to some extent. The Central Board of Trustees of the Provident
Fund have agreed to forgo damages to the tune of Rs. 6 lakhs in the event of
the scheme being sanctioned. The only thing that was harped upon by Mr. Vakil
was that, in the event of winding up, various inquiries can be made into the
misdeeds of the ex-directors and fraudulent preferences can be avoided. I have
already pointed out that the mortgage in favour of the bank and Central Board
of Trustees of the Provident Fund cannot be avoided as fraudulent preferences.
The charges created by decrees in favour of the other five creditors, namely,
Indian Electro Chemicals Ltd., Dyestuffs & Chemicals Private Ltd., Indequip
Ltd., Messrs. Amarshi Damodar and Atul Cotton Traders, have been relinquished,
by way of concession in the above. The result which Mr. Vakil seeks to achieve
is obtained without the order of winding up being made. Thus, giving the matter
my anxious thought the advantages and benefits that are likely to accrue by
sanctioning the scheme far outweigh the imaginary or productive result which
Mr. Vakil thinks can be achieved in winding up. Therefore, also, the scheme
deserves to be sanctioned.
Before sanctioning the scheme it is necessary to give
specific directions subject to which I would accord sanction to the scheme. The
court has power at the time of making an order sanctioning the scheme under
section 392(1)(b) to make such modifications in the compromise or arrangement
as it may consider necessary for the proper working of the compromise or arrangement.
This power can be exercised not for substituting the scheme as approved by the
creditors and members but for making the scheme of compromise and arrangement
effective and workable. The only pre-condition in the exercise of the power
under section 392(1)(b) is that the court can make modifications for the proper
working of the compromise and arrangement. In other words, the court can modify
the scheme of compromise and arrangement so as to make it effective and
workable. It has become necessary to exercise this power because the scheme was
considered by the creditors and members prior to December, 1968, and it was
hoped that it would go through in the early part of the year 1969. For various
reasons, the hope has not materialised with the result that certain
consequential modifications will have to be made in the scheme to make it
effective and workable. Some modifications have also become necessary in order
to restrict the powers of the bank and Central Board of Trustees of the
Provident Fund to throw overboard the scheme at their sweet will and pleasure.
The scheme gives discretion to the bank in the event of the bank in its
absolute discretion feeling that its rights as secured creditors are in
jeopardy or its guarantee is impaired, to take any action as a secured
creditor. The scheme also gives an option to the bank and Central Board of
Trustees of the Provident Fund to recover the whole amount at once if the
default in payment of instalment is committed. While sanctioning the scheme if
these provisions are retained, it would give veto to the bank and the Central
Board of Trustees of the Provident Fund to play ducks and drakes with the
scheme at their sweet will. Such a power to take unilateral action to the
detriment of other interested persons bound by the scheme with a view to
destory the scheme given to the bank and Central Board of Trustees of the
Provident Fund, would always keep the scheme at the tender mercy of those two
creditors and it would not be conducive to the healthy working of the scheme of
compromise and arrangement. Therefore, I consider it just and proper for the
proper working of the scheme of compromise and arrangement to direct the
following modifications to be made in the scheme and, subject to these
modifications, the scheme would be sanctioned.
Under the scheme, the dues of the bankers are to be paid by
monthly instalments commencing from the specified date. The date has become
almost unmeaning when the scheme is being sanctioned. Some instalments holiday
is absolutely necessary to give a breathing time to the company. In my opinion,
the first instalment payable by the company to the Union Bank of
Similarly, the monthly instalments payable to the Central
Board of Trustees under the scheme would commence six month safter the
restarting of all the departments of Unit No. I. The company should pay simple
interest on the outstanding amount at the rate agreed upon between the company
and the Central Board of Trustees of the Provident Fund. The clause in the
scheme giving option to the Central Board of Trustees of the Provident Fund to
recover the whole of the amount due to it in the event of the company
committing default in payment of monthly instalments would stand deleted. The
Central Board of Trustees of the Provident Fund would not be entitled to
recover damages as conceded in letter No. BPF-1969/ 44878-M Education and
Labour Department, Government of Gujarat, dated 18th June, 1969. Whenever the
Central Board of Trustees of the Provident Fund want to sell any property of
the company under the rights conferred on the board in the scheme of compromise
and arrangement the same shall not be exercised without prior permission of the
court. It is not open to the board to go out of the scheme and proceed to
realise the security without obtaining the prior permission of the court.
The claim of Indequip Ltd., Indian Electro Chemicals Ltd.,
Dyestuffs Chemicals Private Ltd., M/S. Amarshi Damodar and M/s. Atul Cotton
Traders shall be verified by the official liquidator as court officer. After
ascertaining the amount, half the verified claim will be converted into share
capital of the company. The balance of 50 per cent. of the verified claim
payable to Indequip Ltd. and Indian Electro Chemicals Ltd. shall not be payable
by the company on their own concession in the event the scheme is finally
sanctioned and is worked.
The directors to whom the management of the company would
be restored by the provisional liquidator on the scheme being sanctioned are
restrained from registering taking any steps hereafter pursuant to the
applications already made in respect of charges created in favour of Indequip
Ltd., Indian Electro Chemicals Ltd., Dyestuffs and Chemicals Private Ltd.,
Messrs. Amarshi Damodar and Messrs. Atul Cotton Traders by the decrees of the
City Civil Court, Ahmedabad.
In the event of the scheme being finally sanctioned the
Union Bank of
Sanction is hereby accorded to the scheme of compromise and
arrangement, copy of which is annexed to this judgment subject to the
aforementioned modifications and directions. The court hereby accords sanction
to the reduction of share capital as envisaged in the scheme.
All the parties who appeared at the hearing should bear
their respective costs, except the official liquidator whose costs should come
out of the company. The costs payable to the official liquidator is quantified
at Rs. 1,000.
The provisional liquidator is in charge of the company. The
directions for return of possession of the company will be given hereafter on
judge's summons being taken out by the petitioner or the company. The operation
of the order sanctioning the scheme is stayed till 10th January, 1970, as two
directors, namely, East India Company, and one other creditor, namely,
Pratapsinh Vasantlal, intend to prefer an appeal against this order. The
company to pay the expenses incurred by the provisional liquidator on the bills
submitted by him.
[1945] 15 COMP CAS 148 (MAD.)
HIGH COURT OF
v.
Indian National
Agencies, Ltd.
CLARK, J.
Applications Nos. 2258 and 2259 of 1944
JANUARY 16, 1945
Row and Reddi, for the appellants.
V.K. Tiruvenkatachari, for the respondent.
P.V. Damodara Reddi and D. Doraiswami Nayudu, each applied
in writing for shares in the Indian National Agencies, Limited. These shares
were of the face value of Rs. 1,000. Their applications were considered at a
meeting of the directors of the company held on 12th April 1942. The
applications for shares appear to have been made in February 1942. Each of the
applicants was allotted two shares at the meeting of 12th April 1942 and the
minutes of that meeting recorded that, upon these allotments being made the two
applicants joined the meeting, that is, as directors of the company. As well as
being present at the remainder of this first meeting, the applicants are said to have been present at a number of other
subsequent meetings. The applicants were duly entered on the register of the
members of the company.
Some eight months
later, in about December 1942, the directors of the company resolved to cancel
the allotment of these shares to the applicants. The present applications are
applications to rectify the register by re-inserting the names of the
applicants. The applications are numbered as Applications Nos. 2258 and 2269
respectively of 1944. I have heard these applications together.
It is said on
behalf of the company that the resolution to remove these applicants' names
from the register of members was passed in consequence of a report of the
auditor of the company on the balance sheet of the company's affairs as at 30th
November 1942. In that report, the auditor expresses the view that the
allotment of the shares to the applicants was ultra vires and that the allotments
might therefore be cancelled by the directors.
Before proceeding
further, I may say I am disposed to regard the removal by the company of the
applicants' names from the register of members as wholly illegal. The register
of the members of a company is a public document and I know of no provision in
the companies Act which permits the directors of a company or any officer of a
company to make any alteration to the register in the circumstances alleged in
the present case. If these members' names had been improperly added to the
register, the remedy of the company was to apply to this Court under Section 38
for the rectification of its register and not to take upon itself to alter the
register.
As, however, the
question of the validity or otherwise of the allotment of these shares is now
before me on the present applications, I think it would be more proper and
suitable for me to dispose of these applications on the merits rather than to
allow the applications on the ground stated above and leave the company to file
similar applications again, if they are so advised.
The company claims
that these allotments were invalid by reason of the provisions of article 5 of
the articles of association. That article provides as follows:—
"The shares
shall be under the control of the directors who may allot or otherwise dispose
of the same only among the existing members but shall not without the consent
of the company in general meeting allot or otherwise dispose of them to
outsiders."
It is said that, as
the allotments were made by the directors without the consent of the company in
general meeting, they are accordingly void and wholly inoperative.
Now Section 30, sub-section 2, of the Act provides that a
person who agrees to become a member of a company and whose name is entered in
its register of members shall be a member of the company. The names of both the
applicants were entered in the register of members and accordingly the only
question to be decided is whether they agreed to become members of the company.
If they did, then the applications must succeed.
An agreement to become a member of a company is usually
constituted by an offer in the form of an application for shares and an
acceptance of that offer by allotment. Admittedly each of the applicants made a
written application and the only question is whether those applications were
accepted by the company.
As I have earlier observed, the company, relying on
article 5 of the articles of association, contends that acceptance of the
applicants' offers by the directors alone was entirely inoperative and
accordingly there were no allotments. Further, it is urged on behalf of the
company that the applicants must be deemed, whatever may have been the fact, to
have contracted on the footing of the articles of association including, of
course, article 5. This is, I think, undoubtedly the case. As was observed by
Lord Cairns, L.J., in Peel's case,
"If the memorandum and articles of association are in
existence when (the member) applies for shares, and if he agrees to take his
shares on the footing of the memorandum and articles of association (which
would seem to be the case here), then I think that he ought to be held bound to
look to the memorandum and articles of association before he applied for
shares."
But, in my view, this does not dispose of the matter.
There are, I think, two grounds on which these allotments must, in the
circumstances of this case, be regarded as valid and binding on the company. In
the first place, I consider that the applicants are entitled to rely on the
rule laid down in The Royal British Bank v. Turquand. In that
case, the articles of the company gave power to borrow with the sanction of a
general meeting and it was held that a lender need not enquire whether such
sanction had, in fact, been given. He was entitled to assume that it had and it
was held further that the absence of sanction could not affect his position.
The rule is stated as follows in Palmer's Company Precedents, Fifteenth
Edition, at page 70:—
"This rule is that where a company is regulated by an
Act of Parliament, genera] or special, or by a deed of settlement or memorandum
and articles registered in some public office, persons dealing with the company
are bound to read the Act and registered documents, and to see that the
proposed dealing is not inconsistent therewith; but they are not bound to do
more; they need not inquire into the regularity of the internal
proceedings—what Lord Hatherley called 'the indoor management.' they are
entitled to assume that all is being done regularly."
Applying these rules to the present case, I hold that the applicants
were entitled to assume that the directors were acting regularly and that the
sanction of the company in general meeting had, in fact, been obtained. That
being so, the allotments cannot now be avoided by the company and the
applicants must be regarded as persons who agreed to become members of the
company. This, added to the fact that their names had been added to the
register of members, constitutes them members of the company and, as such, they
are entitled to have their names re-entered on the register of members from the
date on which they have been improperly removed.
The other ground, which is equally strong and in favour of
the applicants, rests on the peculiar circumstances existing in this company.
At the time when the applicants made applications for shares, there were only
six members of this company and all of them were directors. Five of them were
present at the meeting at which the allotments were made. Now it is said on
behalf of the company that, despite that circumstance, the allotments were bad
because the previous consent of the company in general meeting had not been
obtained. But in this case; a meeting of the board of directors of the company
and the company in general meeting are two descriptions of one and the same
body and in these circumstances I find it altogether too technical to consider
whether the six members of the company are or are not to be regarded as having
sanctioned what five of their number did as directors. In this connection,
reference may be made to the case of Express Engineering Works, Limited, In re which
concerned a private company of five members, all of whom were directors. It is
unnecessary to refer to the facts of the case but the following passages from
the judgments of the learned Judges of the Court of Appeal who dealt with that
case are, I think, particularly apt. Lord Sterndale, M.R , at page 470
observed:
"In the present case these five persons were all the
corporators of the company and they did all meet, and did all agree that these
debentures should be issued. Therefore it seems that the case came within the
meaning of what was said by Lord Davey in Salomon v. Salomon & Co. 'I think it
an inevitable inference from the circumstances of the case that every member of
the company assented to the purchase and the company is bound in a matter intra
vires by the unanimous agreement of its members.' "
Later, Lord Sterndale says:
"It was said here that the meeting was a directors'
meeting but it might well be considered a general meeting of the company, for
although it was referred to in the minutes as a board meeting, yet if the five
persons present had said, 'We will now constitute this a general meeting' it
would have been within their powers to do so, and it appears to me that that
was in fact what they did."
"It happened that these five directors were the only
shareholders of the company, and it is admitted that the five, acting together
as shareholders, could have issued these debentures. As directors they could
not, but as shareholders acting together they could have made the agreement in
question. It was competent to them to waive all formalities as regards notice
of meeting etc., and to resolve themselves into a meeting of shareholders and
unanimously pass the resolution in question. Inasmuch as they could not in one
capacity effectually do what was required but could do it in another, it is to
be assumed that as business men they would act in the capacity in which they
had power to act. In my judgment they must be held to have acted as
shareholders and not as directors, and the transaction must be treated as good
as if every formality had been carried out."
I accordingly allow these petitions and direct the
rectification of the register of members of this company by the re-entry of the
applicants' names with effect from the date when they were wrongfully removed
by the company. The applicants will have their costs of these applications.
[1945] 15 COMP CAS 148 (MAD.)
HIGH COURT OF MADRAS
v.
Indian National
Agencies, Ltd.
CLARK, J.
Applications Nos. 2258 and 2259 of 1944
JANUARY 16, 1945
Row and Reddi, for the appellants.
V.K. Tiruvenkatachari, for the respondent.
P.V. Damodara Reddi and D. Doraiswami Nayudu, each applied
in writing for shares in the Indian National Agencies, Limited. These shares
were of the face value of Rs. 1,000. Their applications were considered at a
meeting of the directors of the company held on 12th April 1942. The
applications for shares appear to have been made in February 1942. Each of the
applicants was allotted two shares at the meeting of 12th April 1942 and the
minutes of that meeting recorded that, upon these allotments being made the two
applicants joined the meeting, that is, as directors of the company. As well as
being present at the remainder of this first meeting, the applicants are said to have been present at a number of other
subsequent meetings. The applicants were duly entered on the register of the
members of the company.
Some eight months
later, in about December 1942, the directors of the company resolved to cancel
the allotment of these shares to the applicants. The present applications are
applications to rectify the register by re-inserting the names of the
applicants. The applications are numbered as Applications Nos. 2258 and 2269
respectively of 1944. I have heard these applications together.
It is said on
behalf of the company that the resolution to remove these applicants' names
from the register of members was passed in consequence of a report of the
auditor of the company on the balance sheet of the company's affairs as at 30th
November 1942. In that report, the auditor expresses the view that the
allotment of the shares to the applicants was ultra vires and that the
allotments might therefore be cancelled by the directors.
Before proceeding
further, I may say I am disposed to regard the removal by the company of the
applicants' names from the register of members as wholly illegal. The register
of the members of a company is a public document and I know of no provision in
the companies Act which permits the directors of a company or any officer of a
company to make any alteration to the register in the circumstances alleged in
the present case. If these members' names had been improperly added to the
register, the remedy of the company was to apply to this Court under Section 38
for the rectification of its register and not to take upon itself to alter the
register.
As, however, the
question of the validity or otherwise of the allotment of these shares is now
before me on the present applications, I think it would be more proper and
suitable for me to dispose of these applications on the merits rather than to
allow the applications on the ground stated above and leave the company to file
similar applications again, if they are so advised.
The company claims
that these allotments were invalid by reason of the provisions of article 5 of
the articles of association. That article provides as follows:—
"The shares
shall be under the control of the directors who may allot or otherwise dispose
of the same only among the existing members but shall not without the consent
of the company in general meeting allot or otherwise dispose of them to
outsiders."
It is said that, as
the allotments were made by the directors without the consent of the company in
general meeting, they are accordingly void and wholly inoperative.
Now Section 30, sub-section 2, of the Act provides that a
person who agrees to become a member of a company and whose name is entered in
its register of members shall be a member of the company. The names of both the
applicants were entered in the register of members and accordingly the only
question to be decided is whether they agreed to become members of the company.
If they did, then the applications must succeed.
An agreement to become a member of a company is usually
constituted by an offer in the form of an application for shares and an
acceptance of that offer by allotment. Admittedly each of the applicants made a
written application and the only question is whether those applications were
accepted by the company.
As I have earlier observed, the company, relying on
article 5 of the articles of association, contends that acceptance of the
applicants' offers by the directors alone was entirely inoperative and
accordingly there were no allotments. Further, it is urged on behalf of the
company that the applicants must be deemed, whatever may have been the fact, to
have contracted on the footing of the articles of association including, of
course, article 5. This is, I think, undoubtedly the case. As was observed by
Lord Cairns, L.J., in Peel's case,
"If the memorandum and articles of association are in
existence when (the member) applies for shares, and if he agrees to take his shares
on the footing of the memorandum and articles of association (which would seem
to be the case here), then I think that he ought to be held bound to look to
the memorandum and articles of association before he applied for shares."
But, in my view, this does not dispose of the matter.
There are, I think, two grounds on which these allotments must, in the
circumstances of this case, be regarded as valid and binding on the company. In
the first place, I consider that the applicants are entitled to rely on the
rule laid down in The Royal British Bank v. Turquand. In that
case, the articles of the company gave power to borrow with the sanction of a
general meeting and it was held that a lender need not enquire whether such
sanction had, in fact, been given. He was entitled to assume that it had and it
was held further that the absence of sanction could not affect his position.
The rule is stated as follows in Palmer's Company Precedents, Fifteenth
Edition, at page 70:—
"This rule is that where a company is regulated by an
Act of Parliament, genera] or special, or by a deed of settlement or memorandum
and articles registered in some public office, persons dealing with the company
are bound to read the Act and registered documents, and to see that the
proposed dealing is not inconsistent therewith; but they are not bound to do
more; they need not inquire into the regularity of the internal
proceedings—what Lord Hatherley called 'the indoor management.' they are
entitled to assume that all is being done regularly."
Applying these rules to the present case, I hold that the
applicants were entitled to assume that the directors were acting regularly and
that the sanction of the company in general meeting had, in fact, been
obtained. That being so, the allotments cannot now be avoided by the company
and the applicants must be regarded as persons who agreed to become members of
the company. This, added to the fact that their names had been added to the
register of members, constitutes them members of the company and, as such, they
are entitled to have their names re-entered on the register of members from the
date on which they have been improperly removed.
The other ground, which is equally strong and in favour of
the applicants, rests on the peculiar circumstances existing in this company.
At the time when the applicants made applications for shares, there were only
six members of this company and all of them were directors. Five of them were
present at the meeting at which the allotments were made. Now it is said on
behalf of the company that, despite that circumstance, the allotments were bad
because the previous consent of the company in general meeting had not been
obtained. But in this case; a meeting of the board of directors of the company
and the company in general meeting are two descriptions of one and the same
body and in these circumstances I find it altogether too technical to consider
whether the six members of the company are or are not to be regarded as having
sanctioned what five of their number did as directors. In this connection,
reference may be made to the case of Express Engineering Works, Limited, In re which concerned
a private company of five members, all of whom were directors. It is
unnecessary to refer to the facts of the case but the following passages from
the judgments of the learned Judges of the Court of Appeal who dealt with that
case are, I think, particularly apt. Lord Sterndale, M.R , at page 470
observed:
"In the present case these five persons were all the
corporators of the company and they did all meet, and did all agree that these
debentures should be issued. Therefore it seems that the case came within the
meaning of what was said by Lord Davey in Salomon v. Salomon & Co. 'I think it
an inevitable inference from the circumstances of the case that every member of
the company assented to the purchase and the company is bound in a matter intra
vires by the unanimous agreement of its members.' "
Later, Lord Sterndale says:
"It was said here that the meeting was a directors'
meeting but it might well be considered a general meeting of the company, for
although it was referred to in the minutes as a board meeting, yet if the five
persons present had said, 'We will now constitute this a general meeting' it
would have been within their powers to do so, and it appears to me that that
was in fact what they did."
"It happened that these five directors were the only
shareholders of the company, and it is admitted that the five, acting together
as shareholders, could have issued these debentures. As directors they could
not, but as shareholders acting together they could have made the agreement in
question. It was competent to them to waive all formalities as regards notice
of meeting etc., and to resolve themselves into a meeting of shareholders and
unanimously pass the resolution in question. Inasmuch as they could not in one
capacity effectually do what was required but could do it in another, it is to
be assumed that as business men they would act in the capacity in which they
had power to act. In my judgment they must be held to have acted as
shareholders and not as directors, and the transaction must be treated as good
as if every formality had been carried out."
I accordingly allow these petitions and direct the
rectification of the register of members of this company by the re-entry of the
applicants' names with effect from the date when they were wrongfully removed
by the company. The applicants will have their costs of these applications.
[1948] 18 COMP. CAS. 215 (BOM.)
HIGH COURT OF
v.
Kumar
Shree Narendrasinghji
BHAGWATI, J.
SUIT NO. 599 OF 1944
MARCH 22, 1948
Parpia, for the Plaintiffs.
S. T. Desai, for the Defendant.
The plaintiffs have filed this suit against the defendant who had been
a director of the plaintiffs from the date of their incorporation up to 30th
October, 1942, to recover from him the sum of Rs. 5,000, being the amount
payable by him to them for 500 qualification shares together with interest
thereon at the rate of 9 per cent. per annum from 28th October, 1943.
On or about 11th July, 1941, the defendant consented to act as a
director of the plaintiffs and also agreed to take from the plaintiffs and pay
for 500 shares of Rs. 10 each, being the number of qualification shares
prescribed for the purpose of holding the office of the director of the
plaintiffs. A statement in lieu of prospectus was signed by the defendant on
nth September, 1941. This agreement by the defendant to take 500 shares from
the plaintiffs was treated by the plaintiffs as an application for the shares
and was given a number, being No. 4, shown in their book containing application
for and allotment of shares. The defendant acted as a director of the.
plaintiffs and attended several meetings in July 1941, and he was paid Rs. 50
each on two occasions, 11th July, 1941, and 17th July, 1941. There were other
meetings which he attended both in 1941 and in 1942, but owing to the adverse
financial circumstances of the plaintiff's no fees were charged by or paid to
any of the directors who attended the several meetings. On 15th June, 1942, the
Board of Directors of the plaintiffs passed a resolution saying that "the
director's 500 ordinary qualification shares applied for by the defendant be
and are hereby allotted to him" and intimation of the said allotment was
given by the plaintiffs to the defendant by their letter dated 22nd June, 1942.
The resolution of allotment was in the ordinary course entered into the minute
book of the proceedings of the meetings of the Board of Directors. On receiving
this letter dated 22nd June, 1942, from the plaintiff, the defendant wrote a
personal letter to Borkar a partner of the managing agents firm of the plaintiffs
and also wrote another letter on the same day to Borkar and Co., the managing
agents of the plaintiffs, enclosing a copy of the letter which he had
personally addressed to Borkar and intimating to them that he was prepared to
resign his directorship if they so desired and asking them to cancel the
resolution of 15th June, 1942, whereby the shares had been allotted to him and
put the matter right. The contents of the letter which he addressed to Borkar
personally are not before me but presumably they put on record what has been
urged by him in para. 2 of his written statement herein contending that he had
merely given his formal consent to act as a director and also agreed to take up
the qualification shares on the strength of certain representations made by
Borkar to him. These representations do not matter. They were made by Borkar
personally and they do not affect the plaintiffs. Even though these allegations
were set out in para. 2 of the written statement, no issue was raised in
respect of the same and the only importance of this being adverted to by me is
that on 16th July, 1942, he raised a protest for whatever it was worth against
the plaintiffs having allotted to him the 500 qualification shares in the
manner they did on 1.5th June, 1942, and asked them to cancel the said
resolution and put: the matter right. Evidently in consequence of this
communication which the defendant addressed to Borkar and Co., the managing
agents of the plaintiffs, the Board of Directors of the plaintiffs cancelled
the said resolution dated 15th June, 1942, as appears from the scoring in the
part of the minutes of the proceedings of the Board of Directors dated 15th
June, 1942, appertaining to this resolution and the initials of the Chairman of
the Board of Directors, Jamnadas Madhavji Mehta, as against the same. The
position, therefore, which obtained towards the end of July, 1942, was that an
allotment of these 500 shares had been made by the plaintiffs to the defendant
and that allotment was cancelled, for whatever reasons there may have been, by
scoring through the minutes of that resolution in the minute book of the
proceeding' of the Board of Directors. In the return of allotment of shares
submitted by the plaintiffs to the Registrar of Companies as of 30th October, 1943,
the defendant was therefore not shown as a holder of any shares of the
plaintiffs. It was only when we come to 16th January, 1943, that we find
another resolution passed by the Board of Directors of the plaintiffs that
"500 ordinary shares of the face value of Rs. 5,000 are hereby allotted to
the defendant and that allotment notice should be given to him." This was
the allotment which was followed by a letter of allotment bearing No. 10 dated
19th January, 1943, whereby intimation of the allotment was given by the
plaintiffs to the defendant. In the summary of share capital as of 19th
January, 1943, which was filed by the plaintiffs with the Registrar of
Companies the defendant was shown as a holder of 500 shares though, he having
retired with effect from 30th October, 1942, as a director his name was not
mentioned as one of the directors. After this letter of 19th January, 1943, was
received by the defendant he carried on correspondence beginning with the
letter dated 2nd February, 1943, in the course of which his attorneys asked for
and were given inspection of the relevant documents in the custody of the
plaintiffs. Nothing further transpired until we come again to 13th September,
1943, when the defendant not having paid the sum of Rs. 5,000 being the price
of the 500 shares, a notice was addressed by the plaintiffs to the defendant
stating that although the said shares had been allotted to him and the letter
of allotment No, 10 had been forwarded to him on 19th January, 1943, he had not
paid Rs. 5,000 and that in default of the defendant paying the said sum of Rs.
5,000 to the plaintiffs within 15 days from the receipt thereof the shares
allotted to him would be forfeited without any further reference. The defendant
failed to pay the said sum of Rs. 5,000, with the result that the Board of
Directors of the plaintiffs passed on 28th October, 1943, a resolution that
"the shares allotted to the defendant be and are hereby forfeited."
On 23rd November, 1943, the plaintiffs gave intimation to the defendant that they had forfeited the shares which
had been allotted to him and claimed a sum of Rs. 5,000 with interest thereon
at 9 per cent. per annum from the defendant. The defendant did not pay the sum
as demanded and in the result the plaintiffs filed this suit against him.
Though the defences as regards the misrepresentations by Borkar and as regards the allotment of the said shares to the defendant on date 16th January, 1943, contravening the provisions of Section 101 of the Companies Act were taken up in the written statement, no issue was raised as regards the first of these defences and even though an issue was raised in regard to the second of these defences, that issue was not pressed at the trial before me. The whole argument before me has proceeded on the basis that the forfeiture dated 28th October, 1943, was invalid and that therefore no liability arose under Article 34 of the Articles of Association of the plaintiffs which would give the plaintiffs a cause of action against the defendant, that the allotment dated the 15th June, 1942, was bad in so far as it was not within a reasonable time of the application or offer in respect of these 500 qualification shares, that the allotment dated 15th June, 1942, having been once made it was not open to the plaintiffs to cancel the same, that in any event the allotment dated 16th January, 1943, even though it might have been competent to the plaintiffs to resort to, was again bad on the same grounds as before, that in giving the notice of forfeiture the plaintiffs had relied upon the allotment dated the 16th June, 1943, and the non-payment of the monies by the defendant as a result thereof as the ground for forfeiture of the shares which had been allotted to the defendant and that the allotment being bad, it could not avail the plaintiffs as a handle for the forfeiture, with the result that the forfeiture dated 28th October, 1943, was in any event invalid and could not give rise to a fresh cause of action against the defendant by attracting the operation of Article 43 of the Articles of Association of the plaintiffs. These were the grounds which were urged by counsel for the defendant as discharging the defendant from liability in respect of the price of the shares. It was further urged that in any event by cancelling the allotment dated 15th June, 1942, the plaintiffs had accepted the position which had been taken up by the defendant in his letter dated 16th July, 1942, addressed by him to Messrs. Borkar and Co., the managing agents of the plaintiffs and apart from anything else the defendant was discharged from any liability by reason of that action of the plaintiffs.
Counsel for the plaintiffs possibly realising the force of some of the contentions which were urged by counsel for the defendant adopted quite another line of attack. Even though in the plaint it had been categorically stated that after the agreement to take up the shares had been signed by the defendant and he had acted as a director of the plaintiffs, the plaintiffs had allotted the shares to the defendant and due notice thereof had been given to him and that the plaintiffs had forfeited the said shares as they were entitled to do under the provisions of the Articles and the defendant had become liable to pay the value of the said shares with interest, viz., Rs. 5,000 with interest at 9 per cent. per annum from 28th October, 1943, being the date of forfeiture, he contended that all the averments in regard to the allotment of the shares and the forfeiture thereof were to be treated as having been absolutely unnecessary or superfluous and the only cause of action which could be spelt out of it was the agreement to act as a director and to take up the 500 qualification shares of the plaintiffs. He therefore contended that all the arguments as regards the allotment of 15th June, 1942, not being valid, about the cancellation of the allotment of 15th June, 1942, not being competent to the plaintiffs, about the allotment dated 16th January, 1943, also being invalid, about the notice of forfeiture not being valid by reason of its referring only to the allotment dated 16th January, 1943, and about no cause of action having accrued to the plaintiffs by reason of the said forfeiture, were beside the mark.
These are the rival contentions of the parties which have been agitated before me with considerable force on both the sides. The plaintiffs have been, if not actually on the rocks, almost on the brink of liquidation. They have done no business worth the name and the only asset which they appear to have got is one decree which they have obtained and in respect of which they have not been able to recover anything so far, and the prospects of getting a decree against the defendant, if they succeed in getting one here from me. As a matter of fact after the directors had been paid their fees in respect of the attendances at the two meetings dated nth July, 1941, and 17th July, 1941, the directors either did not claim or were not paid any fees for their attendances at the meetings of the Board of Directors which took place on several occasions both in the year 1941 and the year 1942. These Rs. 5,000 which they expect to recover from the defendant would certainly stand them in good stead and that is why the matter has been very strenuously and exhaustively dealt with by counsel for the plaintiffs.
Counsel for the defendant has equally strenuously fought the matter and pressed the contentions on behalf of his client even though the defence of misrepresentations was not available to him (the defendant) in law. The defendant seems to have been all along nursing a grievance by reason of what Borker is alleged to have represented to him. He actually offered on 16th July, 1942, to cease acting as a director if the plaintiffs so wanted, and pressed for the cancellation of the allotment of the 500 shares to him which the plaintiffs had made on 15th June, 1942, and for the time being it appears that the plaintiffs acquiesced in that position and cancelled that allotment. The circumstances appear, however, to have been beyond the control of the plaintiffs and they seem to have thought better after the disappearance of Borkar from the scene. One Mangaram came into charge and active management of the plaintiffs after the disappearance of Borkar and he seems to have been advised to allot the shares once again to the defendant on 16th January, 1943, and to press forward the claim of the plaintiffs against the defendant for the price of these 500 shares. The defendant naturally resisted this claim owing to what had happened before and that is the reason of the strenuous fight which has been put up on his behalf.
The position in law on forfeiture is quite clear. As is stated in Palmer's Company Law, 17th Edn., page 138, forfeiture of shares prevents prima facie any action by the company for past calls. Once there is forfeiture the only liability which the shareholder would have to pay the monies would arise by reason of the Articles of Association and the articles commonly provide that where a share has been forfeited the member shall be liable for payment of the call with interest, and this creates a new obligation which can be enforced by action at law. A similar article is also to be found in the Articles of Association of the plaintiffs, and it is Article 34. If there was a valid forfeiture of these 500 shares by the plaintiffs a new cause of action would accrue to them by reason of Article 34 which they would be entitled to sustain by filing a suit as they have done here. In order, therefore, to understand whether there was valid forfeiture, we have got to see what was the position as it obtained in this case. It is also clear that forfeiture is treated very strictly by the Courts, and the directors seeking to enforce it must exactly pursue the course of procedure marked out by the articles. A slight irregularity is as fatal as the greatest. Thus if the call, in respect of which the forfeiture is made, was not validly made or if the notice on which the forfeiture is founded is inaccurate in requiring payment of interest from a wrong date, e.g., the date of the call instead of the date appointed for payment, the forfeiture may be held invalid (See Palmer's Company Law, page 136). It is contended before me by counsel for the defendant that the forfeiture in this case was based on the non-payment by the defendant of the monies due in respect of the allotment of the shares pursuant to the resolution dated 16th January, 1943, a resolution which was both invalid as having been passed by the plaintiffs after the lapse of a reasonable time from the date of the offer by the defendant and also by reason of what had previously happened, viz., the allotment dated 15th June, 1942, and the cancellation thereof. The authorities lay down that an allotment of shares should be made within a reasonable time and the applicant is not bound to accept the allotment after the lapse of a reasonable time: vide Indian Co-operative Navigation and Trading Company, Ltd. v. Padamsey Premji, where it is stated that it is an implied term in an application for shares that the offer must be accepted within a reasonable time, and, if it is not the applicant is entitled to repudiate the allotment. In this case the application, if it can be so called, was made on nth July, 1941, and the allotment was made, according to the case of the plaintiffs, on 16th January, 1943, almost 18 months after the date of the application. It cannot be argued that this lapse of time was not unreasonable and does not bring the allotment within the mischief of these authorities. The further ground which was urged by counsel for the defendant was that once an allotment was made it was not competent to the company to cancel it by any means whatever and that the plaintiffs had first made the allotment on 15th June, 1942, and having made that allotment, it was not within their power to cancel such allotment. The authorities again support this contention of counsel for the defendant: vide Halsbury's Laws of England, Vol. 5, page 256, para. 443 :—
"When an allotment has been made on a binding
contract to take shares, it cannot be cancelled by the company."
and Sircar and Sen on Indian Companies Act, page 288:—
"Once an allotment is made an communicated, the directors have no power to release the shareholder by cancelling the allotment not even on the ground that the shares have been taken under a mistake."
There is, therefore, considerable force in the argument which has been advanced by counsel for the defendant that the allotment dated 15th June, 1942, having been made and communicated to the defendant, it was not competent to the plaintiffs to cancel that allotment. If it was not competent to them to do so, it was much less competent to them to pass a second resolution on 16th June, 1943, allotting the 500 shares to the defendant. If it was not competent to the plaintiffs to do so, that allotment and the non-payment of the monies due thereunder could certainly not be made the foundation of any notice for forfeiture which could be validly addressed by them to the defendant and such invalid notice of forfeiture could certainly not be made the basis of a valid resolution of forfeiture which they purported to pass on 28th October, 1943. These being the steps in the argument it does follow that no fresh cause of action arose to the plaintiffs under Article 34 of the Articles of Association which could be made the basis of the present suit. Even the allotment of 15th June, 1942, was within the mischief of the authorities which I have cited above as being not made within a reasonable time of the application or offer made by the defendant. That also was made on 15th June, 1942, which was almost a year after the date, of the application or offer. That also was not, in my opinion, within a reasonable time and the allotment, if any, made on 15th June, 1942, was, therefore, not competent to the plaintiffs to make. It may be noted in this connection that the defendant immediately repudiated the allotment on the intimation being given to him thereof by his letter dated 16th July, 1942, which he addressed to Messrs. Borkar and Co., the managing agents of the plaintiffs.
The allotment as also the forfeiture being bad, in the manner I have indicated above, the only thing which remains to consider in this connection is what is the effect of the agreement to take up the shares signed by the defendant on nth July, 1941. Does that agreement by itself entitle the plaintiffs to sustain this claim against the defendant ? As I have already stated the cause of action as it has been set out in the plaint is not based merely on this agreement by the defendant to take up the qualification shares. The cause of action is the agreement to take up these shares, the allotment of these shares and the forfeiture thereof on non-payment of the monies due in respect of the shares. It is only as a last resort that counsel for the plaintiffs has been driven to this line of attack as I have already stated. Let us, therefore, consider how far this contention of the plaintiffs can be substantiated.
In connection with this argument of his, counsel for the plaintiffs
relied upon several authorities consisting of decisions of the Courts in
"(1) The subscribers of the memorandum of a company shall be deemed to have agreed to become members of the company, and on its registration shall be entered as members in the register of members.
(2) Every other person who agrees to become a member of a company and whose name is entered in its register of members, shall be a member of the company."
It is Section 30, sub-section (2), which comes in for consideration so far as the defendant is concerned. Incidentally, I may observe that the very same position is set out in Palmer's Company Law, 17th Edition, at page 87. So every person who comes under the category of members under Section 25 (2) is one who agrees to become a member of a company and one whose name is entered in its register of members. Here the section contemplates two things:—(1) an agreement, and (2) entry on the register. An agreement alone does not create the status of membership. It is a condition precedent to acquiring such status of membership that the shareholder's name should be entered on the register. So also at page 95:
"Entry on Register—Where membership is constituted otherwise than by subscribing the memorandum of association, entry in the register of members is, by Section 25, made a condition precedent to membership."
I have therefore got to
consider what is the position of the defendant having regard to the provisions
of Section 30(2), Companies Act. The position in
Section 28 which lays down the nature of shares enacts in subsection (2) that:—
"Each share in a company having a share capital
shall be distinguished by its appropriate number."
Section 29 which talks of the certificate of shares or stock lays down that:—
"A certificate, under the common seal of the company, specifying any shares or stock held by any member, shall be prima facie evidence of the title of the member to the shares or stock therein specified."
One could not issue a certificate of shares in respect of a share merely in general. It must be a share distinguished by its appropriate number as provided in Section 28 (2). A person cannot be a member under Section 30 (2) unless and until, even though he has agreed to become a member of a company, his name is entered in the register of members. How the name is to be entered in the register of members is laid down in Section 31 which says:—
"(1) Every company shall keep in one or more books a register of its members, and enter therein the following particulars:—
(i) the names and addresses, and occupations, if any, of the members and, in the case of a company having a share capital, a statement of the shares held by each member, distinguishing each share by its number,"
and the number cannot be merely 1 share or 500 shares but the specific number which is an appropriate and a distinguishing number as laid down in Section 28(2). It was, therefore, having regard to these provisions of the Indian Companies Act, incumbent on the plaintiffs both in what they called the application for and allotment of shares and also what they called the register of members and the share ledger to give distinctive numbers of shares allotted by them to the defendant. If one sees Ex. D-1 which is the application for and allotment of shares the application of the defendant is numbered as No. 4, the number of allotment of shares is No. 10, the number of shares applied for is 500 and I wonder how those in charge of the management of the plaintiffs got this brain wave to treat the agreement to take the qualification shares as meaning that he had applied for the shares to be issued to him and the distinctive numbers of shares allotted from blank to blank are again blank. The entries in the further columns do not help the plaintiffs at all. When one goes to Ex. D-2 which is the register of members and the share-ledger there also the position is similar. The number of allotment is mentioned as No. 10, number of shares allotted is 500 and when one sees the distinctive numbers, again, they are blank and as vague as vague can be. I cannot understand the argument that merely because the plaintiffs stated that they had allotted 500 shares, 500 specific shares came to be allotted to the defendant. No doubt it is unnecessary in the resolution allotting these shares and also in the letter of allotment to say that particular shares bearing numbers so and so are allotted to the defendant. But when it comes to the making of an entry in the register of members in order that liability may attach as on a compliance with the mandatory provisions of Section 30(2), one does expect that the distinctive numbers of these shares purporting to have been allotted by the plaintiffs to the defendant should have been mentioned there. If one has regard to the other entries which are made in the book containing these exhibits, Exs. D-1 and D-2, viz., the application for and the allotment of shares and the register of shareholders and share-ledger, one finds distinctive numbers as against each and every one except the defendant in whose case no such distinctive numbers of shares have ever been given by the plaintiffs.
Under these circumstances, I have come to the conclusion that the defendant did not become a member of the company in respect of these 500 shares. Even though he had agreed to take up these shares by reason of the agreement which he had signed on nth July, 1941, the condition precedent to membership which is laid down in Section 30 (2), viz., that his name was to be registered in the register of members, was not satisfied as required by Section 31(1), clause (i). That being the position, there was no liability on the defendant, as the matter stood at all relevant and material times, to pay any monies alleged to be due in respect of these 500 qualification shares.
Even though that is not the frame of the suit, I may consider one further aspect of the question, viz., that there having been merely an agreement to take these qualification shares it would have been open to the plaintiffs to file a suit for specific performance of that agreement as against the defendant, and thus to claim Rs. 5,000 being the price of these qualification shares which had been agreed to be purchased by the defendant. Unfortunately for the plaintiffs that is not the action before me. But even though I might consider this aspect of the question by stretching the point in favour of the plaintiffs, there are two objections against this. The first is that the plaintiffs have forfeited these shares by their resolution dated 28th October, 1943, and that forfeiture stands till this date. It would not be open to the Court to consider therefore this aspect of the question in favour of the plaintiffs. The second objection is the delay which also is a factor to be considered by the Court. (Vide Palmer's Company Law, 17th Edn.; page 99, "Specific Performance").
"The Court has
jurisdiction to decree specific performance of a contract by a person to take,
or by a company to allot, shares; but the matter is one of judicial
discretion."
If this question ever came to be considered by me I would certainly hold against the plaintiffs on the ground of delay. The agreement to take shares was dated nth July, 1941, and even though having regard to the provisions of the Indian Limitation Act an action for specific performance of such an agreement could not be barred at the date of the suit which was filed here on nth May, 1944, I would certainly in the exercise of my discretion, having regard to all the circumstances of this case, refuse to grant any specific performance in favour of the plaintiffs.
On all the grounds above-mentioned, therefore, I have come to the conclusion that the plaintiffs' claim against the defendant fails and that the suit should therefore be dismissed with costs. I accordingly dismiss the suit with costs. Costs fixed at Rs. 1,500.
[1934] 4
COMP. CAS. 287 (
v.
Prabh Dayal, Ram Dhan
BHIDE,
J.
MISCELLANEOUS
FIRST APPEAL FROM THE ORDER OF THE DISTRICT JUDGE, MONTGOMERY, IN CHARGE OF
LIQUIDATION WORK, DATED THE 1ST JULY, 1933 (APPEAL NO. 1565 OF 1933)
JUNE 27,
1934
Anant Ram Khosla, for the
Appellant.
Asa Ram Aggarwal, for the
Respondent.
Bhide J.—This is a appeal from an order
of the District Judge, Montgomery, in proceedings relating to the liquidation
of a company named Radhe Shiam Beopar Company, Limited. The liquidators sought
to place the respondents on the list of contributories on the ground that they
were purchasers of certain shares. The respondents objected, stating that the shares
had never been validly allotted to them. The learned District Judge has upheld
this objection and from this decision the present appeal has been preferred.
The facts alleged by the
liquidators were that the respondents had applied for the shares on the 10th of
August, 1930, and a sum of Rs. 250 had been paid along with the application.
The allotment is said to have been made on the 17th of October, 1931. On the
2nd of March: 1932, a letter was issued to the respondents asking them to pay
the allotment money as well as the call money. They at once repudiated the
allotment stating that it was fraudulent and that they had received no notice
about it earlier.
The main point for decision was
whether the shares had been allotted to the respondents according to law. The
learned District Judge has held that the allotment ought to have been made
within a reasonable time and as it was not admittedly made till the 17th of
October, 1931, it was invalid. In support of this decision he has relied on
Ramsgate Victoria Hotel Company, Limited v. Montefiore. The learned counsel for
the appellants sought to distinguish this ruling on the ground that it applies
only to a going concern and not to a company which has gone into liquidation.
In support of this argument he has relied on In re Land Loan Mortgage etc.
It was urged that the names of
the shareholders appeared on the register of the company, but it is not shown
when their names were brought on the register. No evidence was led by the
liquidators and the letter which was issued on the 2nd of March, 1932, calling
for allotment money appears to be highly suspicious in view of the fact that
the Company resolved to go into liquidation on the 3rd of March, 1932, i.e.,
the next day.
In my opinion the decision of the
learned District Judge is correct and I dismiss the appeal with costs.
Appeal
dismissed.
[1955] 25 COMP CAS
78 (MAD.)
HIGH COURT OF
St. M.R. Vr. Murugappa Chettiar
v.
Pudukottai Ceramics Ltd.
KRISHNASWAMI NAYUDU
J.
CIVIL REVISION
PETITIONS NOS. 1882 AND 1924 OF 1950
AUGUST 16, 1954
R. Kesava Aiyangar and K. Parasaran for the Petitioner.
S. Krishnaswami for the Respondent.
JUDGMENT
Krishnaswami Nayudu J.—These revision petitions arise out of two suits, S.C.S. Nos. 55 and 80 of 1950 for recovery of amounts due in respect of certain shares allotted by the plaintiff company to the defendants respectively. The applications for shares were made on 2nd September, 1946,and20th September, 1946, respectively and the plaintiff's case is that on 5th May, 1947, they posted letters of acceptance allotting the shares to the defendants, that there was a statutory meeting on 28th September, 1947, after the posting of these letters of allotment, and share certificates were sentto the defendants on 20th October, 1947,and the defendants received the share certificates, and when the company made demands on 31st August, 1948, for the share amounts, the defendants by their replies, Exs. A. 20 and A. 27, dated 14th September, 1948, and 13th September, 1948, repudiated and denied liability for the amount of the shares allotted to them.
These revision petitions came up before Raghava Rao J. In order to find out whether there has been a 'concluded contract, that is whether the applications for shares have been accepted by the company and such acceptance has been communicated to the defendants, a finding was called for from the court below as to whether the allotment communication was or was not sent to the defendants before examining the other contentions on behalf of the petitioners. The findings have, now been submitted. The lower court finds that Exhibit A. 15 and Exhibit A. 22 which are letters by the company communicating their acceptance of the offer for and allotment of shares, have been sent by post; and in the absence of any other prescribed mode of communication of the acceptance of their offer, it is found that the letters of acceptance by the company were duly sent to the respective parties and thus duly communicated to them. With that finding I see no reason to disagree and it may therefore be taken that there was on offer and an acceptance and a communication of this acceptance which will be sufficient to constitute a concluded contract between the parties.
A
further contention was raised before Raghava Rao J. that by reason of the undue
delay in the acceptance of the offer, the offer must be taken to have
completely lapsed, and, whatever may be the effect of the communication of the
allotment, by reason of the delay the proposal must be deemed to have been
revoked and that in the circumstances there was no scope for contending that
there could be a concluded contract by reason of mere acceptance and
communication of such acceptance. As regards this part of the case reliance is
placed on the decision in
"Now it was settled as long ago as 1866 in Ramsgate Victoria Hotel Co. v. Montefiore, that an allotment of shares must be made within a reasonable time and that a defendant is not bound to accept an allotment made after the lapse of a reasonable time. In that case the delay was from 8th June till 23rd November and it was held that the delay was unreasonable. Here I think clearly the delay between the application in August, 1919, and the allotment in August, 1920, was unreasonable. No doubt if the defendant had been given notice of the allotment, and had not objected to it promptly he would have been bound. But we have no evidence that he was ever told anything whatever about the allotment. That being so, I see no reason why he should not in this suit challenge the allotment."
But in the present cases the defendants have been given notice of such allotment by the letters which were posted on 5th May, 1947, and added to that, the shares certificates have been despatched on 20th October, 1947, and admittedly received and kept by them. It was not until a notice of demand on behalf of the company was made for the amount of the shares that the defendants came out with a case of nonliability under the shares in their replies, Exhibits A. 20 and A. 27, dated 14th September, 1948, and 13th September, 1948. It is not a case therefore where it could be considered that the time taken by the company in making the allotment and communicating the acceptance of the offer was unreasonable, since the defendants themselves could not have so considered it as any delay at all. Not only were they aware of the allotment but they accepted the shares. It was not a case of non-acceptance as in the case in Ramsgate Victoria Hotel Co. v. Montefiore nor a case of even repudiation at the earliest possible time, but a complete acquiescence in the allotment, such a conduct pointing out that they had no grievance as regards the time taken in the matter of allotment and the communication of that allotment. In the circumstances, I do not consider that the proposal made by the defendants in their applications for shares could be said to have been revoked by lapse of time under section 6(2) of the Indian Contract Act. In view of my agreeing with the lower court on this point, it is unnecessary to consider whether the defendants are in any event barred from contending that the allotment is void or voidable under section 101 of the Companies Act by reason of no portion of the share money having been sent along with the share applications as under section 102 of the Companies Act. Any such allotment should be avoided within one month after the holding of the statutory meeting of the company and not later. In this case the statutory meeting was held on 28th September, 1947, and no question of avoiding the allotment arises, as no. steps have been taken by the defendants in this regard. In the result, the revision petitions are dismissed with costs—One advocate's fee.
[1933] 3 COMP. CAS. 45
(MAD.)
HIGH COURT OF
Official Liquidator, Bellary Electric Supply Company Ltd.
v.
Kanniram Rawoothmal
JACKSON AND MOCKETT, JJ.
CIVIL MISCELLANEOUS APPEAL
NO. 266 OF 1929
SEPTEMBER 9, 1932
V.S. Narasimhachariar, for the Appellant.
C.S. Venkatachariar and L. Krishna Dass, for the
Respondents.
JUDGMENT
The relevant facts in this appeal are that the
respondent's firm purchased 110 shares in the Bellary Electric Supply Co.,
Ltd., at some time previous to October 14, 1925, and that on that date on
behalf of his firm the respondent deposited Rs. 1,400 with the company in
respect of 140 more shares. The application for the 140 shares, Ex. 1, dated
October 14, 1925, contains the words "I request you to allot me " 140
shares. No share certificate was admittedly issued in respect of the 140 shares
nor was a letter of allotment sent. The company went into liquidation on a date
subsequent to October 14, 1925, and the respondent now calls upon the Official
Liquidator to refund the Rs. 1,400 because no allotment of shares had been made
to him. The Official Liquidator contends that there was such an allotment. The
learned District Judge found after an elaborate examination of the facts and
the documents that there was no allotment. The short point is, was there an
allotment? The respondent filed an affidavit setting out the above facts. No
counter-affidavit was filed. At the hearing two witnesses were called. The
respondent (there the petitioner) examined one S.M. Hussain once Managing
Director of the Bellary Electric Supply Co., He stated that the Members
Register Ex. II which purported to show that on 14th October, 1925, 140 shares
were allotted to the respondent could not in fact be relied upon as the rubber
stamp of the company was not placed upon the respondent's page nor did it
appear on Ex. II the Members Register. The appellant examined a clerk of the
company who states that although the allotment was authorised by the Managing
Director and the entries made in Ex. II "the applicant was not notified of
the allotment." The appellant relies on s. 40 of the Indian Companies Act.
The Register of Members shall be prima facie evidence of any matters by this
Act directed or authorised to be inserted therein and argues that Ex. II raises
a presumption of allotment which the respondent (who did not give evidence) has
not rebutted. The respondent could, of course, have been cross examined on his
affidavit but the appellant did not give him notice to appear for this purpose.
Any presumption under s. 40 was clearly rebutted by the evidence of the above
two witnesses.
But apart from this aspect of the case there is ample
authority for the proposition that the mere entry of a share holder's name in
the company's register is insufficient to establish that an allotment of shares
was in fact made. An application for shares is an offer and like any other
offer must not only be accepted but the acceptance must be communicated to the
person making the offer. No Indian case in point has been cited but in In re
The Universal Banking Corporation it was held that the principles governing the
formation of a contract between a company and a member of the public are
identical in principle to those regulating the contractual relations between
individuals. The facts in the above case are sufficiently similar to the facts
in this appeal and it was held that a shareholder, to whom the facts that an
allotment of shares had been made had not been communicated, was not bound by
any contract. The mere entry of his name on the register was held not
sufficient for this purpose. We, therefore, agree with the decision of the
learned District Judge.
The lower Court as allowed the petitioner interest at 6 per cent. from October 14, 1925, and the appellant contends that interest should be payable only from the date of demand. We think that this contention must prevail. The law relating to the payment of interest is dealt with in Nanchappa Goundan v. Ittichathara Mannadiar the effect of which is that the provision of the Interest Act are all comprehensive and interest can only be allowed in accordance therewith. Applying that principle it is clear that this payment of Rs. 1,400 cannot be construed to be "a debt or sum certain payable at a certain time—by virtue of a written instrument." It is payable "otherwise" (i.e., as money had and received) and interest is, therefore, only recoverable from the date of demand, that is, petition dated 27th July, 1928. We, therefore, vary the decree of the lower Court to this extent and with this variation dismiss this appeal with costs here and as decreed in the lower Court.
[1933] 3 COMP. CAS. 45
(MAD.)
HIGH COURT OF
Official Liquidator, Bellary Electric Supply Company Ltd.
v.
Kanniram Rawoothmal
JACKSON AND MOCKETT, JJ.
CIVIL MISCELLANEOUS APPEAL
NO. 266 OF 1929
SEPTEMBER 9, 1932
V.S. Narasimhachariar, for the Appellant.
C.S. Venkatachariar and L. Krishna Dass, for the
Respondents.
JUDGMENT
The relevant facts in this appeal are that the respondent's
firm purchased 110 shares in the Bellary Electric Supply Co., Ltd., at some
time previous to October 14, 1925, and that on that date on behalf of his firm
the respondent deposited Rs. 1,400 with the company in respect of 140 more
shares. The application for the 140 shares, Ex. 1, dated October 14, 1925,
contains the words "I request you to allot me " 140 shares. No share
certificate was admittedly issued in respect of the 140 shares nor was a letter
of allotment sent. The company went into liquidation on a date subsequent to
October 14, 1925, and the respondent now calls upon the Official Liquidator to
refund the Rs. 1,400 because no allotment of shares had been made to him. The
Official Liquidator contends that there was such an allotment. The learned District
Judge found after an elaborate examination of the facts and the documents that
there was no allotment. The short point is, was there an allotment? The
respondent filed an affidavit setting out the above facts. No counter-affidavit
was filed. At the hearing two witnesses were called. The respondent (there the
petitioner) examined one S.M. Hussain once Managing Director of the Bellary
Electric Supply Co., He stated that the Members Register Ex. II which purported
to show that on 14th October, 1925, 140 shares were allotted to the respondent
could not in fact be relied upon as the rubber stamp of the company was not
placed upon the respondent's page nor did it appear on Ex. II the Members
Register. The appellant examined a clerk of the company who states that
although the allotment was authorised by the Managing Director and the entries
made in Ex. II "the applicant was not notified of the allotment." The
appellant relies on s. 40 of the Indian Companies Act. The Register of Members
shall be prima facie evidence of any matters by this Act directed or authorised
to be inserted therein and argues that Ex. II raises a presumption of allotment
which the respondent (who did not give evidence) has not rebutted. The
respondent could, of course, have been cross examined on his affidavit but the
appellant did not give him notice to appear for this purpose. Any presumption
under s. 40 was clearly rebutted by the evidence of the above two witnesses.
But apart from this aspect of the case there is ample
authority for the proposition that the mere entry of a share holder's name in
the company's register is insufficient to establish that an allotment of shares
was in fact made. An application for shares is an offer and like any other
offer must not only be accepted but the acceptance must be communicated to the
person making the offer. No Indian case in point has been cited but in In re
The Universal Banking Corporation it was held that the principles governing the
formation of a contract between a company and a member of the public are
identical in principle to those regulating the contractual relations between
individuals. The facts in the above case are sufficiently similar to the facts
in this appeal and it was held that a shareholder, to whom the facts that an
allotment of shares had been made had not been communicated, was not bound by
any contract. The mere entry of his name on the register was held not
sufficient for this purpose. We, therefore, agree with the decision of the
learned District Judge.
The lower Court as allowed the petitioner interest at 6 per cent. from October 14, 1925, and the appellant contends that interest should be payable only from the date of demand. We think that this contention must prevail. The law relating to the payment of interest is dealt with in Nanchappa Goundan v. Ittichathara Mannadiar the effect of which is that the provision of the Interest Act are all comprehensive and interest can only be allowed in accordance therewith. Applying that principle it is clear that this payment of Rs. 1,400 cannot be construed to be "a debt or sum certain payable at a certain time—by virtue of a written instrument." It is payable "otherwise" (i.e., as money had and received) and interest is, therefore, only recoverable from the date of demand, that is, petition dated 27th July, 1928. We, therefore, vary the decree of the lower Court to this extent and with this variation dismiss this appeal with costs here and as decreed in the lower Court.
[1958] 28 COMP. CAS. 386 (PUNJ.)
V.
Union
of
BHANDARI C.J. AND KHOSLA, J.
FEBRUARY 1, 1957
BHANDARI C.J.-This
appeal raises a point upon the construction of Finance Department, Central
Boards of Revenue, Notification No. 1 dated the 16th January, 1937, which is in
the following terms :
“To
remit the stamp duty chargeable under articles 23 and 62 of schedule I to the
said Act on instruments evidencing transfer of property between companies
limited by shares as defined in the Indian Companies Act, 1913, in cases:
(i) Where
at least 90 per cent, on the issued share capital of the transferee company is
in the beneficial ownership of the transferor company, or
(ii) where
the transfer takes place between a parent company and a subsidiary company one
of which is the beneficial owner of not less than 90 per cent. of the issued
share capital of the other or.
(iii) where
the transfer takes place between two subsidiary companies in each of which not
less than 90 per cent. of the share capital is in the beneficial ownership of a
common parent company :
Provided
that in each case a certificate is obtained by the parties from the officers
appointed in this behalf by the Local Government concerned that the conditions
above prescribed are fulfilled.”
In
the year 1952 Phelps and Co. Limited, a company incorporated in the year 1937,
found that large sums of money belonging to it had been embezzled by the
carelessness of its auditors the directors accordingly decided that this
company should be wound up and its affairs settled, that the name of the company
should be altered from Phelps and Co. Limited into Associated Clothiers
Limited, that the goodwill of Phelps and Co. which was of considerable value
should be retained, that a new company bearing the name of Phelps and Co.
Limited should be incorporated and that all the assets of Associated Clothiers
should be taken over by Phelps and Co. in lieu of shares which were to be
offered by the said company. In pursuance of this scheme of reconstruction the
directors took certain important steps on the 21st March, 1952, among others
being:
(a) that
they changed the name of the company from Phelps and Co. Limited of Associated
Clothiers Limited under section 11(4) of the Indian Companies Act,
(b)
that new company was incorporated
under the name of Phelps and Co. Limited, and
(c) that
the Associated Clothiers Limited (hereinafter referred to as the petitions)
entered into an agreement with Phelps and Co. Limited, according to which the
petitioners agreed to sell and Phelps and co. to buy the several assets of the
petitioners (including a building situate in the Connaught Place, Delhi, valued
at Rs. 2,24,637) for a sum of Rs. 18,58,892-10-9. A part of the consideration
was to be paid in cash, a part in the discharge of the debts and liabilities of
the petitioners and the balance of the consideration by the allotment of shares
of the aggregate value of Rs. 12,30,000. the transfer of the premises in
In
pursuance of this scheme the petitions were allotted shares of the face value
of Rs. 12,30,000 (out of the total issued share capital of Rs. 12,30,000)
partly on the 31st May, 1952, and partly on the 14th October, 1952. After
obtaining the consent of the Controller of Capital Issues the shares certificates
thereof were duly issued to the petitioner and the latter were duly entered as
shareholders in the statutory register of members maintained by Phelps and Co.
After the shares had been allotted to the petitioners, Phelps and Co. called
upon the petitioners to execute the sale deed in regard to the premises situate
in Connaught Place, Delhi, after obtaining a certificate of exemption from the
payment of stamp duty under the Notification of 1937.
The
petitioners prepared a draft deed of sale and requested the Collector of
Stamps,
The
petitioners’ claim for exemption was rejected and the order of the Collector of
Stamps upheld the petitioners have come to this court in appeal and the
question for this court is whether the learned single Judge came to a correct
determination in point of law.
The
notification of 1937 is designed to facilitate reconstruction of a company or
amalgamation of two companies which are more or less under the same ownership
so that they should be able to re-arrange their affairs without being saddled
with liability for payment of stamp duties. A company wishing a claim relief
from stamp duty under the provisions of this notification must satisfy the
officers concerned (1) that the document evidences the transfer of property
between companies limited by shares, (2) that shares of the transferee company
are in the beneficial ownership of the transferor company to the extent of 90
per cent, Shares must be in the beneficial ownership of the transferor company
but legal ownership is not necessary.
The
first of the two conditions mentioned above has been completely satisfied in
the present case, for the draft sale deed evidences transfer of property
between two companies limited by shares. The only question is whether at least
90 per cent. of the issued share capital of Phelps and Co., is in the
beneficial ownership of the petitioners.
Now
what exactly is the meaning of the expression “beneficial ownership” which appears
in clause (1) of the notification referred to above. This expression is not
susceptible of a very clear and precise definition. According to Ballentine’s
Law Dictionary it means such a right to enjoyment of property as exists where
the legal title is in one person and the right to such beneficial use or
interest is in another and where such right is recognised by law and can be
enforced by the courts at the suit of such owner or of someone on his behalf.
One is also said to have the beneficial ownership of land who has done
everything to entitle him to patent from the Government, and who therefore has
the legal right to such patent, and all that remains to be done is for the
proper officer to issue it.
The
question now arises as to the point of time at which a person acquires the
status of a shareholder of a company, obtains a right to demand shares and to
exercise the rights of a shareholder. A mere subscription to shares in a
company does not constitute a subscriber a shareholder, for until the subscription
is accepted, the subscription amounts to nothing more than an offer to take
share. On allotment of shares and a communication of that allotment, the
contract becomes complete and absolute and the subscriber becomes a
shareholder.
It
has accordingly been held that an application for shares in a company does not
constitute the applicant a shareholder until the shares are formally allotted
to him and the notice of the allotment is formally given to him. it is only on
the communication of the allotment that the title to the shares subscribed by
him comes to vest in him and it is only on the receipt of this letter that he
has a right to receive the certificate of shares and to be put on the register
of shareholders.
The
application for shares and the letter of allotment constitute a valid and
legally binding contract between the applicant and the company, “a contract the
fruit of which is shares” :Collins v. Associated Greyhound Race Courses Ltd. An
applicant has an equitable right to the shares from the time when the letter of
allotment is sent to him and can obtain specific performance of the contract by
the company to allot those shares to him : Tillotson Ltd. v. Inland Revenue
Commissioners. the issue of a certificate of shares is not necessary to constitute
him a shareholder : In re Heaton’s Steel and Iron Co. Blyth’s case ; for the
certificate is only the indicia of ownership of shares.
Section
30 of the Indian Companies Act provides that every person who agreed to become
a member of a company and whose name is entered in its register of member of a
company and section 40 declares that the register of members shall be prima
facie evidence that a person whose name is on it is a shareholder. If in
addition it be proved that such person has become, by subscribing to the
prescribed sum or otherwise, entitled to a share in the company, the evidence
that he is a shareholder is conclusive :Portal v. Emmens the petitioners in the
present case entered into an agreement with Phelps and Co. for the allotment of
shares.
Shares
were allotted to them in due course and the allotment was communicated to them.
There was thus an application, an allotment and a communication of that
allotment. A valid and binding contract came into existence between the
petitioners and Phelps and Co., a contract which could be enforced by an action
under section 42 of the Specific Relief Act. A certificate of shares was later
issued and the name of petitioners was entered on the register of shareholders.
It seems to me therefore that the petitioners acquired not only the beneficial
but also the legal ownership of the shares. Prima facie therefore they are
entitled to the exemption for which a provision has been made in the
notification of 1937.
But
Mr. Bishambar Dayal, who appears for the State, contends that the agreement
dated the 21st March, 1952, was a composite agreement according to which
certain things were to be done by Phelps and Co., and certain other things were
to be done by the petitioners. the shares which were to vest in the petitioners
could best in them only if they had performed their own part of the contract
the failed to fulfil certain terms of the contract, for the property known as
9A, Connaught Place, which was to be transferred to Phelps and Co., has not
been conveyed so far.
This
being so, it is argued, the petitioners, cannot be said to have acquired the
shares allotted to them or to have become beneficial owners of 90 per cent. of
the share capital of Phelps and Co. Limited. Our attention has been invited to
certain decisions such as Manicka Goundan v. Elumalai Goundan, Ramananda Paul
v. Pankaj Kumar, and Udit Upadhia v. Imam Bandi Bibi, but I must confess with
regret that I have not been able to discover any observation which may possibly
support the proposition propounded by the learned counsel.
An
enforceable contract presupposes the existence of an offer, an acceptance and a
consideration. It is binding on both parties so that action can be maintained
by each against the other. If the contract is broken or time for performance
has expired, it is open to the injured party either to bring an action for
specific performance or to institute a suit for recovery of damages. If the
contract is repudiated the injured party may either rescind the contract in
toto or he may terminate the contract for purposes of further performance and
hold the opposite party liable for damages sustained by reason of the
repudiation. A failure of consideration is not a ground for treating shares as
unpaid : In re Continental and Shipping Butter Co.: Mege and Angier’s case;
although an application for shares made upon a condition precedent does not
become binding on the applicant until it has been complied with or its
performance waived.
The
agreement of the 21st March, 1952, between the petitioners on the one hand and
Phelps and Co. on the other contains reciprocal promises by which one party
undertakes to do one thing and the other party another. Phelps and Co. has
fulfilled a part of its contract by allotting to the petitioners the number of
shares which it had agreed to sell. the share certificates have been issued and
the name of Association Clothiers has been placed on the register of
shareholders. All formal acts have been completed and in the eye of law the
petitioners have been put in possession of the shares. they have acquired the
status of an owner, or at any rate a beneficial owner of at least 90 per cent.
of the issued share capital of Phelps and Co. The contract contains no
condition precedent, the fulfillment of which alone would have vested the right
of ownership in the petitioners.
It
may be that the contract contains a number of reciprocal promises some of which
have been performed and some of which have not, but that fact alone would not, in
my opinion, lead one to the conclusion that the petitioners have not fulfilled
the conditions on which alone exemption can be claimed. If the petitioners fail
company with the terms of the contract it would be open to Phelps and Co., to
bring an action against them for specific performance or for recovery of
damages. Phelps and Co., has no power to recall the shares which have been
allotted by them or to divest the petitioners of the right of ownership which
has come to vest in them.
For
these reasons I would allow the appeal, set aside the order of the learned
single judge and direct the officers concerned to grant a certificate to the
petitioners that the conditions prescribed in the notification of 1937 have
been fulfilled. I would order accordingly. There will be no order as to costs.
KHOSLA,
J.-I agree.
Appeal allowed.
[1936] 6 COMP. CAS. 195 (
v.
Sohan Singh
ADDISON AND ABDUR RASHID, JJ.
JANUARY 16, 1936
H.J.
Rustomji and M.C. Shukla for Appellant.
Mehr
chand Mahajan for Respondent.
Addison,
J.—This appeal has arisen out of an action
brought by the plaintiffs for a declaration to the effect that they were not the
share-holders and directors of the Mutual Bank of India, Limited, defendant No.
1. The allegations of the plaintiffs were that in the month of March 1931, Lala
Narinjan Das, defendant No. 3, Chairman of the Mutual Bank of India Limited,
and Lala Sain Das, Secretary of the Bank, approached Malik Mukhbain Singh,
Barrister-at-law, plaintiff No. 3 and asked him to persuade some influential
and rich men of Rawalpindi to become Directors of the Bank and take over its
management. During the course of the. negotiations it was represented to the
plaintiffs that the Bank had suffered some losses but that these losses will be
made good by the Chairman and defendants Nos. 3 to 9, that a sum of Rs. 6,000
had been deposited in the Bank by the directors, and that investments to the
extent of Rs. 35,000 had been made by the Bank. As a result of these
misrepresentations, each of the plaintiffs and Bhagat Jaswant Singh defendant
No. 10, agreed to buy 100 shares of the Bank of the value of Rs. 100 each and
also to become its director, provided certain conditions which were embodied in
a letter dated April 14, 1931, written by plaintiff No. 3 to the Chairman of
the Bank were fulfilled. The plaintiffs prayed that as they had been induced by
misrepresentations to sign the applications for the allotment of shares and to
consent to become Directors and as the conditions embodied in the letter
referred to above had not been fulfilled the action of defendants Nos. 2 to 9
in allotting shares to the plaintiffs and in announcing that they had been
appointed as Directors was irregular and ultra vires and that they were
entitled to a decree that they were not share-holders and Directors of the
Mutual Bank.
Defendants
Nos. 2 to 4 and 7 to 9 pleaded that they had not induced the plaintiffs to
purchase shares by means of any misrepresentation, that the plaintiffs' offer
to purchase shares was unconditional and that the terms embodied in the letter
dated April 14,1931, were to be fulfilled after the plaintiffs had become
share-holders and Directors of the Mutual Bank. It was admitted by the
defendants that the plaintiffs did not pay any money along with their
applications for allotment of shares, but it was pleaded that according to an
agreement between the parties this money was to be paid by the plaintiffs when
the head office of the Bank was shifted to
The
trial Court decreed the plaintiffs' claim, and as the Bank had gone into
voluntary liquidation while the suit was pending in the trial Court, the
Voluntary Liquidator and Lala Narinjan Das Chairman of the Bank, have preferred
an appeal to this Court.
It
was contended by Mr. Rustomji on behalf of the appellants that each of the
plaintiffs had signed an application for allotment of shares on April 7th,
1931, that these applications had been forwarded to the Bank on April 14, that
100 shares had been alloted to each of the plaintiffs by the Directors in their
meeting on April 16, 1931 and that the plaintiffs must, therefore, be regarded
as the share-holders of the Bank since April 16. It was contended that the
applications for allotment and their acceptance by the Directors constituted a
valid contract between the parties, and that the terms embodied in the letter
dated April 14, could not in any way invalidate this contract. It was
maintained that the terms mentioned in the letter referred to above were not to
be fulfilled before the allotment of shares but that these terms could be
carried out by the Chairman and the Secretary of the Bank after the allotment.
In any case, according to the learned Counsel these terms were not in the
nature of conditions precedent to the allotment of the shares.
It
appears that the application forms were not forwarded to the Chairman of the
Bank on April 7. They were forwarded as enclosures to the letter dated April
14. In this letter Mr. Mukhban Singh made it perfectly clear that he and the
other plaintiffs were prepared to buy shares and become mentioned in the letter
was accepted by the Chairman and the Directors of the Bank, and if the
information conveyed to him by Lala Sain Das was correct. The conditions
mentioned in this letter were as follows:—
(1) The Chairman was to give a personal
guarantee on a stamped paper in respect of the Bank's investments.
(2) The Chairman was to be personally
responsible, in the manner stated in the letter, for making good the loss of
Rs. 14,000 suffered by the Bank up to April, 1931.
(3) Rupees 3,000 were to be paid
straight off by the Chair man on account of an additional payment of Rs. 30 per
share by the Directors.
(4) The fixed deposit of the Directors
in the Bank was to be Rs. 6,000 and that was not to be withdrawn.
(5) 300 shares were to be sold by the
Chairman out of the shares that had been forfeited.
The reply of the Chairman dated April 18, shows that
practically none of the conditions imposed by the letter dated April 14
"had been fulfilled by the Chairman and the Directors up to April 16,1931,
when they proceeded to allot shares to the plaintiffs and defendant No. 10 and
to appoint them as Directors. It is, therefore, clear that the application of
the plaintiffs could not be taken into consideration by the Directors on April
19, nor could any valid allotment of shares be made on that day.
It is common ground between the parties that no money was
forwarded by any of the plaintiffs with their applications for allotment of
shares. The applications no doubt state that the sum of Rs. 1,000 being a
deposit of Rs. 10 per share in respect of 100 shares had been paid but this is
admittedly incorrect. Section 101 of the Indian Companies Act lays down the
procedure to be followed at the time of the allotment of shares. Sub-sec. (3)
is to the effect that the amount payable on application on each share shall not
be less than 5 per cent, of the nominal amount of the share. It was held by the
lower Court that S. 101 does not apply to any allotment of shares subsequent to
the allotment of shares at the time of the formation of the company. This is an
erroneous view of the law. Sub-s. (6) of S. 101 is in the following terms:—
"This section, except sub-s, (3) thereof, shall not
apply to any allotment of shares, subsequent to the first allotment of shares
offered to the public for subscription."
It is obvious, therefore, that Sub-s. (3) is applicable to
all allotments of shares whether at the time of the floating of the company or
any subsequent period. Any allotment which is made without payment of at least
5 per cent, of the nominal value of the shares by the applicant is, therefore,
invalid.
The objection with respect to the maintainability of the
suit in a declaratory form is also without any substance. In the present case,
no money was paid by the plaintiffs and a prayer to the effect that the
register of the company may be rectified by the removal of the plaintiffs' name
from the list of share-holders would merely be a prayer for a nominal relief.
In the peculiar circumstances of this case,
therefore the plaintiffs have substantially asked for all the relief to which
they were entitled.
For
the reasons given above, we dismiss this appeal. The appellants will pay the
costs of the plaintiffs-respondents.
[1936] 6 COMP. CAS. 195 (
v.
Sohan Singh
ADDISON AND ABDUR RASHID, JJ.
JANUARY 16, 1936
H.J.
Rustomji and M.C. Shukla for Appellant.
Mehr
chand Mahajan for Respondent.
Addison,
J.—This appeal has arisen out of an action
brought by the plaintiffs for a declaration to the effect that they were not
the share-holders and directors of the Mutual Bank of India, Limited, defendant
No. 1. The allegations of the plaintiffs were that in the month of March 1931,
Lala Narinjan Das, defendant No. 3, Chairman of the Mutual Bank of India
Limited, and Lala Sain Das, Secretary of the Bank, approached Malik Mukhbain
Singh, Barrister-at-law, plaintiff No. 3 and asked him to persuade some
influential and rich men of Rawalpindi to become Directors of the Bank and take
over its management. During the course of the. negotiations it was represented
to the plaintiffs that the Bank had suffered some losses but that these losses
will be made good by the Chairman and defendants Nos. 3 to 9, that a sum of Rs.
6,000 had been deposited in the Bank by the directors, and that investments to
the extent of Rs. 35,000 had been made by the Bank. As a result of these
misrepresentations, each of the plaintiffs and Bhagat Jaswant Singh defendant
No. 10, agreed to buy 100 shares of the Bank of the value of Rs. 100 each and
also to become its director, provided certain conditions which were embodied in
a letter dated April 14, 1931, written by plaintiff No. 3 to the Chairman of
the Bank were fulfilled. The plaintiffs prayed that as they had been induced by
misrepresentations to sign the applications for the allotment of shares and to
consent to become Directors and as the conditions embodied in the letter
referred to above had not been fulfilled the action of defendants Nos. 2 to 9
in allotting shares to the plaintiffs and in announcing that they had been
appointed as Directors was irregular and ultra vires and that they were
entitled to a decree that they were not share-holders and Directors of the
Mutual Bank.
Defendants
Nos. 2 to 4 and 7 to 9 pleaded that they had not induced the plaintiffs to
purchase shares by means of any misrepresentation, that the plaintiffs' offer
to purchase shares was unconditional and that the terms embodied in the letter
dated April 14,1931, were to be fulfilled after the plaintiffs had become
share-holders and Directors of the Mutual Bank. It was admitted by the
defendants that the plaintiffs did not pay any money along with their
applications for allotment of shares, but it was pleaded that according to an
agreement between the parties this money was to be paid by the plaintiffs when
the head office of the Bank was shifted to
The
trial Court decreed the plaintiffs' claim, and as the Bank had gone into
voluntary liquidation while the suit was pending in the trial Court, the
Voluntary Liquidator and Lala Narinjan Das Chairman of the Bank, have preferred
an appeal to this Court.
It
was contended by Mr. Rustomji on behalf of the appellants that each of the
plaintiffs had signed an application for allotment of shares on April 7th,
1931, that these applications had been forwarded to the Bank on April 14, that
100 shares had been alloted to each of the plaintiffs by the Directors in their
meeting on April 16, 1931 and that the plaintiffs must, therefore, be regarded
as the share-holders of the Bank since April 16. It was contended that the
applications for allotment and their acceptance by the Directors constituted a
valid contract between the parties, and that the terms embodied in the letter
dated April 14, could not in any way invalidate this contract. It was
maintained that the terms mentioned in the letter referred to above were not to
be fulfilled before the allotment of shares but that these terms could be
carried out by the Chairman and the Secretary of the Bank after the allotment.
In any case, according to the learned Counsel these terms were not in the
nature of conditions precedent to the allotment of the shares.
It
appears that the application forms were not forwarded to the Chairman of the
Bank on April 7. They were forwarded as enclosures to the letter dated April
14. In this letter Mr. Mukhban Singh made it perfectly clear that he and the
other plaintiffs were prepared to buy shares and become mentioned in the letter
was accepted by the Chairman and the Directors of the Bank, and if the
information conveyed to him by Lala Sain Das was correct. The conditions
mentioned in this letter were as follows:—
(1) The Chairman was to give a personal
guarantee on a stamped paper in respect of the Bank's investments.
(2) The Chairman was to be personally responsible,
in the manner stated in the letter, for making good the loss of Rs. 14,000
suffered by the Bank up to April, 1931.
(3) Rupees 3,000 were to be paid
straight off by the Chair man on account of an additional payment of Rs. 30 per
share by the Directors.
(4) The fixed deposit of the Directors
in the Bank was to be Rs. 6,000 and that was not to be withdrawn.
(5) 300 shares were to be sold by the
Chairman out of the shares that had been forfeited.
The reply of the Chairman dated April 18, shows that
practically none of the conditions imposed by the letter dated April 14
"had been fulfilled by the Chairman and the Directors up to April 16,1931,
when they proceeded to allot shares to the plaintiffs and defendant No. 10 and
to appoint them as Directors. It is, therefore, clear that the application of
the plaintiffs could not be taken into consideration by the Directors on April
19, nor could any valid allotment of shares be made on that day.
It is common ground between the parties that no money was
forwarded by any of the plaintiffs with their applications for allotment of
shares. The applications no doubt state that the sum of Rs. 1,000 being a
deposit of Rs. 10 per share in respect of 100 shares had been paid but this is
admittedly incorrect. Section 101 of the Indian Companies Act lays down the
procedure to be followed at the time of the allotment of shares. Sub-sec. (3)
is to the effect that the amount payable on application on each share shall not
be less than 5 per cent, of the nominal amount of the share. It was held by the
lower Court that S. 101 does not apply to any allotment of shares subsequent to
the allotment of shares at the time of the formation of the company. This is an
erroneous view of the law. Sub-s. (6) of S. 101 is in the following terms:—
"This section, except sub-s, (3) thereof, shall not
apply to any allotment of shares, subsequent to the first allotment of shares
offered to the public for subscription."
It is obvious, therefore, that Sub-s. (3) is applicable to
all allotments of shares whether at the time of the floating of the company or
any subsequent period. Any allotment which is made without payment of at least
5 per cent, of the nominal value of the shares by the applicant is, therefore,
invalid.
The objection with respect to the maintainability of the
suit in a declaratory form is also without any substance. In the present case,
no money was paid by the plaintiffs and a prayer to the effect that the
register of the company may be rectified by the removal of the plaintiffs' name
from the list of share-holders would merely be a prayer for a nominal relief.
In the peculiar circumstances of this case,
therefore the plaintiffs have substantially asked for all the relief to which
they were entitled.
For
the reasons given above, we dismiss this appeal. The appellants will pay the
costs of the plaintiffs-respondents.
[1979] 49 COMP. CAS. 321 (BOM.)
Deccan Farms & Distilleries
Ltd.
v.
Velabai
Laxmidas Bhanji
B.N. DESHMUKH
AND R.L. AGGARWAL, JJ.
Appeal No. 3 of 1975 in Company
Petition No. 22 of 1974
SEPTEMBER 6, 8, 1976
D.R.
Poddar and R.C. Desai for the Appellants.
M.U.
Patel for the Respondents.
J.B.
Chenai for the Directors.
Aggarwal,
J.—The present appeal is directed against
the judgment and order dated 26th November, 1975, passed by a learned single
judge of this court in Company Petition No. 22 of 1974.
The
petitioner, Velabai Laxmidas Bhanji, had given a loan of Rs. 2,500 to a company
named Deccan Farms and Distilleries Private Limited on or about 10th September,
1973, for which the said private limited company issued a loan certificate
acknowledging the loan of Rs. 2,500 from the petitioner repayable on 31st
August, 1974, being the date of maturity carrying interest thereon at the rate
of 15 per cent. per annum. By her attorney's letter dated 26th September, 1974,
the petitioner demanded the repayment of the said sum of Rs. 2,500 with
interest thereon and by the same letter she gave a statutory notice as required
under s. 434 of the Companies Act, 1956. The said statutory notice was
addressed to the private limited company. It appears that, after the said
transaction, the private limited company was converted into a public limited
company, and certificate of change dated 19th November, 1973, was duly obtained
from the Registrar of Companies. After the said change was made, the public
limited company invited subscription from the public and in this connection
issued a prospectus whereby 3,00,000 equity shares of Rs. 10 each were offered
to the public. The subscription was opened on 8th April, 1974, and was to close
on 22nd April, 1974. A sum of Rs. 2.50 was required to be paid on application
and a further sum of Rs. 2.50 on allotment. It appears that the shares were
over-subscribed. The company, however, received Rs. 15 lakhs on the basis of
the money paid on application and on allotment in respect of the said 3,00,000
equity shares. The company applied for permission to list the shares on the
Bombay Stock Exchange before the expiry of 10 weeks from 22nd April, 1974, as
required by s. 73 of the Companies Act, 1956. However, the said permission was
withdrawn on 26th April, 1975, on account of the failure on the part of the
company to fulfil the various formalities or requirements. Some of the
directors of the company filed a complaint with the General Branch, C.I.D.,
Reverting
to the said letter of demand and the statutory notice dated 26th September,
1974, the public limited company by its letter dated 8th October, 1974, did not
dispute its liability and, on the other hand, expressed its extreme regret for
the inconvenience caused to the petitioner. It was also stated that the company
was trying its best to repay as soon as funds were in its hands.
On
28th October, 1974, the petitioner presented a winding-up petition under s.
433(e) of the Companies Act, 1956, on the ground that the company was unable to
pay its debts. The petition was accepted on 11th December, 1974. On 15th
January, 1975, notice was served upon the company which was made returnable on
5th February, 1975. There was no contest to the admission of the petition and,
in the circumstances, the petition was ordered to be admitted and advertised on
14th February, 1975. After being advertised in Times of India and in the Government
Gazette, the petition came up for hearing on 14th April, 1975, when the company
applied for adjournment on the ground that it wanted to settle the matter with
the petitioner. At that hearing, it was pointed out to the learned company
judge that the company was making payments to other creditors and had in fact
paid a sum of Rs. 8,000 to one Anantrao Jadhav & Co. of Kolhapur. In these
circumstances, an interim injunction restraining the company and its directors
either by themselves or through their employees, servants or agents from
disposing of any property or assets of the company as well as from disbursing
any amount on behalf of the company until further orders was passed. When the
matter came up for hearing on 18th June, 1975, neither the company nor its
directors nor the attorneys on record appeared and a winding-up order was
passed which was, however, set aside on 3rd July, 1975. The company filed its
affidavit dated 22nd July, 1975, opposing the winding-up petition. In para 5 of
the affidavit, the company admitted its liability to the petitioner and
submitted that at present the company is having more than Rs. 7,00,000 liquid
cash in the company's various bank accounts, and that due to disputes and
differences between the two groups of directors, the management of the company
is under a deadlock. It was also pointed out that a false complaint was lodged
by some of the directors with the police authorities, as a result of which the
amount lying in the banks has been frozen, and the company intended to file a
writ petition challenging the validity of the police order freezing the bank
accounts of the company. It was also stated that the company had given an
ultimatum to various banks to the effect that if their bank accounts were not
released, necessary legal action would be taken against them. It was also
stated that a sugar plant was a very profitable project and it is hoped that in
a very short period the company will be able to pay dividends as also about 300
people in the rural area will get employment opportunities in the company's
project which is in a backward area. It was submitted that the company had
substantial funds and capacity to start their project and it was only due to
non-co-operation of the directors and the deadlock in the management that the
company had suffered.
During
the pendency of the present winding-up petition, the company's then attorneys,
M/s. Manilal Kher Ambalal & Co., took out a judge's summons dated 29th
August, 1975, asking for permission to withdraw and to pay to themselves a sum
of Rs. 15,000 from the account of the company with the Bank of India, Fort
Branch, to enable them to defend the present Company Petition No. 22 of 1974
and three other Company Petitions Nos. 17 of 1974, 4 of 1975 and 6 of 1975, all
for winding up of the company, and another Company Application No. 16 of 1975
for issue of share certificate, and a criminal case pending before the
Metropolitan Magistrate. Another reason advanced for the said payment of Rs.
15,000 was that the company desired to prepare a petition for sanctioning a
scheme including preparation of and printing of the scheme; thirdly, petition
against police authorities for release of books, etc.; fourthly, petition
against the Stock Exchange challenging their arbitrary decision of delisting
the company fifthly, petition for convening an annual general meeting ; and,
lastly, a suit against B. B. Consulting & Engineering Pvt. Ltd. to recover
Rs. 51,000, being advance paid by the company towards machineries. It is not
necessary to refer to the other prayers of the said judge's summons as they are
not relevant for the purposes of this appeal.
Notice
also may be taken of another Company Petition No. 14 of 1975 filed by Dhunji H.
Dhunjibhoy, one of the directors of the company. This was also a petition for
winding up of the company on the ground that it is just and equitable that the
company should be wound up. In support of this, six circumstances were alleged
: (1) That the managing director of the company is carrying on business of the
said company in a fraudulent manner and/or in a manner detrimental to the
interest of the company. (2) That the managing director does not command the
confidence of the petitioner and the other directors named, Dr. R.R.
Hattiangadi, Mr. V.J. Ghatge, Mr. P.R. Kibe and Mr. K.R. Moorthy, and that
there is a complete lack of probity on the part of the said managing director.
(3) That on account of failure to hold the annual general meeting, there is no
properly constituted board of directors to control the management of the said
company. (4) That the object for which the said company Was incorporated has
substantially failed and it is impossible to carry on business in the said
company in the near future, and there is no reasonable hope that the said
company will carry on any' business in the near future. (5) That the auditor of
the company has given a report which gives the assets and liabilities position
of the company as at 31st March, 1973, and 30th September, 1973. Since then the
company's books have been audited up to 30th April, 1974, and a balance-sheet
has been prepared but with qualified remarks ; a profit and loss account of the
company has been submitted directly by the auditors to the Registrar of
Companies without the signature of the petitioner and/or the said four
directors. (6) That the prospectus states that an application will be made to
the Bombay Stock Exchange for permission to deal in and for an official
quotation of the equity shares of the company. The Stock Exchange has refused
permission and/or has not granted permission, and, in the circumstances, by
reason of the provisions of s. 73 of the Companies Act, the allotment of shares
made by the company has become void and the company has become liable to pay
all moneys received from applicants in pursuance of the said prospectus.
When
the present winding-up petition reached hearing on 26th November, 1975, before
the learned single judge the company's present attorneys, M/s. Poddar and Co.,
made an application for adjournment on the grounds as stated by Mr. Poddar
before us that his firm had been engaged on 24th November, 1975, and that he
wanted time to go through the papers and was also considering the question of
presenting a scheme. The learned company judge refused the application for
adjournment and proceeded to hear the petition on merits. At the hearing, the
petitioners in Company Petitions Nos. 17 of 1974, 4 of 1975 and 6 of 1975
appeared and supported the petitioner in the present petition. These three
other petitioners were also the creditors of the company in the sums of Rs.
3,000, Rs. 5,000 and Rs. 5,000. According to Mr. Chinai, he had also appeared
in support of the Company Petition No. 14 of 1975 and had supported the present
petition for winding up. However, neither his appearance nor of his attorneys
in Company Petition No. 14 of 1975 is shown. None the less, we have no reason
to disbelieve the statement of the learned counsel that he in fact appeared in
the said petition and supported the winding up of the company.
The learned
company judge passed an order winding up the company and appointed the official
liquidator to take charge of the assets, properties and all the records of the
company. In view of the winding-up order passed in the present company
petition, rightly by virtue of s. 447 of the Companies Act, 1956, no separate
order for winding up was passed in the other company petitions except as
regards costs.
Mr.
Poddar, appearing on behalf of the appellant-company, has raised four
contentions before us. In the first place, he contended that the petition ought
to have been adjourned, inasmuch as he had come on record on 24th November,
1975. His application for adjournment was not a frivolous application but a
bona fide one. He submitted that the refusal to grant adjournment has caused
miscarriage of justice to the company. We do not find merit in this contention.
The petition was admitted on 5th February, 1975, without contest and thereafter
advertised. The company had filed its affidavit-in-reply challenging the passing
of the order for winding up. Several adjournments were obtained on behalf of
the company, the last of which was on 12th November, 1975, on the ground that
the client was sick and an adjournment for two weeks was sought. The mere fact
that the company had chosen to change its attorneys on 24th November, 1975,
when the matter was fixed for hearing on 26th November, 1975, could be no valid
ground for adjournment and, in these circumstances, the learned company judge
was justified in refusing to adjourn the matter.
Mr.
Poddar laid great stress on the fact that the company had no funds and by the
judge's summons dated 29th August, 1975, it had asked for permission for
payment of Rs. 15,000 to its previous attorneys. He vigorously contended that
the company's hands were tied and it had no funds to adopt proceedings against
the police and the Bombay Stock Exchange at the time when his firm took over
the cases of the company. This contention is devoid of any merit. We find that
during the pendency of the present appeal, the company continued to make
applications to the court for withdrawal of moneys. By two orders dated 27th
February, 1976, and 28th April, 1976, amounts to the extent of Rs. 20,250 were
allowed to be withdrawn. This included payment of Rs. 4,000 to the present
attorneys on record. On being questioned about this amount of Rs. 4,000, we
were told by Mr. Poddar that a large amount has been incurred in connection
with the scheme prepared by the company under s. 391 of the Companies Act. It
is necessary to bear in mind that the above amounts were withdrawn from the
separate bank account maintained under s. 73 in respect of moneys received from
applicants in pursuance of the prospectus offering 3,00,000 equity shares of
Rs. 10 each to the public. Under s. 73, these moneys are required to be repaid
with interest to the applicants when the allotment of shares becomes void and
cannot be used for any other purpose-whatsoever. We seriously doubt the bona
fides of the company that on account of want of funds it could not go in appeal
against the decision of the Bombay Stock Exchange. We think that this is a
false excuse put forth by the managing director of the company, if regard could
be had to the fact that a payment of Rs. 8,000 has been made to M/s. Anantrao Jadhav
& Co. of
The
second contention raised was that the company petition should have been
adjourned for six months to enable the company to come out of the deadlock and
there would have been no prejudice on that score. In this connection, Mr.
Poddar relied upon the paragraph relating to adjournment of petition from
Halsbury's Laws of England, Vol. 7, 4th edn., page 615, para 1030, and also a
decision of the Chancery Division in In re St. Thomas' Dock Company [1876] 2 Ch
D 116 (Ch D). In our opinion, neither the statement from Halsbury nor the
authority cited has any relevance to the facts of the present case. The company
had sufficient time to come out of its so-called deadlock. The petition was
advertised in February, 1975, and the winding-up order was passed in November,
1975. The company had ample opportunity and time. There is no fixed rule of law
or principle that the company is entitled to an adjournment for six months as
sought to be urged on behalf of the company.
The
third contention was that the unpaid creditors' right to an order for winding
up is not an absolute rule. If the court finds that the winding up is not in
the interest of the general body of creditors, it should refuse to wind up the
company. In support of this, Mr. Poddar referred to a decision in In re
Greenwood & Co. [1900] 2 QB 306 (QB) and also a decision of the Supreme Court in Madhusudan
Gordhandas & Co. v. Madhu Woollen Industries
P. Ltd. [1972] 42 Comp Cas 125 and a decision of this court in Focus
Advertising Pvt. Ltd. v. Ahoora Blocks P. Ltd. [1975] 45 Comp Cas 534 (Bom).
In
the case before the Supreme Court, creditors to the extent of Rs. 7,50,000
opposed the winding-up petition, whereas creditors demanding Rs. 44,477.56 in
all supported the same. In the case of Focus Advertising P. Ltd. [1975] 45 Comp
Cas 534 (Bom) in this court, at the hearing of the petition, affidavits of the
eight supporting creditors showed that their claims were of the aggregate value
of Rs. 7,68,000 and those opposing the winding up totalled Rs. 3,03,862.07. In
all these three cases, the courts considered the wishes of the creditors on
both sides. These cases provide a guideline for considering the competing
interest of the creditors. The rule is that if there is opposition to the
making of the winding-up order by the creditors, the court will consider their
wishes and may decline to make the winding-up order. This rule finds place in
s. 557 of the Companies Act, 1956. The wishes of the creditors are to be
examined by the court. The court has to see whether the case of the creditors
opposing the winding up is reasonable and whether there are matters which
should be inquired into and investigated if a winding-up order is made. The
court can consider the wishes of the creditors "as proved before it by
sufficient evidence" as laid down by s. 557. A fact is said to be
"proved" when after considering the matters before it, the court
either believes it to exist or considers its existence so probable that a
prudent man ought, under the circumstances of the particular case, to act upon
the supposition that it exists. The creditors who wish that their wishes should
be regarded have to place the necessary evidence before the court. They have to
point out reasonable grounds in order to enable the court to ascertain whether
the grounds are good. Either the material should be on record or the creditors
should place it on affidavit or in some other satisfactory manner to enable the
court to determine the competing wishes and make a judicial choice at the
hearing. If this is not possible to decide at the hearing, the court can direct
that a meeting of the creditors be called and held in such manner as laid down
in cls. (b) and (c) of s. 557(1) of the Companies Act, 1956.
In
the present case, there is no evidence that at the time of the passing of the
winding-up order, any of the creditors of the company opposed the petition for
winding up. On the other hand, at the time of the hearing of the petition for
winding up, three creditors to the extent of Rs. 13,000 had supported the
petition for winding up. There is nothing to show that any other creditor was
present at the hearing to oppose the present petition for winding up. What was
urged on behalf of the company by Mr. Poddar was that a scheme has been
presented under s. 391 of the Companies Act, and at the meeting called under
the directions of the court under that section, 79 creditors had attended, out
of whom 50 creditors to the extent of about Rs. 4,47,000 had voted for the
scheme and 26 creditors of the value of about Rs. 88,000 in the aggregate had
opposed the scheme. The provision for ascertaining the wishes of the creditors
under s. 557 is for a different situation than the one which is contemplated
under s. 391. In fact, under s. 391, there is no question of ascertaining the
wishes of the creditors by the court. It is a provision for scrutinising the
scheme which may be put forth either by the company or by any of the class of
creditors or members of the company. In the case before us, at the time of the
passing of the order for winding up, there was no evidence at all, much less
sufficient evidence, to show that the creditors were opposing the winding up,
whose wishes could have been ascertained by the court. It is true that it is
not an absolute rule of law that the court is bound to make an order for
winding up when the conditions required for winding up exist. It is entirely a
matter of judicial discretion. In the present case, in our opinion, the learned
company judge has exercised that discretion in a sound and proper manner and
there is no reason to interfere with the same.
The
other question which requires to be considered is whether the order for winding
up would benefit the petitioning-creditor or the company's creditors generally.
In this connection, Mr. Poddar pointed out that the company has liquid cash of
nearly Rs. 7 lakhs, but on account of the obstructive and destructive attitude
adopted by some of the directors, the amount is not realisable from the banks
as the police has instructed the banks not to allow the operation of the bank
accounts. In this connection, the provisions of s. 73 of the Companies Act are
being overlooked. Mr. Poddar was grossly in error in treating the amount lying
in the bank accounts as an asset available to the company for disbursement at
the discretion and sweet will of the company's directors. It is admitted that
the Bombay Stock Exchange has withdrawn the permission contemplated under s. 73
since 26th April, 1975, and that no appeal has been filed against that
decision. Sub-section (5) of s. 73 provides that for the purposes of this
section, it shall be deemed that permission has not been granted if the
application for permission, where made, has not been disposed of within the
time specified in sub-s. (1). Sub-section (1), to the extent it is relevant,
says that where permission has been applied for before the tenth day after the
first issue of the prospectus, or, where such permission has been applied for
before that day, if the permission has not been granted by the Stock Exchange
before the expiry of ten weeks from the date of the closing of the subscription
lists, any allotment made on an application in pursuance of such prospectus
shall be void. In the present case, the permission was given subject to certain
conditions being fulfilled and since those conditions were not complied with,
the permission was revoked. The conditional permission did not amount to grant
of the application for permission to deal in shares on the Stock Exchange as
contemplated under s. 73(1). The permission intended under that sub-section is
an unqualified and wholesome permission. Any qualified permission is as good as
not granted and the application should be construed as not disposed of within
the time prescribed by sub-s. (1) of s. 73. The amount received from the
applicants is required to be kept in a separate account under sub-s. (3) of s.
73 until the permission is granted or the appeal preferred against the refusal
to grant such permission is disposed of under s. 22 of the Securities Contracts
(Regulation) Act, 1956. The text of sub-s. (3A) of s. 73 reads:
"(3A)
Moneys standing to the credit of the separate bank account referred to in
sub-section (3) shall not be utilised for any purpose other than the following
purposes, namely :—
(a) adjustment against allotment of shares,
where the shares have been permitted to be dealt in on the stock exchange or
each stock exchange specified in the prospectus ; or
(b) repayment of moneys received from applicants
in pursuance of the prospectus, where shares have not been permitted to be
dealt in on the stock exchange or each stock exchange specified in the
prospectus, as the case may be, or, where the company is for any other reason
unable to make the allotment of shares."
This
authorises the utilisation of the moneys for any one of the two purposes and
for no other purpose. The language of s. 73 is simple and clear. This section
had been amended by the Companies (Amendment) Act, 1974, whereby greater
protection was sought to be given to the investing public, underwriting
institutions and trade than hithertobefore. It also became necessary for the
Government to have a second look at some of the provisions of s. 73 in view of
the judgment in Union of India v. Allied International Products Ltd. [1971] 41 Comp Cas 127 (SC). Looking to the interest of the investing public, the rate
of interest was enhanced from six per cent, to twelve per cent, by the 1974
Amendment, so that the investor received the repayment at a higher interest
when the allotment became void under s. 73(1). The 1974 Amendment brought about
the substitution of sub-ss. (1) and (5) and insertion of sub-ss. (2A), (2B),
(3A) and amendment of some other provisions of s. 73 in order to provide
several safeguards, but in real life these provisions can be set at naught as
in the present case. Although the allotment has become void, yet the moneys
have not been repaid with interest in the manner laid down and, on the other
hand, over eight lakhs of rupees, out of fifteen lakhs of rupees, have been
utilised for purposes other than those specified under s. 73(3A) quoted above. This
kind of mischief cannot be avoided unless s. 73 is further amended to prohibit
operation of such separate bank account until a company produces the permission
of the stock exchange concerned as contemplated under s. 73. It is against such
a permission that the separate bank account should be allowed to be operated.
This case illustrates that more safeguards are needed to give real and
effective protection to the investing public, underwriting institutions and
trade. There is no check, as this case shows, in misapplying the moneys. In
fact, the moneys falling into the coffers of a company pursuant to the
prospectus cannot be touched or employed to use unless the conditions
contemplated under s. 73 are faithfully complied with.
It
seems to us that, in using these moneys, the provisions of s. 73 are breached.
Such breach is made punishable apart from fixing joint and several liability on
the directors. It may be made clear that we are not expressing any opinion on
this aspect of the case as the point is not in issue before us. We find that
there is no prospect of the company doing any business. There is a complete
deadlock among the directors. These directors have filed a winding-up petition
on the ground that it is just and equitable that the company be wound up. The
majority of the directors do not have confidence and faith in the managing
director, Shri A.B. Patil, and another director, Shri I.B. Patil. Large amounts
have been paid by them to a concern in which both of them are interested. In
these circumstances, it is in the interest of the petitioning creditor and
other supporting creditors that the assets of the company should be protected.
After all, the object of winding-up by the court is to facilitate the
protection and realisation of the assets of a company with a view to ensure an
equitable distribution thereof among those entitled. In our opinion, the
winding-up order is in the general interest of all the creditors. However, we
make it clear that these observations will not prejudice the scheme which is
presented by the company under s. 391 of the Companies Act.
The
last contention was that the petitioning-creditor should have filed a suit.
Winding up is no alternative to the ordinary remedy provided for recovery of a
debt. No doubt, a winding-up petition is not a legitimate means of seeking to
enforce payment of a debt, but such a debt should be disputed by the company.
There should be some bona fide dispute. In the present case, the debt is
admitted. It was admitted in reply to the statutory notice. It was not disputed
at the time when the company petition came for admission. It was also not
disputed in the affidavit opposing the admission of the petition. In the
present case, the deeming provisions of s. 434(1)(a) are clearly attracted as
the company has neglected to pay the debt of the petitioner. There is nothing
to show that the petitioner has instituted the present proceedings with any
ulterior motive. In these circumstances, the petitioner has rightly availed of
the cheap and speedy remedy provided under the Companies Act to creditors who
are unable to recover debts, and we see no reason why the petitioner should
have been refused this cheap remedy.
All
the contentions raised on behalf of the company fail.
In
the result, the appeal is dismissed. The appellant-company is directed to hand
over forthwith to the official liquidator all the articles and things of which
possession has been taken pursuant to the order dated 2nd February, 1976. The
official liquidator to take necessary action immediately. The appellant-company
to pay to the respondent costs of the appeal. Costs to come out of the assets
of the company.
At this stage, Mr. Poddar applies for leave to appeal to the Supreme Court. The same is refused.
[1995]
6 SCL 227 (SC)
SUPREME COURT OF
v.
Stock
Exchange
J.S. VERMA AND K. VENKATASWAMI. JJ.
CIVIL APPEAL NO. 9723 OF 1995
[ARISING OUT OF SPECIAL LEAVE PETITION (CIVIL)
NO. 8420 OF 1995]
OCTOBER 31, 1995
Section 73(1A) of the Companies Act, 1956 - Allotment of shares -
Listing of shares in Stock Exchanges - Whether, unless permission is granted by
each or everyone of all stock exchanges named in prospectus for listing of
shares to which application is made by company, consequence is to render entire
allotment void - Held, yes
Words and phrases - Expression 'each such stock exchange' occurring in
subsection (1A) of section 73
FACTS
The appellant-company issued a
prospectus offering to the public for subscription of equity shares, mentioning
therein that applications had been made to the
HELD
Sub-section (1A) of section 73
requires that where a prospectus states that an application under sub-section
(1) has been made for permission for the shares or debentures offered thereby
to be dealt in one or more recognised stock exchanges, such prospectus shall
state the name of the stock exchange or, as the case may be, each such stock
exchange. In other words, if the application is made only to one stock exchange
then the name of that stock exchange is to be mentioned and where the
prospectus states that application has been made to more than one recognised
stock exchanges, then it shall state the name of each such stock exchange,
i.e., every such stock exchange or in other words, all the stock exchanges to
which the application has been made. The second part of subsection (1A) of
section 73 then provides the consequence of refusal of the permission by saying
that any allotment made on an application in pursuance of such prospectus shall
be void if the permission has not been granted bv the stock exchange or each
such stock exchange, as the case may be, before the expiry of ten weeks from
the date of the closing of the subscription list. This means that any allotment
made shall be void if the permission has not been granted by the stock exchange
where the application is made only to one stock exchange or each such stock
exchange 'where the application is made to more than one stock exchange'. The
expression 'each such stock exchange' here must mean the same as in the earlier
part of sub-section (1A) of section 73, i.e., each and every, or in other
words, all such stock exchange. Thus, where the prospectus held out that
enlistment of shares would be in more than one stock exchange the consequence
envisaged in subsection (1A) of section 73 ensues to render void the entire
allotment of shares unless the permission is granted by each and everyone or
all of the stock exchanges named in the prospectus for enlisting the shares.
This is the plain meaning of sub-section (1A) of section 73. In short, unless
permission is granted by each or everyone of all the stock exchanges named in
the prospectus for listing of shares to which application is made by the
company the consequence is to render the entire allotment void. In other words,
if permission has not been granted by any one of the several stock exchanges
named in the prospectus for listing of shares, the consequence by virtue of
section 73(1A) is to render the entire allotment void and the grant of permission
by one of them is inconsequential.
The appeal was, therefore,
dismissed.
CASE REFERRED TO
Union of
PER COURT
Decision of the Supreme Court
in Union of India v. Allied International Products Ltd. AIR 1971 SC 251 was
sought to be overcome by making a suitable amendment in section 73 since it was
visualised that the said decision is likely to lead to complications inasmuch
as the investing public as well as under-writing institutions were likely to
lose the intended protection enjoyed by them. In other words, the effect of the
decision in Allied International Products Ltd. 's case (supra) that even if any
of the stock exchanges mentioned in the prospectus approved the application for
enlistment it would mean sufficient compliance with the provisions of section
73 and the allotment made in pursuance of that prospectus would be valid was
sought to be overcome by amending section 73 to provide that enlistment has to
be done in all the stock exchanges
mentioned in the prospectus and in the case of failure to do so the money
received in respect of allotment of shares on the basis of the prospectus
should be refunded within a specified time. Thus, the consequence of rendering
the entire allotment of shares void was required to ensue if the enlistment
contemplated in all the stock exchanges mentioned in the prospectus does not
materialise. There can be no doubt that the clear object of insertion of
sub-section (1A) in section 73 was to overcome the decision in Allied
International Products Ltd.'s case (supra) by amending the law in this manner.
JUDGMENT
Verma, J. - Leave
granted.
2. The short but ticklish question which arises
for decision in the present case is the meaning of the word 'each' in the expression
"if the permission has not been granted by the stock exchange or each such
stock exchange" used in sub-section (1A) of section 73 of the Companies
Act, 1956 ('the Act'). This is the real question for decision in the present
appeal.
3. Section 73 of the Act, insofar as it is
material is as under :
"Allotment of shares and debentures to be dealt in on stock
exchange.— (1) Every company intending to offer shares or debentures to the
public for subscription by the issue of a prospectus shall, before such issue,
make an application to one or more recognised stock exchanges for permission
for the shares or debentures intending to be so offered to be dealt with in the
stock exchange or each such stock exchange.
(1A) Where a prospectus, whether issued generally or not, states that
an application under sub-section (1) has been made for permission for the
shares or debentures offered thereby to be dealt in one or more recognised
stock exchanges, such prospectus shall state the name of the stock exchange or,
as the case may be, each such stock exchange, and any allotment made on an
application in pursuance of such prospectus shall, whenever made, be void, if
the permission has not been granted by the stock exchange or each such stock
exchange, as the case may be, before the expiry of ten weeks from the date of
the closing of the subscription lists :
Provided that where an appeal against the decision of any recognised
stock exchange refusing permission for the shares or debentures to be dealt in
on that stock exchange has been preferred under section 22 of the Securities
Contracts (Regulation) Act, 1956 (42 of 1956), such allotment shall not be void
until the dismissal of the appeal." [Emphasis supplied]
4. The material facts which give rise to the above
question are only a few. On 31-5-1994 the appellant-company issued a prospectus
offering to the public for subscription 27,40,000 equity shares of Rs. 10 each
in terms of the prospectus, intimating that "applications have been made
to the Stock Exchanges at Coimbatore, Bombay and Madras for permission
to deal in and for an official quotation in respect of the equity shares of the
company now being offered in terms of this prospectus". The date of
closing the subscription mentioned in the prospectus was 19-7-1994. The period
of ten weeks from the date of closing of the subscription list prescribed in
section 73(1A) for grant of permission by the stock exchange expired on
27-9-1994. The allotment of shares was finalised on 16-9-1994. Permission was
granted by the Coimbatore Stock Exchange on 26-9-1994 and the trading commenced
therein on 7-10-1994. Permission was granted by the Madras Stock Exchange on
28-10-1994. However, in spite of reminders issued on 18-8-1994 and 12-9-1994 by
the Bombay Stock Exchange to the company to complete the required formalities,
the necessary compliance was not made by the company which resulted in
rejection of the company's application by the Bombay Stock Exchange on
28-9-1994. The city-wise break up of allotment of the shares shows that the
number of shares allotted were 17,44,600 in Bombay, 3,45,400 in Coimbatore and
2,89,900 in Madras.
5. In this context, the effect of rejection of the application by the Bombay Stock Exchange on the allotment of shares arises for consideration under sub-section (1A) of section 73. The question is: Whether the entire allotment of shares is rendered void by virtue of section 73(1A) because of the rejection of the application by the Bombay Stock Exchange to render ineffective even the grant of permission by the Coimbatore Stock Exchange within the specified period ?
6. In substance the contention of Shri F.S. Nariman is, that the consequence of rendering void the allotment made under section 73(1A) envisaged by the provision cannot render ineffective the permission granted by the Coimbatore Stock Exchange within the prescribed period. The reply of Shri Harish Salve is that the consequence of rendering the entire allotment void is clearly envisaged where rejection of the application for permission is by any such stock exchange to which application has been made. Shri Salve referred to the legislative history which led to the insertion of sub-section (1A) to overcome the consequence of the decision of this Court in Union of India v. Allied International Products Ltd. AIR 1971 SC 251, by the amendment of law in this manner. It is, therefore, necessary at this stage to refer to the decision of this Court in Allied International Products Ltd.'s case (supra).
7. In Allied International Products Ltd.'s case (supra), a similar question arose for decision prior to insertion of sub-section (1A) in section 73 when applications were made for permission to several stock exchanges but only one out of them granted the permission to enlist the company's share. That question arose in the context of section 73(1), as it then stood, which was as under:
"(1) Where a prospectus, whether issued generally or not, states
that application has been made or will be made for permission for the share or
debentures offered thereby to be dealt in on a recognised stock exchange, any
allotment made on an application in pursuance of the prospectus shall, whenever
made, be void, if the permission has not been applied for before the tenth day
after the first issue of the prospectus, or, if the permission has not been
granted before the expiry of four weeks from the date of the closing of the
subscription lists or such longer period not exceeding seven weeks as may,
within the said four weeks, be notified to the applicant for permission by or
on behalf of the stock exchange."
8. It was held by this Court as follows :
"... If applications are made to several Exchanges, some within
the period of ten days after the first issue of the prospectus, and some
beyond, or that one or more applications, but not all, is or are defective, and
the error is not rectified, it would be unreasonable to hold that because some
of the applications made beyond the tenth day after the first issue of the
prospectus, or are defective, are liable to be rejected, the applications
properly made before some of the Exchanges are also ineffective and the
allotment made may be invalid." (p. 256)
9. This is precisely the effect of the argument
of Shri Nariman even after the change has been made by insertion of sub-section
(1A) in section 73. It has, therefore, to be seen whether in spite of this
change in the law subsequent to the decision of this Court in Allied
International Products Ltd. 's case (supra), the position in law remains
unaltered.
10. The Statement of Objects and Reasons for
making the amendment in the Companies Act clearly states as under :
"6. Under the present Bill some other practices prevalent in the
corporate sector, in so far as they may prove injurious or undesirable, are
also sought to be checked. The provisions contained in the Bill designed for
this purpose deal with the following :—
(1) Failure
to enlist shares with all the stock exchanges mentioned in a prospectus. In
legislating on this point, it is proposed to make an incidental amendment to
Securities Contracts (Regulation) Act, 1956."
11. In the notes on clauses the portion relevant
for this amendment is as under:
"Clause 7.- Sub-clauses (i) and (iii),- Section 73 prescribes
certain time-limit for enlistment with the stock exchanges. It also
contemplates that enlistment has to be done in all the stock exchanges
mentioned in the prospectus and in case of failure to do so, the money received
in respect of allotment of shares on the basis of the prospectus should be
refunded within a specified time. In the recent judgment in Union of India v.
Allied International Products Limited, the Supreme Court has held that if the
stock exchange had intimated that it would give further consideration to
an application, the time-limit
contemplated by the section will not operate. It has also held that if any one
of the stock exchanges mentioned in the prospectus approved the application for
enlistment, it would mean sufficient compliance with the provisions of section
73 and the allotment made in pursuance of that prospectus would be valid.
It has been felt that the decision of the Supreme Court referred to
above is likely to lead to complications inasmuch as the investing public as
well as under-writing institutions are likely to lose the protection hitherto enjoyed
by them. Hence, section 73 is being amended suitably." [Emphasis supplied]
12. It is, therefore, clear that the effect of
the decision of this Court in Allied International Products Ltd.'s case (supra)
in this behalf was sought to be overcome by making a suitable amendment in
section 73 since it was visualised that the said decision is likely to lead to
complications inasmuch as the investing public as well as under-writing
institutions were likely to lose the intended protection enjoyed by them. In
other words, the effect of the decision in Allied International Products Ltd. s
case (supra) that even if any of the stock exchanges mentioned in the
prospectus approved the application for enlistment it would mean sufficient
compliance with the provisions of section 73 and the allotment made in
pursuance of that prospectus would be valid was sought to be overcome by
amending section 73 to provide that enlistment has to be done in all the stock
exchanges mentioned in the prospectus and in the case of failure to do so the
money received in respect of allotment of shares on the basis of the prospectus
should be refunded within a specified time. Thus, the consequence of rendering
the entire allotment of shares void was required to ensue if the enlistment
contemplated in all the stock exchanges mentioned in the prospectus does not
materialise. There can be no doubt that the clear object of insertion of
sub-section (1A) in section 73 was to overcome the decision in Allied
International Products Ltd.'s case (supra) by amending the law in this manner.
The question is whether this object has been achieved by the language used in
sub-section (1A) of section 73.
13. The meaning and true purport of the word
'each' in the relevant expression in section 73(1A) is to be determined for
this purpose. In Collins Dictionary of the English language, the meaning of
'each' is given as "every (one) of two or more considered
individually"; and 'every' means "each one (of the class specified),
without exception". In Stroud's Judicial Dictionary of Words and Phrases,
the true meaning of 'every' is "each one of all".
14. The meaning of the word 'each' in the
expression "if the permission has not been granted by the stock exchange
or each such stock exchange" in sub-section (1A) of section 73 is now to
be determined. Sub-section (1A) of section 73 requires that where a prospectus
states that an application under sub-section (1) has been made for
permission for the shares or debentures offered thereby to be dealt in one or
more recognised stock exchanges, 'such prospectus shall state the name of the
stock exchange or, as the case may be, each such stock exchange'. In other
words, if the application is made only to one stock exchange then the name of
that stock exchange is to be mentioned and where the prospectus states that
application has been made to more than one recognised stock exchanges then it
shall state the name of each such stock exchange, i.e., every such stock
exchange or in other words, all the stock exchanges to which the application
has been made. The second part of sub-section (1A) of section 73 then provides
the consequence of refusal of the permission by saying that any allotment made
on an application in pursuance of such prospectus shall be void "if the
permission has not been granted by the stock-exchange or each such stock
exchange", as the case may be, before the expiry of ten weeks from the
date of the closing of the subscription list. This means that any allotment
made shall be void if the permission has not been granted by the stock exchange
where the application is made only to one stock exchange or each such stock
exchange "where the application is made to more than one stock
exchange". The expression "each such stock exchange" here must
mean the same as in the earlier part of sub-section (1A) of section 73, i.e.,
each and every or in other words, all such stock exchanges. Thus, where the
prospectus held out that enlistment of shares would be in more than one stock
exchange the consequence envisaged in sub-section (1A) of section 73 ensues to
render void the entire allotment of shares unless the permission is granted by
each and everyone or all of the stock exchanges named in the prospectus for
enlisting the shares. This is the plain meaning of sub-section (1A) of section
73. In short, unless permission is granted by each or everyone of all the stock
exchanges named in the prospectus for listing of shares to which application is
made by the company, the consequence is to render the entire allotment void. In
other words, if the permission has not been granted by any one of the several
stock exchanges named in the prospectus for listing of shares the consequence
by virtue of sub-section (1A) of section 73 is to render the entire allotment
void and the grant of permission by one of them is inconsequential. This
construction also promotes the object of insertion of sub-section (1A) in
section 73 by amendment of the law made to overcome the effect of the decision
of this Court in Allied International Products Ltd.'s case (supra). The
contention of Shri Nariman, the learned counsel for the appellants is,
therefore, untenable.
15. Consequently, the appeal fails and is dismissed. No costs.
[1998] 15 SCL 128 (GUJ.)
HIGH COURT OF
v.
Vadodara
Stock Exchange Ltd.
M.S. SHAH, J.
SPL. CIVIL APPLICATION NO. 7237 OF 1996
NOVEMBER 25, 1997
Section 73(3), read with section 69(4), of the Companies Act, 1956-Allotment of shares and debentures to be dealt in on stock exchange-Whether even if one of stock exchanges mentioned in prospectus refuses to give permission for listing, allotment cannot be made and application money has to be returned-Held, yes-Whether pending permission for listing in stock exchange share application money collected should be kept deposited in separate account with bankers to issue and not with any other bank-Held, yes-Whether, therefore, where share application money in form of stockinvests was issued by bank other than banker to issue it could be said that amount was paid to and received by company-Held, no
Section 22 of the Securities Contract (Regulation) Act, 1956 read with
sections 69 and 73 of the Companies Act, 1956-Refusal of stock exchange to list
securities-Appeal against-Whether appellate authority hearing company's appeal
against refusal of listing permission by stock exchange is not only empowered,
but also duty bound to satisfy itself that company has complied with mandatory
statutory requirement of minimum subscription-Held, yes-In company's appeal
against refusal to listing by stock exchange some share applicants alleged that
minimum of 90 per cent of issued shares was not subscribed and company accepted
fictitious stockinvests to make up minimum subscription-They sought return of
money-Appellate authority held that condition of minimum subscription was not
fulfilled since stockinvests were dubious and same were not paid to and received
by company within meaning of sections 69 and 73 of Companies Act as
stockinvests were not with banker to issue - It, therefore, dismissed
appeal-Whether finding of appellate authority could be held to be perverse
warranting interference-Held, no
Section 69 of the
Companies Act, 1956-Allotment of shares-Prohibition of-Whether share
application money collected has to be kept deposited in separate account in
scheduled bank which is banker to issue and not with any other scheduled bank -
Held, yes - Whether where stockinvests were made in bank other than banker to
issue and if stockinvests were excluded minimum subscription of 90 per cent of
public issue was not fulfilled, it could be said that amount related to
stockinvests was not paid to and received by company and, therefore, provisions
of section 69 were not complied with and allotment of shares was illegal and
invalid - Held, yes
Words and Phrases - 'Scheduled Bank' appearing in sections
69 and 73 of the Companies Act, 1956
FACTS
The petitioner-company made a public issue of Rs. 32,38,100 equity
shares at Rs. 10 each cash at par aggregating to Rs. 323.81 lakhs. According to
the terms of the prospectus, the shares were to be listed on VSE, BSE and ASE.
According to the petitioner the issue was subscribed to the extent of 96 per
cent which was more than the minimum subscription prescribed at 90 per cent of
the size of the issue. VSE and ASE granted approval for listing of the
company's share. But, BSE refused to do so as the amended requirement for
listing shares that 'there should be at least five public shareholders for
every one lakh net capital offered to the public' was not fulfilled by the
company. On appeal, the SEBI held that since the company's public issue opened
prior to the date of amendment amending the listing requirement that was not
applicable to the company. However, the appeal was dismissed on the ground that
there was substance in the complaint lodged by some of the shareholders to the
effect that issue was under-subscribed and in order to bring the subscription
at the public issue upto 90 per cent of the share capital offered, the company
had accepted six disputed applications for one lakh shares each of the
applicants having similar addresses and the payment was purported to have been
made by stockinvests under the consecutive numbers issued by a bank.
On writ, the company contended that (i) the appellate authority could
not expand the scope of appeal so as to decide any issue other than that raised
in the appeal; and (ii) once the appellate authority held that the amount was
paid and received, it was not open to the appellate authority to give a finding
that the amount was not really received but merely technically received for a
few moments and, therefore, the allotment was not proper.
On writ petition:
HELD
As per sections 69 and 73 of the Companies Act, for valid allotment of
shares, there are, inter alia, two conditions precedent (i) minimum
subscription, and (ii) listing permission by each of the recognised stock
exchanges in the prospectus. In point of time minimum subscription precedes
listing permission. Hence, compliance with the mandatory statutory requirement
of minimum subscription is a condition precedent for listing permission as
well. It, therefore, stands to reason that the appellate authority hearing the
company's appeal against refusal of listing permission by the Stock Exchange is
not only empowered, but also duty bound, to satisfy itself that the company had
complied with the mandatory statutory requirement of minimum subscription.
Examination of complaints of investors regarding non-compliance with the above
requirement is, therefore, a logical and legitimate part of the exercise of
appellate powers by the appellate authority.
In the instant case, the
appellate authority found that there were six disputed applications coming from
six applicants having similar addresses with no income-tax numbers except one.
Each application was for one lakh shares each and the stock invests
accompanying the said applications were also consecutively numbered and issued
by the Punjab National Bank. Though bankers to the issue were Karur Vysya Bank
Ltd. and Vijaya Bank, all these stockinvests were encashed in a particular
account with the Punjab National Bank which was opened on 25-4-1996 with a
token amount of Rs. 500 and between that date and 11-5-1996, the only entries
therein were regarding encashment of the stockinvests amounting to Rs. 30 lakhs
and withdrawal of the entire amount on the same day. Thus, the stockinvests
were not encashed with the bankers to the issue but they were encashed with the
Punjab National Bank immediately after the basis of the allotment was finalised
and the entire amount so encashed was withdrawn in cash through cheques in
favour of an employee of the petitioner company. The Chairman of the company
informed the appellate authority that the withdrawal was for purchase of plant
and machinery. The appellate authority rightly did not accept the explanation
as the names of the suppliers of the machinery were not furnished, the details
about name and type of machineries were not supplied; no information was
furnished as to whether the money was actually given to the suppliers even on
the date of hearing. On the basis of this material, no fault could be found
with the finding given by the appellate authority that the receipt of Rs. 30
lakhs by the company was merely an illusion. In any case, such finding could
not be interfered with, since it was neither perverse nor based on no evidence.
What the provisions of section 69 read with section 73 contemplate is
not merely that the amounts of application money tendered with the share
applications should be deposited in a separate bank account with scheduled
bank, but they must be deposited in a separate bank account with the scheduled
bank/s which are bankers to the issue and shall be kept deposited with them
till the fulfilment of the purposes contemplated by sub-section (4) of section
69 and sub-sections (3) and (3A) of section 73. It is true that the provisions
of sub-section (4) of section 69 speak of moneys being deposited in 'a
Scheduled Bank' and sub-sections (3) and (3 A) of section 73 speak of moneys
being deposited in 'a separate bank account maintained with a Scheduled Bank'
and, therefore, by themselves, are capable of being interpreted as 'any
Scheduled Bank'. But bearing in mind the object of minimum subscription
requirement as well as the mandatory nature of the provisions of sections 69
and 73 laying down the minimum subscription requirement and the other
conditions for valid allotment which are stipulated by the Legislature for the
protection of investors, it is clear that it is a condition precedent to valid
allotment that the whole of the application money should have been paid to and
actually received by the company. Any means such as cash, cheques, drafts
and/or stockinvests may be used, but instruments must be received and encashed
and remittances must be lying with the bankers to the issue before the company
can proceed for allotment of shares. As specified in sub-section (3A) of
section 73, moneys received pursuant to the public off r of the shares can be
utilized only for one of the two purposes.
(a) if listing permission is granted by all the stock exchanges specified in the prospectus, the application money received from the public can be adjusted against allotment of shares,
(b) but if listing permission is not received from each of the stock exchanges specified in the prospectus (or the company is unable to make allotment for any other reason), the application moneys have to be refunded to the applicants.
Listing permission cannot be
granted by a stock exchange if the minimum subscription requirement as required
by sub-sections (1) to (3) of section 69 is not complied with. If the listing
permission is not granted by even one stock exchange specified in the
prospectus or where the company is for any reason unable to make allotment of
shares, application moneys received from the public have to be refunded within
the time limit stipulated in the provisions of section 73 of the Companies Act.
The scheme of sections 69 and 73 would, therefore, suggest that the moneys
should not be allowed to be handled or manipulated by the company till all the
mandatory requirements of sections 69 and 73 are complied with and till the
company can proceed to make valid allotment of shares. In other words, the
moneys must be kept out of the reach of the company and its directors/promoters
till the company can make allotment of shares in accordance with law. This
salutary object of the provisions of the Companies Act will be frustrated if it
is held that application moneys received from the public are permitted to be
deposited in any bank account of any scheduled bank where the company may
choose to deposit. In that case, there will be no control on the company which
may withdraw the application moneys or any part thereof in flagrant violation
of the provisions of sections 69 and 73 and then agree to pay a fine of Rs.
5,000 under sections 69(4) and 73(3). No difficulty will arise either to the
company which has offered its shares to the public and is acting bona fide or
to the investors if the provisions of sub-section (4) of section 69 and
sub-sections (3) and (3A) of section 73 are interpreted as stated earlier, that
is to say, all moneys received from applicants for shares offered to the public
for subscription shall be deposited and kept deposited in the scheduled bank/s
which are bankers to the issue until the company has complied with all the
requirements of section 69 and section 73. It has been held that hankers to the
issue hold the application moneys in the nature of a trust fund, i.e., the
statute has erected a kind of trust for the protection of persons who pay the
money on the faith of a promise to refund the money, in case certain conditions
are not fulfilled. It is only the bankers to the issue who can be expected to
make sure that before withdrawal the company has got the listing permission from
each stock exchange specified in the prospectus. It is only the bankers to the
issue who are subject to the statutory control of the SEBI through the SEBI
(Bankers to an Issue) Rules, 1994 and the SEBI (Bankers to an Issue)
Regulations, 1994.
On the other hand, if the
aforesaid provisions are interpreted to mean that moneys received from
applicants for shares may be deposited in any scheduled bank to the choice of
the company, it will give the company an opportunity to resort to manipulations
not to make the application moneys or a part thereof available to the company
for the purposes for which moneys are raised from the public.
In the instant case, since the
admitted fact was that stock invests of Rs. 30 lakhs received from six
applicants (who were found to be dubious by the appellate authority) were not
deposited with or encashed by either of the bankers to the issue, i.e., Vijaya
Bank and Karur Vysya Bank, the said amount could not be said to have been paid
to and received by the company as required by sub-section (I) of section 69.
The finding of the appellate authority that the said amount was actually not
received by the petitioner-company could, therefore, be upheld on this ground
also. Besides, the said illegality had assumed the dimension of a fraud because
said stockinvests of Rs. 30 lakhs were not only encashed with the Punjab
National Bank (not a banker to the issue) but were also withdrawn in cash by
bearer cheque in the name of an employee of the petitioner-company. Further,
the said amount was withdrawn by the Chairman and Directors of the company in
the aforesaid manner between 25-4-1996 and 11-5-1996, i.e., long prior to the
date on which Vadodara Stock Exchange and Ahmedabad Stock Exchange granted
listing permission on 27-5-1996. As already noted earlier, the application of
the company for listing permission to the Bombay Stock Exchange was still
pending. Under the circumstances, the company had clearly committed flagrant
breach of the mandatory provisions of subsections (3) and (3A) of section 73 by
withdrawing Rs. 30 lakhs from the application moneys received pursuant to the
public offer of its shares before listing permission was granted by any stock
exchange. Such withdrawal could not have been made before allotment of shares
and such allotment of shares could not have been made before listing permission
was granted by all the three stock exchanges.
Such listing permission could
not have been granted without the company having actually received application
moneys for the minimum subscription. It was thus clear that non-deposit of the
stockinvests of Rs. 30 lakhs with the bankers to the issue was clearly a part
of the well-thought-out design on the part of those in charge of the company in
order to play a fraud on the investors and to circumvent the mandatory
provisions of sections 69 and 73. Mere encashment of stockinvests of Rs. 30
lakhs with the Punjab National Bank (not bankers to the issue) without
withdrawal thereof would have been an irregularity or illegality which would
have gone unnoticed. It was the withdrawal thereof in hot haste in a dubious
manner and for unexplained purpose which not only lent it the character of
fund, but also justified 'the sympathetic and imaginative discovery 'of the
meaning of the words 'a Scheduled Bank' in sub-section (4) of section 69 and
sub-sections (3) and (3A) of section 73 as 'the Scheduled Bank/s which are the
bankers to the issue'.
Once the above meaning of the
term 'a Scheduled Bank' is appreciated, the meaning of the words "the sum
payable on application for the amount so stated (minimum subscription) has been
paid to and received by the company" in sub-section (1) of section 69 must
be interpreted in conjunction with the provisions of sub-section (4) of section
69 and sub-sections (3) and (3A) of section 73. Since entire application money
paid to and received by the company is to be kept out of the reach of the
company till all the conditions for valid allotment are satisfied, there cannot
be any hiatus between receipt of the money by the company and its deposit with
the Scheduled Bank/s which are bankers to the issue. In other words, that
application money cannot be said to have been paid to or received by the
company which might have been physically received by the company, but which is
not deposited in a separate bank account with the Scheduled Bank/s which are
bankers to the issue.
Having regard to the aforesaid
object of statutory provisions and the findings of fact arrived at by the
appellate authority, it had to be held that the application money pursuant to
the minimum subscription of shares offered to the public was not paid to and
received by the company as required by the provisions of sections 69 and 73. In
view of the fraudulent conduct on the part of those in charge of management of
the petitioner-company, the Court had to decline to exercise its prerogative
discretionary jurisdiction under article 226 of the Constitution in favour of
the petitioner-company.
The petition was, therefore, dismissed.
K.P. Varghese v. ITO [1981]
4SCC 173/7, C.B. Gautam v. Union of India [1993] 1 SCC 78/[1992] 65, Reserve
Bank of India v. Bank of Credit & Commerce International (Overseas) Ltd.
(No. 1) [1993] 78 Comp. Cas. 207 (Bom.), Reserve Bank of India v. Bank of
Credit & Commerce International (Overseas) Ltd. (No. 2) [1993] 78 Comp.
Cas. 230 (Bom.), K. Balakrishna Rao v. Haji Abdulla Sait AIR 1980 SC 214, Brett
v. Brett [1926] 3 Addams 210 and State of
S.N. Soparkar for the
Petitioner. S.N. Shelat, B.H. Chatrapathi, A.L. Shah andK.k. Puj for
the Respondent.
JUDGMENT
1. This petition under article 226 of
the Constitution challenges the order dated 10-9-1996 passed by the appellate authority
of the Securities and Exchange Board of India ('the SEBF) dismissing the appeal
filed by the petitioner herein under section 22 of the Securities Contracts
(Regulation) Act, 1956 ('the Act').
2. The petitioner is a public limited
company registered under the Companies Act, 1956 in the year 1992. The
petitioner made a public issue of 32,38,100 equity shares of Rs. 10 each cash
at par aggregating to Rs. 323.81 lakhs. According to the terms of the
prospectus, the shares of the petitioner-company were to be listed on three
Stock Exchanges, i.e., Vadodara Stock Exchange (VSE), Bombay Stock Exchange
(BSE) and Ahmedabad Stock Exchange (ASE). The public issue opened on 8-4-1996,
earliest closing was to be on 11 -4-1996 and it was to close not later than 18-4-1996.
Accordingly, it was closed on 18-4-1996. According to the petitioner-company,
the issue was subscribed to the extent of 96 per cent which is more than the
minimum subscription prescribed at 90 per cent of the size of the issue under
the provisions of section 69 of the Companies Act, 1956. On 27-5-1997, the
Vadodara Stock Exchange granted the listing permission and being the Regional
Stock Exchange, it also approved the basis of allotment on 27-5-1996 itself,
since the subscription was to the extent of 96 per cent. On that day, the
Ahmedabad Stock Exchange also granted approval for listing of the company's
shares on the Ahmedabad Stock Exchange.
The petitioner's application
was pending before the Bombay Stock Exchange, but in the meantime on 27-5-1996
the Governing Board of the Bombay Stock Exchange changed the conditions of
listing agreement requiring that "there should be at least five public
shareholders for every one lakh net capital offered to the public". In
view of the aforesaid requirement, the petitioner-company's public issue was
required to have 1,566 shareholders,
but in fact the petitioner had only 1,415 shareholders and, therefore, on
27-6-1996 the Bombay Stock Exchange rejected the petitioner's application for
listing of shares of the petitioner-company on the Bombay Stock Exchange. The
petitioner, therefore, challenged the aforesaid decision by filing an appeal
before the SEBI under section 22 on 1-7-1996.
3. In the meantime, on 28-6-1996 some investors
who had applied in response to the public issue approached this Court by filing
Special Civil Application No. 4515 of 1996 making certain complaints about the
manner in which the public issue was handled by the petitioner-company
including dispute about non-compliance with the minimum subscription
requirement and also seeking a declaration that because the Bombay Stock
Exchange had refused listing permission, the allotment cannot survive and the
present petitioner-company must refund the entire subscription. That petition
came to be disposed of by this Court on 5-7-1997 in terms of certain
observations and directions and in view of the statements and undertaking given
on behalf of the petitioner-company. The relevant portion of the order of this
Court reads as under:
"2. ...
this petition is preferred with a view to safeguard the petitioner's interest
to claim refund lest the amount may not be available for refund with the
company if it is allowed to withdraw the amount of subscription received by the
banks and utilise it. In order to attain this relief, several grounds have been
raised, including the dispute about raising minimum subscription.
3. However,
this apprehension does not survive in view of the categorical statement made by
learned counsel for respondent No. 1 (that is the petitioner-company herein)
that unless the appeal of the Lead Manager in respect of deemed refusal of
permission is allowed by the appellate authority of the SEBI and listing
permission is granted, the subscription would fail, and the company is not
entitled to withdraw any amount from the banks until then. It was also stated
that even otherwise, the petitioner- company undertakes not to withdraw any
amount out of the subscriptions received by the respective banks in pursuance
of the public issue.
4. As
a result of this statement made on behalf of the company, in my opinion, no
present cause or grievance survive to proceed with this petition. Notice
discharged. The parties are free to make their respective representations
before the appellate authority, if they have any grievance about listing of the
shares by the Bombay Stock Exchange. No costs."
4. Thereafter, the appellate authority of the
SEBI heard the petitioner- company through its Chairman and also considered the
representations made by investor Shri Kamlesh S. Jain (respondent No. 4)
regarding certain aspects in respect of the public issue of the
petitioner-company. The appellate authority ultimately passed the impugned
order dated 10-9-1996 holding that since the petitioner-company's
public issue opened prior to the date the amendment amending the listing
requirement regarding minimum number of shareholders in its meeting held on
27-5-1996, the said requirement cannot be made applicable to the
petitioner-company. However, the appellate authority dismissed the appeal on
the ground that there was substance in the complaint lodged by some of the
shareholders to the effect that in order of bring the subscription at the
public issue upto 90 per cent of the share capital offered, the company had
accepted six disputed applications for one lakh shares each of the applicants
having similar addresses and the payment was purported to be made by
stockinvests under the consecutive numbers and issued by Punjab National Bank.
All the stockinvests were encashed in Current A/c No. 1361 of Punjab National
Bank (not bankers to the issue) opened on 25-4-1996 with a token amount of Rs.
500 and the stockinvests worth Rs. 30 lakhs were encashed upto 11-5-1996 and
withdrawal of the entire amount was on the same day. The appellate authority
further found that the entire amount of Rs. 30 lakhs upon encashment of
stockinvests was withdrawn in cash through cheque in favour of K. Machi, an
employee of the petitioner-company.
The appellate authority,
therefore, came to the conclusion that although apparently the full amount of
more than 90 per cent of the subscription was paid and received, but it was
merely an illusion because the amount came from a set of dubious applicants
acting in concert and the amount remained with the company technically for a
few moments but were withdrawn immediately for purposes not explained properly
and justifiably. Hence, the appellate authority came to the conclusion that the
money was not really received and, therefore, the allotment was not proper. It
was clearly found that excluding the aforesaid applications, minimum
subscription clause was not complied with and hence, the company becomes liable
to refund the money in terms of the prospectus. Contentions on behalf of the
petitioner
5. At the hearing of this petition, Mr.
S.N. Soparkar, the learned counsel for the petitioner urged the following
contentions to challenge the order of the appellate authority:
I. The petitioner-company had filed the
appeal under section 22 for challenging the decision of the Governing Board of
the Bombay Stock Exchange refusing to grant listing permission. Hence, the
appellate authority could not have expanded the scope of the appeal so as to
decide any issue other than that raised in the petitioner's appeal.
II. The petitioner-company was not
supplied with the material document being letter dated 12-7-1996 addressed by
Bombay Stock Exchange to SEBI on which letter the appellate authority has based
its decision.
III. On merits, once the appellate authority
held that the amount was paid and received, it was not open to the appellate
authority to give a finding against the petitioner-company on the ground that
the amount was not really received but merely technically received for a few
moments and, therefore, the allotment was not proper.
Submissions on behalf of the
respondents
6. On the other hand, Mr. S.N. Shelat
with Mr. B.H. Chhatrapati appearing for respondent No. 3 - Appellate authority
of SEBI submitted as under:
(i) When persons who had applied in response to the public issue
of the petitioner-company had filed Special Civil Application No. 4515 of 1996,
this Court specifically observed in its order that the parties are free to make
their respective representations before the appellate authority, if they have
any grievance about listing of the shares by the Bombay Stock Exchange. This
Court did not entertain the petition filed by some of the applicants to the
public issue raising certain disputes including non-compliance with minimum
subscription requirement, in view of the plea of the petitioner-company
(respondent No. 1 in that petition) that the matter was being examined by the
appellate authority. Therefore, the SEBI was entitled to examine the grievance
of the investors against the petitioner-company.
(ii) As far as letter dated 12-7-1996 mentioned in the last
paragraph of the impugned order of the appellate authority is concerned, a copy
thereof was produced at the hearing of the petition. That letter merely stated
that the copies of letter dated 10-7-1996 and its enclosures received from one
Shri Kamlesh S. Jain were being sent by the Bombay Stock Exchange to the
appellate authority. However, the said letter and enclosures sent by Kamlesh S.
Jain were already sent to the petitioner also along with letter dated 12-7-1996
from the Bombay Stock Exchange to the petitioner and the said letter along with
letter dated 10-7-1996 of respondent No. 4 and its enclosures are already
annexed at Annexure T to the petition. Hence, there was no breach of the
principle of natural justice.
(iii) On merits, it was submitted that on an examination and
analysis of the facts brought to the notice of the SEBI by Kamlesh S. Jain for
which the appellate authority had given an adequate opportunity to the
petitioner-company to give explanation in response to the complaints, the
appellate authority has come to the conclusion and given a finding of fact that
the amount of subscription of more than 90 per cent of the issue offered was
only technically paid and received, but it was merely an illusion and the
categorical finding, therefor, given is
that the money was not really received and, therefore, the minimum subscription
clause was not complied with.
Mr. K.A. Puj, the learned advocate for the applicants of Civil
Application No. 8478 of 1996, i.e., 3 investors who are permitted to be joined
as respondent Nos. 4 to 6, also supported the order of the appellate authority
and prayed that the appeal be dismissed. He made some further submissions on the
basis of the complaint made by his clients before the appellate authority.
Minimum subscription and statutory provisions
7. Before considering the rival contentions
urged on behalf of the parties, it is necessary to refer to the meaning and
object of minimum subscription and the relevant provisions of sections 69 and
73 of the Companies Act which are part of the group of sections prescribing
conditions of valid allotment of shares and connected matters including grant
of listing permission/s by recognized stock exchanges and custody of
application moneys.
8. Minimum subscription means the amount which,
in the estimate of the directors, must be raised to meet the following needs,
namely, purchase price of any property to be defrayed partly or wholly out of
the proceeds of the issue, preliminary expenses and working capital. No shares
can be allotted unless at least so much amount has been subscribed.
Prof. Gower has lucidly explained the object
of these provisions in the following words:
"The
object of these provisions (relating to minimum subscription) is to prevent the
company getting under way until it has raised the capital needed to carry out
the objects in which it has invited the public to participate; it would
obviously be iniquitous to force an applicant, who has accepted an invitation
to participate in a one million pound issue for the purpose of buying Wembley
Stadium, to sink his capital in a company which has only raised enough money to
buy a suburban villa. They also afford protection to the creditors by ensuring
that a limited company is not able to incur commitments if it is grossly
under-capitalised."
(Gower's Principles of Modern Company Law -
4th edn., pages 355-56)
There is no dispute about the fact that the minimum subscription required in the instant case as mentioned in the prospectus issued by the petitioner-company was 90 per cent of the equity capital offered to the public. Section D of the guidelines for disclosure and investor protection dated 11-6-1992 issued by the SEBI also stipulates that minimum subscription of 90 per cent is mandatory for each issue of capital to public.
9. Section 69 starts with the title or heading
"Prohibition of allotment unless minimum subscription received"
Sub-sections (1) and (2) of
section 69 contain a prohibition against the allotment of any share capital of
a company offered to the public for subscription, unless the amount stated in
the prospectus as the minimum subscription has been subscribed and the sum
payable on application for the amount so stated has been paid to and received
by the company, whether in cash or by a cheque or other instrument which has
been paid. Sub-section (4) provides that all monies received from applicants
for shares shall be deposited and kept deposited in a Scheduled Bank until the
certificate to commence business is obtained and until the entire amount
payable on applications for shares in respect of the minimum subscription has
been received by the company. If such amount of minimum subscription has not
been received within 120 days after the first issue of the prospectus, all
monies received from the applicants for shares shall be returned in accordance
with sub-section (5). Contravention of this subsection is punishable with fine
to be imposed on every person knowingly responsible for such contravention.
Sub-section (5) provides that
non-compliance with the aforesaid conditions shall require the company as well
as the directors of the company to repay all monies received from the
applicants for shares with liability to pay interest if the repayment is made
after 130 days after the date of issue of the prospectus. Sub-section (6)
provides that any condition for waiver of the requirements of section 69 shall
be void.
Section 73 provides for
allotment of shares to be dealt in on stock exchange. Sub-section (1) requires
that every company intending to offer shares to the public for subscription by
the issue of a prospectus shall before such issue, make an application to one
or more recognized stock exchanges for listing permission. Sub-section (1A)
thereof provides that any allotment made on an application in pursuance of such
prospectus shall, whenever made, be void if the listing permission has not been
granted by each of the stock exchanges whose permission is sought, before the
expiry of ten weeks from the date of the closing of the subscription lists, but
if an appeal against the decision of any recognized stock exchange refusing
listing permission has been preferred under section 22 of the Securities
Contracts (Regulation) Act, such allotment shall not be void until the
dismissal of the appeal. Sub-section (2) provides that where the permission has
not been granted, the company is required to repay all monies received from the
applicants, with or without interest, depending on the length of the period of
delay in making such repayment.
Sub-section (3) specifically
provides that all monies received from the applicants for shares shall be kept
in a separate bank account maintained with a Scheduled Bank, until the listing
permission has been granted or until disposal of the appeal, with liability to
repay the amounts if the permission has not been granted.
Sub-section (3A) specifically contains a prohibition to the effect that
moneys standing to the credit of the separate bank account as aforesaid shall
not be utilized for any purpose other than the following;
(a) where listing permission is granted by
each stock exchange specified in the prospectus, for the purpose
of adjustment against allotment of shares.
(b) in any other case, for
repayment of application moneys to investors.
Sub-section (4) provides that any condition for waiver of the
requirements of section 73 shall be void. It bears repetition that the
provisions of subsection (6) of section 69 and sub-section (4) of section 73
make the mandatory nature of the requirements of section 69 and section 73
abundantly clear by providing that any condition purporting to require or bind
any applicant for shares to waive compliance with any requirement of these
sections shall be void.
Contention I-Scope of appeal
10. Mr. Soparkar relied on the provisions of
section 22 to contend that the jurisdiction of the appellate authority in the appeal
filed by the petitioner was only to consider the grievance made by the
petitioner-company against refusal of the listing permission and that it had no
jurisdiction to consider the complaints of the investors. Section 22 reads as
under:
"Right of appeal against refusal of stock exchanges to list
securities of public companies.—Where a recognized stock exchange acting in
pursuance of any power given to its bye-laws, refuses to list the securities of
any public company, the company shall be entitled to be furnished with reasons
for such refusal, and may,—
(a) Within fifteen days from the date on which the reasons for such
refusal are furnished to it, or
(b) ** ** **
appeal to the Central Government against such refusal, omission or failure, as the case may be, and thereupon the Central Government may, after giving the Stock Exchange an opportunity of being heard,—
(i) vary or set aside the decision of the stock exchange, or
(ii) where the stock
exchange has omitted or failed to dispose of the application within the
specified time, grant or refuse the permission,
and where the Central Government sets aside the decision of the
recognized stock exchange or grants the permission, the stock exchange shall act
in conformity with the orders of the Central Government."
Mr. Soparkar submitted that the SEBI as an authority for protection of
investors is different from the appellate authority of SEBI acting as a
delegate of the Central Government for hearing and deciding the appeals.
He further submitted that if
the appellate authority had no jurisdiction to go into the grievances raised by
the investors while considering the petitioner's appeal under section 22, even
the alleged consent or deemed consent on account of any statement made at the
hearing of Special Civil Application No. 4515 of 1996 cannot confer
jurisdiction on the appellate authority. It was further submitted that Kamlesh
S. Jain whose complaint was examined by the appellate authority was not a party
to Special Civil Application No. 4515 of 1996.
11. Although the contention urged on
behalf of the petitioner appears to be prima facie attractive, it cannot be
accepted. As per sections 69 and 73 for valid allotment of shares, there are,
inter alia, two conditions precedent (i) minimum subscription, and (ii) listing
permission by each of the recognized stock exchanges specified in the
prospectus. In point of time minimum subscription precedes listing permission.
Hence, compliance with the mandatory statutory requirement of minimum
subscription is a condition precedent for listing permission as well. It,
therefore, stands to reason that the appellate authority hearing the company's
appeal against refusal of listing permission by the Bombay Stock Exchange was
not only empowered, but also duty bound, to satisfy itself that the company had
complied with the mandatory statutory requirement of minimum subscription.
Examination of complaints of investors regarding non-compliance with the above
requirement was, therefore, a logical and legitimate part of the exercise of
appellate powers by the appellate authority.
It is in this context that it
is required to be noted that when some of the investors of the
petitioner-company had earlier filed Special Civil Application No. 4515 of 1996
making various grievances including the grievance about non-compliance with the
minimum subscription requirement, this Court had granted liberty to the parties
to make representations to the appellate authority. In fact, the petition itself
was not entertained as the learned counsel for the company (respondent No. 1 in
that petition) had urged that the matter was pending with the appellate
authority as the petitioner-company had filed an appeal against the refusal to
grant listing permission by the Bombay Stock Exchange. The fact remains that
Special Civil Application No. 4515 of 1996 was filed by some of the investors
in the petitioner-company and the nature of the grievances made by the said
investors was the same as the grievance made by Kamlesh S. Jain before the
Bombay Stock Exchange which in turn was considered by the appellate authority.
Hence, the appellate authority did not commit any error in looking into the
grievances made by Kamlesh S. Jain who has been permitted to be joined as
respondent No. 4 herein.
Contention II-Principles of
Natural Justice
12. As far as non-supply of letter dated
12-7-1997 is concerned, since the copy
thereof was produced at the hearing of the petition and it was found that the
contents of the said letter were identical with the contents of the letter
dated 12-7-1997 from the Bombay Stock Exchange to the petitioner-company, the
learned counsel for the petitioner fairly stated that no prejudice was caused
to the petitioner-company on account of non-supply of the letter in question to
the petitioner.
Contention III-Merits of the Controversy
13. Coming to the merits of the controversy
between the parties, it is required to be noted that the appellate authority
examined the facts of the case along with the explanation offered by the
petitioner-company or absence thereof and, thereafter, found that there were
six disputed applications coming from six applicants having similar addresses
with no income-tax numbers except one. Each application was for one lakh shares
each and the stockinvests accompanying the said applications were also
consecutively numbered and issued by the Punjab National Bank. Though bankers
to the issue were Karur Vysya Bank Ltd. and Vijaya Bank, all these stockinvests
were encashed in a particular account with the Punjab National Bank which was
opened on 25-4-1996 with a token amount of Rs. 500 and between that date and 11
-5-1996, the only entries therein were regarding encashment of the stockinvests
amounting to Rs. 30 lakhs and withdrawal of the entire amount on the same day.
Thus, the stockinvests were not encashed with the bankers to the issue but they
were encashed with the Punjab National Bank immediately after the basis of the
allotment was finalised and the entire amount so encashed was withdrawn in cash
through cheques in favour of K. Machi, an employee of the petitioner- company.
The Chairman of the company informed the appellate authority that the
withdrawal was for purchase of plant and machinery. The appellate authority
rightly did not accept the explanation as the names of the suppliers of the
machinery were not furnished; the details about name and type of machineries
were not supplied; no information was furnished as to whether the money was
actually given to the suppliers even on the date of hearing, i.e., on 4-9-1996.
On the basis of this material, no fault can be found with the finding given by
the appellate authority that the receipt of Rs. 30 lakhs by the company was
merely an illusion. In any case, such finding cannot be interfered with, since
it is neither perverse nor based on no evidence.
14. Since the aforesaid findings of fact and the
inferences drawn on the basis thereof by the appellate authority cannot be
reappreciated in writ j urisdiction, the learned counsel for the petitioner
urged that the appellate authority, having given a finding that apparently the
amount was paid and received, could not have thereafter taken the view that the
money was not really received, but merely technically received for a few moments
and, therefore, the allotment was not proper. Apropos the said submission, it
is required to be noted that what the provisions of section 69 read with
section 73 contemplate is not merely that the amounts of application money
tendered with the share applications should be deposited in a separate bank
account with a Scheduled Bank, but they must be deposited in a separate bank
account with the Scheduled Bank/s which are bankers to the issue and shall be
kept deposited with them till the fulfilment of the purposes contemplated by
sub-section (4) of section 69 and sub-sections (3) and (3A) of section 73. It
is true that the provisions of sub-section (4) of section 69, speak of moneys
being deposited in 'a Scheduled Bank' and sub-sections (3) and (3 A) of section
73 speak of moneys being deposited in "a separate bank account maintained
with a Scheduled Bank" and, therefore, by themselves, are capable of being
interpreted as 'any Scheduled Bank'. In this connection, it is, however,
necessary to bear in mind the following dictum of Judge learned Hand of the
United States of America, which is quoted with approval by their Lordships of
the Supreme Court in the case of K.P. Varghese v. 77TO[1981] 4 SCC 173/7 and
also in the case of C.B. Gautam v. Union of India[1993]lSCC78/[1992] 65:
"... it is true
that the words used, even in their literal sense, are the primary and
ordinarily the most reliable source of interpreting the meaning of any writing;
be it a statute, a contract or anything else. But it is one of the surest
indexes of a mature and developed jurisprudence not to make a fortress out of
the dictionary; but to remember that statutes always have some purpose or
object to accomplish, whose sympathetic and imaginative discovery is the surest
guide to their meaning...." (p. 460)
Bearing in mind the object of
minimum subscription requirement as well as the mandatory nature of the
provisions of sections 69 and 73 laying down the minimum subscription
requirement and the other conditions for valid allotment which are stipulated
by the Legislature for the protection of investors, it is clear that it is a
condition precedent to valid allotment that the whole of the application money
should have been paid to and actually received by the company. Any means such
as cash, cheques, drafts and/or stockinvests may be used, but instruments must
be received and encashed and remittances must be lying with the bankers to the
issue before the company can proceed for allotment of shares. As specified in
sub-section (3A) of section 73, moneys received pursuant to the public offer of
the shares can be utilized only for one of the two purposes:
(a) if listing permission is granted by all the stock exchanges specified in the prospectus, the application money received from the public can be adjusted against allotment of shares,
(b) but if listing permission is not received from each of the
stock exchanges specified in the prospectus (or the company is unable to make
allotment for any other reason), the application moneys have to be refunded to the
applicants.
Listing permission cannot be
granted by a stock exchange if the minimum subscription, requirement as
required by sub-sections (1) to (3) of section 69 is not complied with. If the listing
permission is not granted by even one stock exchange specified in the
prospectus or where the company is for any reason unable to make allotment of
shares, application moneys received from the public have to be refunded within
the time limit stipulated in the provisions of section 73. The scheme of
sections 69 and 73 of the Companies Act would, therefore, suggest that the
moneys should not be allowed to be handled or manipulated by the company till
all the mandatory requirements of sections 69 and 73 are complied with and till
the company can proceed to make valid allotment of shares. In other words, the
moneys must be kept out of the reach of the company and its directors/promoters
till the company can make allotment of shares in accordance with law. This
salutary object of the provisions of the Companies Act will be frustrated if it
is held that application moneys received from the public are permitted to be
deposited in any bank account of any Scheduled Bank where the company may
choose to deposit. In that case, there will be no control on the company which
may withdraw the application moneys or any part thereof in flagrant violation
of the provisions of sections 69 and 73 and then agree to pay a fine of Rs.
5,000 under sections 69(4) and 73(3). No difficulty will arise either to the
company which has offered its shares to the public and is acting bona fide or
to the investors, if the provisions of sub-section (4) of section 69 and
sub-sections (3) and (3A) of section 73 are interpreted as stated earlier, that
is to say, all moneys received from applicants for shares offered to the public
for subscription shall be deposited and kept deposited in the Scheduled Bank/s
which are bankers to the issue until the company has complied with all the
requirements of section 69 and section 73. It has been held that bankers to the
issue hold the application moneys in the nature of a trust fund, i.e., the
statute has erected a kind of trust for the protection of persons who pay the
money on the faith of a promise to refund the money, in case certain conditions
are not fulfilled - 1955 (3) All ER 219, Reserve Bank of India v. Bank of
Credit & Commerce International (Overseas) Ltd. (No. 1) [1993] 78 Comp.
Cas. 207 (Bom.) and Reserve Bank of India v. Bank of Credit & Commerce
International (Overseas) Ltd. (No. 2)[1993] 78Comp. Cas. 230 (Bom.). It is only
the bankers to the issue who can be expected to make sure that before
withdrawal the company has got the listing permission from each stock exchange
specified in the prospectus. It is only the bankers to the issue who are
subject to the statutory control of SEBI through the SEBI (Bankers to an Issue)
Rules, 1994 and the SEBI (Bankers to an Issue) Regulations, 1994.
On the other hand, if the
aforesaid provisions are interpreted to mean that moneys received from
applicants for shares may be deposited in any Scheduled Bank of the choice of
the company, it will give the company an opportunity to resort to manipulations
not to make the application moneys or a part thereof available to the company
for the purposes for which moneys are raised from the public.
15. In light of the aforesaid discussion
and the admitted fact that stockinvests of Rs. 30 lakhs received from six
applicants (who are found to be dubious by the appellate authority) were not
deposited with or encashed by either of the bankers to the issue, i.e., Vijaya
Bank and Karur Vysya Bank, the said amount cannot be said to have been paid to
and received by the company as required by sub-section (1) of section 69. The finding
of the appellate authority that the said amount was actually not received by
the petitioner-company can, therefore, be upheld on this ground also. Besides,
the said illegality has assumed the dimension of a fraud because said
stockinvests of Rs. 30 lakhs were not only encashed with the Punjab National
Bank (not a banker to the issue) but were also withdrawn in cash by bearer
cheque in the name of an employee of the petitioner-company. It is also
pertinent to note that the said amount was withdrawn by the Chairman and
Directors of the company in the aforesaid manner between 25-4-1996 and
11-5-1996, i.e., long prior to the date on which Vadodara Stock Exchange and
Ahmedabad Stock Exchange granted listing permission on 27-5-1996 (Annexures
"D" and "E" respectively). As already noted earlier, the
application of the company for listing permission to the Bombay Stock Exchange
was still pending. Under the circumstances, the company had clearly committed
flagrant breach of the mandatory provisions of sub-sections (3) and (3 A) of
section 73 by withdrawing Rs. 30 lakhs from the application moneys received
pursuant to the public offer of its shares before listing permission was
granted by any stock exchange. Such withdrawal could not have been made before
allotment of shares and such allotment of shares could not have been made
before listing permission is granted by all the three stock exchanges, i.e.,
BSE, VSE and ASE. Such listing permissions could not have been granted without
the company having actually received application moneys for the minimum
subscription. It is thus clear that non-deposit of the stockinvests of Rs. 30
lakhs with the bankers to the issue was clearly a part of the well thought out
design on the part of those in charge of the company in order to play a fraud
on the investors and to circumvent of the mandatory provisions of sections 69
and 73. Mere encashment of stockinvests of Rs. 30 lakhs with the Punjab
National Bank (not bankers to the issue) without withdrawal thereof would have
been an irregularity or illegality which would have gone unnoticed. It is the
withdrawal thereof in hot haste in a dubious manner and for unexplained purpose
which not only lends it the character of
fund, but also justifies 'the sympathetic and imaginative discovery' of the
meaning of the words 'a Scheduled Bank' in sub-section (4) of section 69 and
sub-sections (3) and (3A) of section 73 as 'the Scheduled Bank/s which are the
bankers to the issue'.
16. Once the above meaning of the term 'a
Scheduled Bank' is appreciated, the meaning of the words "the sum payable
on application for the amount so stated (minimum subscription) has been paid to
and received by the company" in sub-section (1) of section 69 must be
interpreted in conjunction with the provisions of sub-section (4) of section 69
and sub-sections (3) and (3A) of section 73. In K. Balakrishna Raov. Haji
Abdulla Sait AIR 1980 SC 214 (para 17), the
"... The key to the opening of every law is the reason and spirit
of the law; it is the animus imponentis, the intention of the law-maker
expressed in the law itself, taken as a whole. Hence, to arrive at the true meaning
of any particular phrase in a statute, the particular phrase is not to be
viewed detached from its context in the statute, it is to be viewed in
connection with its whole context, meaning by this as well the title and
preamble as the purview or enacting part of the statute." (p. 221)
Similarly in State of West Bengali. Union of
"...
The Court must ascertain the intention of the Legislature by directing its
attention not merely to the clauses to be construed but to the entire statute;
it must compare the clause with the other parts of the law, and the setting in
which the clause to be interpreted occurs...." (p. 1265)
Applying the aforesaid well settled principles of interpretation of
statutes and in light of the detailed discussion in para 14 above, it has to be
held that since the entire application money paid to and received by the
company is to be kept out of the reach of the company till all the conditions
for valid allotment are satisfied, there cannot be any hiatus between receipt
of the money by the company and its deposit with the Scheduled Bank/s which are
bankers to the issue. In other words, that application money cannot be said to
have been paid to or received by the company which might have been physically
received by the company, but which is not deposited in a separate bank account
with the Scheduled Bank/s which are bankers to the issue.
17. Having regard to the aforesaid object of
statutory provisions and the findings of fact arrived at by the appellate
authority, this Court has no hesitation in holding that the application money
pursuant to the minimum subscription of shares offered to the public was not
paid to and received by the company as required by the provisions of sections
69 and 73. Out of abundant caution, this Court would like to add that
even otherwise, in view of the fraudulent conduct on the part of those in
charge of management of the petitioner-company, this Court would have declined
to exercise its prerogative discretionary jurisdiction under article 226 of the
Constitution in favour of the petitioner-company.
18. Mr. Puj for the investors submitted
that the money was not even otherwise received inasmuch as the Stockinvests
were purchased after 18-4-1996 and were antedated, as it was found that the
company had received subscription for approximately only about 80 per cent of
the equity capital. Mr. Puj further wanted to refer to other allegations of
irregularities pointed by respondent No. 4 Kamlesh S. Jain as mentioned in his
letter dated 10-7-1996 which are annexed to the petition.
It is, however, not necessary
to go into any such allegations made by respondent No. 4, as the appellate
authority has not given any specific finding on any such alleged irregularities
and the order of the appellate authority is even otherwise being upheld.
19. 1n the result, the petition is hereby
dismissed. Notice is discharged with costs. The amounts of costs are quantified
at Rs. 5,000 for respondent No. 3 and another sum of Rs. 5,000 for respondent
Nos. 4 to 6 in one set. The costs shall be paid within one month from today.
After the judgment is
pronounced, Mr. Soparkar, the learned counsel for the petitioner prays for stay
of this judgment. All that this Court has done is to dismiss this petition
against the order of the appellate authority under section 22 of the Securities
Contracts (Regulations) Act. During the pendency of the petition, there was no
ad interim or interim stay against operation of the said order of the appellate
authority nor was there any other interim or ad interim relief granted in
favour of the petitioner. In this view of the matter, the request is rejected.
[1971] 41 COMP CAS 127 (SC)
Union of
v.
Allied
International Products Ltd. and Another
1. J.B. Dadachanji; 2. Peter Jeffrys; 3. Industrial
Development
Bank of
5. Industrial Finance Corporation of
J.C. SHAH, K.S. HEGDE AND A.N.
GROVER JJ.
CIVIL APPEALS NOS. 1772 AND 1773
OF 1970
OCTOBER 19, 1970
C.K. Daphtary, Senior Advocate (S.P. Nayar, Advocate, with
him), for the Appellant.
N.A. Palkhivala, Senior Advocate (Santosh Chatterjee, A.M.
Parikh and G. S. Chatterjee, Advocates, with him), for the Respondent
JUDGMENT
Shah J.—On May 29, 1965, the Allied International Products Ltd.,
hereinafter called "the company", issued a prospectus offering to the
public for subscription 5,00,000 equity shares of Rs. 10 each and 10,000
cumulative preference shares of Rs. 100 each, and intimating that
"applications are being made to Bombay, Calcutta and Delhi Stock Exchanges
for permission to deal in for official quotations of the shares of the
company".
On June 3, 1965, the company submitted applications to the
Stock Exchange at
On June 9, 1965, the Calcutta Stock Exchange called upon
the company to modify certain articles of association, and by letter dated July
12, 1965, asked for particulars in respect of specified matters. On July 27,
1965, the Calcutta Stock Exchange granted time for compliance till the end of
the seventh week from the date of the closing of the subscription list. On
November 5, 1965, the Calcutta Stock Exchange rejected the application of the
company for "enlisting" the shares.
The Delhi Stock Exchange informed the company on July 10,
1965, that in order to facilitate compliance with the provisions of section 73
of the Companies Act, "the allotment of shares should be finalised as soon
as possible in consultation with the Stock Exchange". By another letter
dated August 9, 1965, the Exchange informed the company that the matter of
"enlistment" of shares was under consideration, and the company will
be intimated of the decision of the Exchange as soon as it is taken. The Delhi
Stock Exchange by letter dated December 4, 1965, rejected the application of
the company for "enlistment" of its shares.
The company challenged the orders passed by the Calcutta
and Delhi Stock Exchanges rejecting the applications for
"enlistment", in separate appeals under section 22 of the Securities
Contracts (Regulation) Act, 1956 (42 of 1956). The Central Government dismissed
the appeals. In the orders recording dismissal it was recited that the Exchange
did not grant the permission for the shares to be "enlisted" before
the expiry of four weeks from the date of closing of the subscription list as
required by section 73(1) of the Companies Act, 1956, and that the Exchange did
not notify any extension of time for the grant of the permission within four
weeks.
The company then moved petitions in the High Court of Delhi
for the issue of writs quashing the order passed by the Central Government in
appeals under section 22 of the Securities Contracts (Regulation) Act, and the
orders of the Stock Exchanges rejecting the applications of the company as
"void, illegal and of no effect", and for orders directing the Stock
Exchanges to "grant enlistment" of the shares of the company, and further
declaring section 22 of the Securities Contracts (Regulation) Act, 1956 (42 of
1956), and section 73 of the Companies Act, 1956, ultra vires the Constitution
of India.
Rangarajan J. was of the opinion that grant of permission
by the Bombay Stock Exchange was valid, and that allotment of shares did not
become void, merely because one out of the three Exchanges alone gave the
permission to enlist the company's shares. The learned judge quashed the order
of the Central Government and directed that writs of mandamus do issue against
the
Against the decision of Rangarajan J. the Union of India
appealed to a Division Bench of the High Court of Delhi. The two Exchanges acquiesced
in the orders passed against them. The High Court confirmed the order
of Rangarajan J. With certificate granted by the High Court, the Union of India
has appealed to this court.
In support of these appeals, two principal contentions were
urged on behalf of the
(1) the
permission granted by the Bombay Stock Exchange after the expiry of seven weeks
violated the provisions of section 73(1) of the Companies Act, 1956, and was on
that account invalid ; and
(2) that
grant of permission by one out of the three Exchanges did not protect the
allotment of shares from being invalid under section 73(1) of the Companies
Act, 1956.
The two Stock Exchanges which had acquiesced in the
judgment of Rangarajan J. urged that the order granting writs of mandamus
requiring the two Exchanges to enlist the shares of the company was without
jurisdiction. Rangarajan J., it was said, could only direct that the
applications be considered by the two Exchanges.
The relevant provisions of section 73 of the Companies Act,
1956, in force at the date of the applications for permission for the shares to
be dealt in the Exchanges provided :
"(1) Where a prospectus, whether issued generally or not, states that
appli cation has been or will be made for permission for the shares or
debentures offered thereby to be dealt in on a recognised stock exchange, any
allotment made on an application in pursuance of the prospectus shall, whenever
made, be void, if the permission has not been applied for before the tenth day
after the first issue of the prospectus or, if the permission has not been
granted before the expiry of four weeks from the date of the closing of the
subscription lists or such longer period not exceeding seven weeks as may,
within the said four weeks, be notified to the applicant for permission by or
on behalf of the stock exchange.
(2) Where the permission has not been applied for as aforesaid, or
has not been granted as aforesaid, the company shall forthwith repay without
interest all moneys received from applicants in pursuance of the prospectus,
and, if any such money is not repaid within eight days after the company
becomes liable to repay it, the directors of the company shall be jointly and
severally liable to repay that money with interest at the rate of five per
cent, per annum from the expiry of the eighth day:.............
(5) For the purpose of this section, permission shall not deemed
to be refused if it is intimated that the application for permission though not
at present granted, will be given further consideration..............
(7) No prospectus shall state that application has been made for
permission for the shares or debentures offered thereby to be dealt in on any
stock exchange, unless it is a recognised stock exchange".
By the Securities Contracts (Regulation) Act, machinery is
set up for extending recognition to and for withdrawal of recognition to stock
exchanges and for other incidental matters such as the making of rules and
bye-laws of the exchange. By section 22 of the Act it is provided :
"Where a recognised stock exchange acting in pursuance
of any power given to it by its bye-laws, refuses to list the securities of any
public company, the company shall be entitled to be furnished with the reasons
for such refusal, and may appeal against the decision of the recognised stock exchange to the Central Government, and the Central
Government may, after giving the stock exchange an opportunity of being heard,
vary or set aside the decision of the recognised stock exchange, and when it
does so the stock exchange shall be bound to act in conformity with the orders
of the Central Government".
Sub-section
(5) of section 73 of the Companies Act, 1956, is intended to be explanatory of
sub-sections (1) and (2) of section 73. Before that sub-section was amended by
Act 31 of 1965 different phraseology was used in sub-sections (1) and (2) and
in sub-section (5): the former used the express-sion "permission has not
been granted", whereas sub-section (5) used the expression
"permission shall not be deemed to be refused". The expression
"permission has not been granted" is ambiguous: it may mean
"permission has been refused" : it may also mean that the application
for permission is under consideration and has not been disposed of.
Sub-sections (1) and (2) of section 73 were borrowed from section 51 of the
English Companies Act, 1948, with slight modifications. But the draftsman of
the Indian Act, for reasons which it is difficult to appreciate, substituted
the expression "permission has been refused". In enacting sub-section
(5) of section 51 of the English Act, viz., "permission shall not be
deemed to be refused" were adopted. In our judgment, the expression
"permission has not been granted" in sub-sections (1) and (2) was
intended in the context in which it occurs and in the light of the object of
the enactment, to mean "permission has been refused".
A
stock,exchange fulfils a vital function in the economic development of a
nation: its main function is to "liquify capital by enabling a person who
has invested money in, say a factory or a railway to convert it into cash by
disposing of his share in the enterprise to some one else". Investment in
joint stock companies is attractive to the public, because the value of the
shares is announced day after day in the stock exchanges, and shares quoted on
the exchanges are capable of almost immediate conversion into money. In modern
days a company stands little chance of inducing the public to subscribe to its
capital, unless its shares are quoted in an approved stock exchange. All public
companies are anxious to obtain permission from reputed exchanges for securing
quotations of their shares and the management of a company is anxious to inform
the investing public that the shares of the company will be quoted on the stock
exchange. To prevent malpractices, Parliament enacted legislation which aimed
at securing control over the proper functioning of the stock exchange, and also
placed stringent restrictions upon the representations made by the companies in
issuing prospectus inviting subscriptions. Parliament enacted the Securities
Contracts (Regulation) Act, 1956 (42 of 1956), and simultaneously made
provision in section 73 of the Companies Act, 1956, for ensuring that representations made in the
prospectus are carried out and fluidity of the investment by the holder of
stock is ensured by procuring permission for quotation of shares in a
recognised stock exchange.
Under sub-section (1) of section 73 an application for
permission to secure quotation if not previously made, shall be made before the
tenth day after the first issue of the prospectus, and if the application is
not so made, the allotment is void. Again if the exchange rejects the
application within four weeks, or within seven weeks after extending the time,
the allotment will be void, unless within that period the exchange has informed
the company that further consideration will be given to the application. It is
however not enacted in section 73(1) that if the application is not granted
within the time prescribed it cannot be granted after the expiry of the
prescribed period, even if the exchange has intimated that it will give further
consideration to the application. Sub-section (5) contains a clear implication
to the contrary. If the exchange has intimated within the period prescribed by
sub-section (1) that the application will be given further consideration, it is
not to be deemed that the application is refused. The exchange is not obliged
to give any intimation relating to the consideration of the application before
the last day of tile prescribed period. If no intimation is given till the last
date of the prescribed period, no inference of refusal follows. It would then be
difficult to hold that if the exchange intimates that it is considering the
application or intends to give further consideration to the application such an
inference may follow. The amendment made by Act 31 of 1965 in sub-section (5)
by the substitution of the expression "permission shall not be deemed to
be refused" by the expression "it shall not be deemed that permission
has not been granted" also gives a clue to the legislative intention that
the inference of refusal will not be made if the exchange has intimated to the
applicant that further consideration will be given to the application.
We are unable to hold that permission for
"enlistment" of shares can be given within the initial four weeks or
if time be extended within seven weeks from the date of the closing of the
subscription list, and if permission be not granted by the exchange within
those seven weeks, the allotment becomes void, even if the stock exchange
intimates that it is giving further consideration to the application. The
intendment of sub-sections (1), (2) and (5) is plain. If within four weeks from
the date of the closing of the subscription list, the stock exchange sends no
intimation either extending the time or notifying that the application
"though not at present granted will be given further consideration",
the application is deemed to be refused. If the stock exchange so desires it
may intimate that the period is being extended to seven weeks. The exchange may
say nothing more within the extended period, in which case, on the expiry of
the extended period, the allotment becomes void. If, however, within the four
weeks, or within the extended period of seven weeks, the exchange intimates
that even though the application for permission is not at present granted, the
application will be given further consideration, the application is not deemed
to be refused until it is finally decided.
The application for allotment of shares and acceptance
thereof constitute a contract between the company and the applicant. Section
73(1) of the Companies Act imposes a penalty whereby the allotment of shares
becomes void on the happening of the contingency specified therein. The
imposition of penalty depends upon the volition of the exchange and when
imposed operates to invalidate all contracts resulting from allotment of shares
between the applicants for shares and the company. Such a provision must be
strictly construed. Unless the statute in clear terms so provides, when the
exchange intimates its desire to consider the application further, an inference
that the exchange has still rejected the application, cannot be made.
It is true that in the prospectus issued by the company it
was intimated that applications are being made to the
Section 73(1) is enacted with the object that the
subscribers will be ensured the facility of easy convertibility of their
holdings when they have subscribed to the shares on the representation in the
prospectus that an application for quotation of shares has been or will be
made.
The allotment of shares will be invalid only when permission
for quotation is not obtained. When permission from one or more of the
exchanges is obtained, it carries out the object of the Act. It will be a
mechanical interpretation wholly divorced from the true object and intendment
of the Act to hold that even if permission is secured for quotation of shares
in an exchange, the allotment will be invalid because another exchange has not
granted the permission. That this is the true meaning of section 73(1) is clear
from the fact that the penalty of avoidance of allotment of shares is attracted
not only where the permission applied for has not been granted, but where no
application has been made within the prescribed period. If applications are
made to several exchanges, some within the period of ten days after the first
issue of the prospectus, and some beyond, or one or more applications, but not
all, is or are defective, and the error is not rectified, it would be
unreasonable to hold that because some of the applications are made beyond the
tenth day after the first issue of the prospectus, or are defective, and are
liable to be rejected, the applications properly made before some of the
exchanges are also ineffective and the allotment made may be invalid.
Counsel for the Calcutta Stock Exchange urged that where a
person is induced to subscribe for shares relying upon a representation that an
application is made or intended to be made for quotation of the shares in an
exchange near his home-town, and it is found that the application is not made,
or if made it is rejected by the exchange, it would be a great hardship to the
shareholder if he is bound by the allotment, even if the condition of securing
quotation in the exchange convenient to him is not carried out. But section
73(1) declares the entire allotment void : it does not take into consideration
the right or convenience of individual shareholders. An enquiry whether a
shareholder or a class of shareholders was or were induced to subscribe for
shares on representation is irrelevant in determining whether the allotment is
rendered invalid for failure to secure compliance with a statutory condition.
We need not consider whether the individual shareholder who finds that an
exchange convenient to him has not listed the shares furnishes a cause of
action to him for avoiding the contract.
We are, in the view we have taken, not called upon to
decide whether the provisions of section 73 of the Companies Act, 1956, are
ultra vires, nor do we consider it necessary to decide whether section 22 of
the Securities Contracts (Regulation) Act, 1956, is ultra vires.
It was urged on behalf of the
We
need, however, not express any final opinion on this question. We are informed
at the Bar that the Calcutta Stock Exchange has applied for certificate to the
High Court of Delhi and that application is pending. We need not pre-judge the
result of that application or the appeal, if any, which may be filed in this
court.
The appeals
fail and are dismissed with costs. There will be one hearing fee in favour of
the company. The other parties will bear their own costs.
Appeals dismissed.
[1997] 88 COMP. CAS 197 (
v.
Coventry Spring and
Engineering Co. Ltd.
UMESH CHANDRA BANERJEE AND SOHAN LAL SORAF JJ.
APPEAL NO. . . . OF 1994 (SUIT
NO. 259 OF 1993)
JANUARY 4, 1995
Banerjee J.—This stay petition is directed against an order of the learned trial
judge dismissing the interlocutory application in the civil suit filed by the
appellant herein. Be it recorded that the plaintiff-appellant instituted the
suit with a prayer for leave under Order 1, rule 8 of the Code of Civil
Procedure, inter alia, for the following reliefs:
"(a) Declaration
that the company is not entitled to make any allotment of shares in favour of
the applicants to the issue of shares offered to the public for subscription by
the company pursuant to the prospectus dated February 24, 1993, and that the
purported allotment of shares sought to be made by the company in respect of
the said public issue on July 16, 1993, is illegal, null and void.
(b) Declaration
that the applicants including the plaintiff who had applied and subscribed for
shares of and in the company pursuant to the prospectus issued by the company
dated February 24, 1993, are entitled to immediate refund of their application
moneys along with interest accrued thereon as prescribed under the provisions
of the Companies Act, 1956.
(c) Decree for
delivery up of the allotment of shares sought to be made by the company on July
16, 1993, and all record relating thereto in respect of the public issue of
shares made by the company pursuant to the prospectus dated February 24, 1993,
and the same be cancelled and adjudged void.
(d) Perpetual
injunction restraining the company from making any allotment of share capital
of the company offered to the public for subscription pursuant to the
prospectus issued by the company and dated February 24, 1993.
(e) Perpetual
injunction restraining the company from giving any effect or further effect to
the allotment of share capital of and in the company offered to the public for
subscription pursuant to prospectus issued by the company dated February 24,
1993, alleged to have been made on July 16, 1993, in any manner whatsoever.
(f) Perpetual
injunction restraining the company from utilising any moneys received from the
applicants for shares including the plaintiff pursuant to the prospectus dated
February 24, 1993, in any manner whatsoever.
(g) Perpetual
injunction restraining the company from taking any steps to have its shares
listed in any stock exchange including the Calcutta, Delhi, Bombay and
Ahmedabad Stock Exchanges and/or taking any steps for grant of permission for
shares so offered pursuant to the prospectus dated February 24, 1993, to be
dealt with in any of the said stock exchanges in any manner whatsoever.
(h) Perpetual
injunction restraining defendant No. 2 from approving the allotment of shares
made by the company on July 16, 1993, in any manner whatsoever.
(i) Perpetual
injunction restraining defendant No. 2 from approving listing of the shares of
the company and/or permitting the dealing of the shares of the company in the
Calcutta Stock Exchange in any manner whatsoever.
(j) Perpetual
injunction restraining the company and defendant No. 2 from giving any effect
or further effect to the purported publication dated July 16, 1993, contained
in the daily issue of The Statesman, dated July 19, 1993, in any manner
whatsoever.
(k) Perpetual
injunction restraining defendant No. 1 from in any manner proceeding with its
said public issue or giving any effect or further effect to the applications
received pursuant thereto.
(l) Mandatory
injunction directing the company, its servants, agents and assigns to forthwith
refund to the applicants for shares of and in the company including the
plaintiff offered to the public for subscription by the company pursuant to the
prospectus dated February 24, 1993, the application moneys relating to such
applications along with interest accrued thereon and with effect from June 28,
1993, as provided and prescribed under the provisions of the Companies Act, 1956.
(m) Receiver;
(n) Interlocutory injunction;
(o) Attachment;
(p) Costs;
(q) Further or other reliefs."
Be it noted here that the appellant-petitioner moved an
interlocutory application for injunction, as noted above and the matter came to
this court and this, court also from time to time passed diverse orders
eventually, however, culminating in the order of the learned trial judge.
Normally, this court would not have interfered with the
order of the learned trial judge, more so, by reason of the fact that the same
arises out of an interlocutory application, but since elaborate and detailed
submissions have been made on questions of law and the issue involved is rather
interesting, this court deems it expedient to deal with the matter on the
merits as well.
It will be convenient, however, at this juncture to
recapitulate the factual aspect briefly, so as to appreciate the contentions
raised on behalf of the parties before this court. Respondent No. 1
(hereinafter referred to as "the company") offered Rs. 21,70,000
equity shares of Rs. 10 each at a premium of Rs. 35 per share aggregating to
Rs. 976.50 lakhs to the public for subscription pursuant to a prospectus dated
February 24, 1993, under the terms and conditions contained in the said
prospectus.
It is the definite case of the appellant-petitioner that
the company has not received a minimum subscription amount of 90% of the issue
including development of underwriters within 120 days from the opening of the
issue, and as such in terms of the provisions of sections 69, 70 and 71 read
with section 73 of the Companies Act, it is the bounden obligation on the part
of the company to refund the entire subscription money within 128 days with
interest for delay beyond 78 days from the date of the closure of the issue.
Mr. Mukherjee appearing in support of the application for
stay contended that in terms of the provisions of section 73 of the Companies
Act, unless approval for listing is obtained from each of the stock exchanges mentioned
in the prospectus, allotment cannot be made and the sums received would be kept
in a separate bank account and the company would not be able to appropriate the
said fund. According to Mr. Mukherjee, the prospectus was first issued on
February 24, 1993, and more than 120 days have expired since the date of the
first issue of the prospectus and the minimum subscription provided in the said
prospectus has not been raised or paid to or received by the company. Mr.
Mukherjee contended that more than ten weeks have expired from the date of
closing of the said issue, but no listing has been effected in terms of the
provisions of section 73(1) of the Companies Act. It was further contended that
subsequently, however, in an appeal preferred against non-listing on the part
of the Calcutta Stock Exchange, the Central Government, on February 1, 1994,
granted permission to the Calcutta Stock Exchange for listing of the shares of
the company.
The decision of the Central Government, is, however, under
challenge in a writ proceedings pending before this court and an order of
status quo is subsisting regarding the listing of shares.
Mr. Mukherjee submitted that the other stock exchanges
mentioned in the prospectus, namely, the
It was contended further that as on the date of closing of
the public issue, the company had not satisfied the conditions prescribed under
the guidelines for listing of securities on recognised stock exchanges, or the
provisions of rule 19(2)(b) both of which have statutory force as also the
terms and conditions mentioned in the prospectus.
While it is true that Mr. Mukherjee raised the points as
above with force, the main thrust of challenge of Mr. Mukherjee is in regard to
non-compliance with the requirement of section 73(1) of the Companies Act, read
with the other provisions of the abovenoted section. Mr. Mukherjee contended
that in the facts of the matter under consideration this public issue cannot
but be ascribed to be void and as such the applicants ought to be paid back
their money with interest, by reason of the expiry of the period of time as
envisaged under the statute.
It is on this factual background that the learned trial
judge has dealt with the matter. For convenience sake, however, the
observations of the learned trial judge pertaining to this aspect of the matter
ought also to be noted. The learned trial judge observed as follows:
"If
I were satisfied almost beyond any manner of doubt or argument that an
illegality would be perpetrated in allowing the company to utilise the capital
or make calls for the balance half sums, I would have no hesitation in
continuing the interim order even if it were at the instance of three parties
whose financial stakes are hopelessly disproportionate to the financial stake
of the company and its prospective investors in this matter.
But I
cannot at this interlocutory stage, after paying the most careful attention to
the arguments advanced on behalf of or in support of the petitioner's case come
to the conclusion that the case of illegality is so sound as to be almost
certain of success at trial.
If 90
per cent. of the invited capital is not collected by the closing date, then and
only then do the underwriting agreements come into operation. Were I to hold
that by reason of non-receipt of 90 per cent. within the closing date the issue
has already failed without a possibility of redemption, I would also have to
hold as an automatic and inescapable consequence that all underwriting
agreements in relation to these share issues will never be enforceable. For,
how can one enforce an underwriting agreement when the underwriter has
underwritten a contingency which has already failed? In my opinion, it would
require a fuller consideration at the trial to resolve this issue finally.
It is
today settled law that not merely the language of the section is to be looked
into for arriving at its true construction, the purpose of the section has to
be given full effect by the true construction thereof. The Act has to be read
in its entirety. The application of the Act to the practical world of business
which is intended to be controlled by it must also be considered, so that the
interpretation put upon it by a court of law does not become absurd or
ridiculous.
Similarly
with regard to listing on stock exchanges. If more than one stock exchange is
involved in the prospectus and, say, only one stock exchange is unsuccessfully
approached for listing, will it mean that the issue will fail in its entirety
although all other conditions are satisfied? In my opinion, this question
cannot and should not be finally answered at this interlocutory stage. It is
not free from doubt whether these provisions relating to raising of capital by
the company are mandatory or directory or partly mandatory and partly directory.
It would require a fuller scale of arguments than is appropriate at the
interlocutory stage, to come to final conclusions in these matters.
So
also with regard to the wide holding of shares and the applicants who must
apply to make the issue successful. Can it be said that in the instant case the
entire issue would fail if instead of 2,170 applicants 2,169 applied and all
other conditions were fulfilled? This question also requires a fuller trial at
the hearing of the suit."
Mr. Mukherjee in support of the appeal, however, contended
that as a matter of fact, the learned trial judge erred in not deciding the
issue as regards the illegality. It was the definite submission of Mr.
Mukherjee that when a public issue is to be ascribed to be illegal, the
question of further hearing of the matter does not and cannot arise and there
cannot be two opinions. The transaction in question is void ab initio by reason
of the long lapse of time and by reason of non-listing with the three stock
exchanges within the time specified. It was contended that the defects
abovenoted are not curable in nature and as such this court cannot but pass an
order directing refund of the money to the applicants in terms of the
provisions of the statute.
Though submissions of Mr. Mukherjee, however, seem to be
attractive at first blush, on a closer scrutiny, however, we do not find any
merit thereon. The proviso to section 73 makes the position amply clear and for
convenience sake the proviso is set out hereinbelow:
"73(1A).
. . Provided that where an appeal against the decision of any recognised stock
exchange refusing permission for the shares or debentures to be dealt in on
that stock exchange has been preferred under section 22 of the Securities
Contracts (Regulation) Act, 1956 (42 of 1956), such allotment shall not be void
until the dismissal of the appeal."
It is at this juncture, however, that Mr. Mitter's
contention ought to be noted. Mr. Mitter in no uncertain term submitted that as
against the total inaction of the Calcutta Stock Exchange in the matter of
listing in terms of the prospectus, there was an appeal taken to the Central
Government and the Central Government by an order dated February 1, 1994,
granted permission and directed listing of shares of Coventry Spring and
Engineering Co. Ltd., so far as the Calcutta Stock Exchange is concerned. It
was the further contention of Mr. Mitter that immediately after such order all
the other stock exchanges did list the shares. As such, the question of the
issue being declared void ab initio does not and cannot arise.
It is the definite contention of Mr. Mitter that once an
appeal is preferred and till such time the decision is taken in the appeal, the
rigours of the statute will not be operative and the language of the proviso
makes the position abundantly clear. Be it noted here that the Central
Government, while dealing with the matter, did record a detailed order and
judgment. For convenience sake, paragraph 13 of the order is set out
here-inbelow which reads as follows:
"13.
The representative of the company stated that company had submitted listing
applications to the stock exchanges at
There is no manner of doubt that in the event of an act
being declared to be void, question of further proceeding in the matter does
not and cannot arise, but the issue arises in this application for stay is as
to whether the act can be stated to be a void act, within the meaning of
section 73(1) of the Companies Act.
In our view, on a plain reading of the proviso, as noted
above, question of the public issue being declared void, does not and cannot
arise. The language of the proviso, namely, "any recognised stock
exchange" makes the position amply clear. The subsequent user of the
expression "such" before "allotment" also makes the
position clear, so as to declare an action to be void, in the event of
non-listing of shares. An appeal was preferred and there was a subsequent order
of listing and immediately thereafter, the listing was effected.
In that view of the matter, we are unable to record our
concurrence with the submissions of Mr. Mukherjee appearing in support of the
appeal in so far as the main thrust of the challenge is concerned. As regards
the other issues as noted above, since they are not very seriously pressed, we
need not dilate much on this score, neither are we, however, expressing any
opinion in regard thereto. But so far as the issue as regards non-listing
within a definite time frame in terms of the provisions of the statute, in the
view we have taken as above, the application cannot be sustained and as such,
the application fails and is dismissed.
All interim orders are vacated.
There shall be no order as to costs.
Be it recorded here that by reason of our finding as above,
the question of keeping the appeal pending does not and cannot arise. The
appeal is, therefore, also treated on the day's list by consent of the parties
and is also dismissed. No order as to costs.
All undertakings given by the appellant stand discharged.
Be it recorded here that this court being desirous of
disposing of the entire matter in issue, observed that the suit also should
stand disposed of, but Mr. Mukherjee, however, on instructions submitted that
there are certain other issues which may be tried at the time of hearing of the
suit and as such, the suit be kept pending. In view of such a submission, let
the suit be heard and all steps be taken for expeditious disposal of the suit.
Sohan Lal Soraf J.—I agree.
[1957] 27 COMP. CAS. 559 (
Calcutta Stock
Exchange Association Ltd., In Re.
MUKHARJI, J.
MARCH 1, 1957
MUKHARJI, J. :- This
is an application by a registered partnership firm called Srigopal Jalan & Co.
for an order upon the Calcutta Stock Exchange Association Ltd. to file a return
of allotment in the prescribed form giving all necessary particulars with the
Registrar of Companies, in respect of 70 forfeited shares re-issued and
allotted by the Stock Exchange. The summons was taken out on the 29th June,
1956, when the new Companies Act, 1956, had come into operation.
The
application is based on section 75 of the Companies Act, 1956, and is made
under section 614 of that Act. It raises an important question of principle
which involves construction and interpretation of section 75 of the Companies
Act. Before proceedings to discuss the law I shall briefly state the facts
which are short and simple :
The
applicant claims to be a member and shareholder of the Calcutta Stock Exchange
Association Ltd. Its case is that the company has from time to time forfeited
70 shares of Rs. 1,000 each extinguishing the liability in respect of share
capital paid up therein and that out of the said forfeited shares 65 had been
originally issued for consideration other than cash and 5 for cash
consideration. It also asserts that the said forfeited shares were re-issued by
the company as fully paid up shares for cash consideration of Rs. 1,000 each.
It refers to the last balance sheet of the 30th September, 1955, in support of
its contentions.
The
main point of the applicant’s case is that the said 70 shares forfeited by the
company were not forfeited for non-payment of calls and therefore both under
section 104 of the old Indian Companies Act, 1913, as well as under section 75
of the Companies Act, 1956, it is obligatory upon the Calcutta Stock Exchange
Association Ltd. to file a return of allotment of the said shares with the
Registrar of Joint Stock Companies. That is the only point for decision in this
application and is the only point argued on behalf of the applicant.
Section
75 of the Companies Act, 1956, provides :
“(1)
Whenever a company having a share capital makes any allotment of its shares,
the company shall, within one month thereafter, -
(a) file
with the Registrar a return of the allotments, stating the number and nominal
amount of the shares comprised in the allotment, the names, addresses and
occupations of the allottees, and the amount if any, paid or due and payable on
each shares;
(b) in
the case of shares (not being bonus shares) allotted as fully or partly paid up
otherwise than in cash, produce for the inspection and examination of the
Registrar a contract in writing constituting the title of the allottee to the
allotment together with any contract of sale, or a contract for services or
other consideration in respect of which that allotment was made, such contracts
being duly stamped, and file with the Registrar copies verified in prescribed
manner of all such contracts and a return stating the number and nominal amount
of shares so allotted, ..........; and
(c)
in the case of bonus shares, file with the Registrar a return stating the
number and nominal amount of the bonus shares so allotted.”
Then
the section proceeds to make other provisions including the provision for
default in the filing of such return and making such default punishable with
fine which may extend to Rs. 500 for every day during which the default
continues, provided that in case of default the company or any officer who is
in default may apply to the court for relief, and the court, if satisfied that
the omission to file the document was accidental or due to inadvertence or that
on other grounds it is just and equitable to grant relief, may make an order
extending the time for the filing of the document for such period as the court
may think proper.”
Ultimately
sub-section (5) of section 75 of the Companies Act, 1956, makes the following
provision on which the present applicant relies :
“(5)
Nothing in this section shall apply to the issue and allotment by a company of
shares which under the provisions of its articles were forfeited for
non-payment of calls.”
It
is the argument of the applicant that the only exception provided in section
75(5) of the Companies Act is the case where shares are forfeited for
non-payment of calls. In such a case it is contended that no return of the
allotments need be filed as provided in section 75 of the Act. But it is argued
that in all other cases where the forfeiture of shares takes place not on the
ground of non-payment of calls but on other grounds the return of allotments of
shares issued in the place of the forfeited shares must be filed under section
75 of the Act. The argument on behalf of the applicant is based on the
principle expressio unius est exclusio alterius. It is argued that because
section 75(5) of the Companies Act, 1956, includes only the case of forfeiture
of shares for non-payment of calls, it should, therefore, on the basis of the
above principle be held that Parliament must have impliedly legislated that in
other cases of forfeiture of shares on grounds other than non-payment of calls
a return of the allotments in respect of such forfeitures must be made under
section 75 of the Act.
The
present application, therefore, is made under section 614 of the Companies Act,
1956, which provides that any member or creditor of a company or the Registrar
can make an application to this court compelling the company to make good such
default. The applicant in this case still claims to be a member although its
membership hangs by a very uncertain thread which might snap by the decision of
two pending suits the result of which might be that under article 22 it had
ceased to be a member. Article 22 of the articles of association of the
Calcutta Stock Exchange Ltd. provides that any member who is declared a
defaulter by reason of his failure to fulfil any engagement between himself and
any other member or members and who fails to fulfil such engagement within six
months of the date upon which he is so declared a defaulter shall at the
expiration of such period of six calendar months automatically cease to be a
member. By the operation of this rule the applicant would have become a
defaulter and ceased to be a member because of the applicant’s failure to pay
the sum of Rs. 6,700 found due and payable by the applicant to one Durgadutt
Jalan under the direction of the Full Committee of the respondent Association
and also for the applicant’s failure to pay to Singhania Brothers two several
sum of Rs. 21,875 and Rs. 5,150 also under the directions of the Full Committee
of the respondent Association. But before any steps could be taken by the Stock
Exchange Association against the applicant for non-payment of the said sums to
Durgadutt Jalan and Singhania Brothers the applicant filed two suits in this
court being Suit No. 1866 of 1948, Sri Gopal Jalan & Co. v. Calcutta Stock
Exchange Ltd., and Suit No. 1171 of 1948, Sri Gopal Jalan & Co. v.
Singhania Brothers, and on July 8, 1948, obtained from this court an injunction
directing the respondent Association not to take any steps until the disposal
of those two suits. While granting the injunction the court also restrained the
applicant from doing any business as a member of the respondent Association
until the disposal of the said two suits.
Article
24 of the articles of association of the respondent company expressly provides
:
“Upon
any member ceasing to be a member under the provisions of article 22 hereof and
upon any resolution being passed by the Committee expelling any member under
the provisions of article 21 hereof or upon any member being adjudicated
insolvent the share held by such a member shall ipso facto be forfeited.”
The
actual forfeiture of the applicant’s share under article 24 has been prevented
by the interim injunction granted in the two suits mentioned above and
therefore the applicant’s share still remains unforfeited. The applicant,
therefore, has a right to move this application as a member under section 614
of the Companies Act. I must state here, however, that the application which
the applicant has made is not in respect of his share but with respect to 70
other forfeited shares on similar grounds and which were not for non-payment of
calls.
There
is no decision in
The
judicial maxim of interpretation that to exclude one by name is to include all
that is not covered by that name has got many limitations. A specific exception
may be construed as an implied inclusion of all that is not covered by the
specific exception. But it is a rule of construction. This rule has many
exceptions. LORD CAMPBELL enjoined great caution in Saunders v. Evans in the
application of this principle and said that it was not of universal
application. In the application of this principle to statutes the learned
editor of the eleventh edition of Broom’s Legal Maxims at page 452 utters the
same caution and observes :
“The
sages of the law, according to Plowden, have ever been guided in the
construction of statutes by the intention of the Legislature, which they have
always taken according to the necessity of the matter and according to that
which is consonant to reason and sound discretion.”
HARRIES
C.J., in Calcutta Stock Exchange Association Ltd. v. S. M. Nundy, said that it
was somewhat difficult to understand what could be the reason why shares
forfeited for non-payment of calls should be excluded from the return of
allotments. I shall venture an explanation. The explanation is that the
forfeiture for non-payment of calls was the only kind of forfeiture which is
described in the Companies Act and in the model table for articles of
association known a Table “A”. I am, therefore, of the opinion that by
excluding forfeiture of shares for non-payment of calls, Parliament intended to
exclude all kinds of forfeiture. While that decision holds that by a proper adjustment
and framing of the model rules suitable articles of association could be formed
allowing for forfeiture of shares on grounds other than non-payment of calls,
that does not mean that the statute should also refer to such other types of
forfeiture when neither the statute nor the Table “A” was considering those
forfeitures. I do not think that any construction should be put on a statute or
a statutory provision which imputes illogicality to Parliament. If a return was
required under section 75 of the Companies Act in every case of allotment of
share, then it would be illogical to provide that where such allotment was made
after forfeiture of shares, and re-issue of them, then such allotment was made
after forfeiture of shares, and re-issue of them, then such allotment should be
excluded. In that event, there would be no reason for such an exception but
mere whim. It will be a self-contradictory construction upon section 75 of the
Act. The doctrine, therefore, that an express exclusion of one means an implied
inclusion of the rest loses all its force where a statutory provision such as
section 75(5) of the Companies Act can be read not as selecting one particular
type for exclusion from the return but as excluding the only kind of forfeiture
with which the statute was expressly dealing. It therefore means exclusion of
all kinds of forfeiture from the operation of section 75 of the Companies Act.
The fact that other kinds of forfeiture are permissible by suitable articles of
association specially framed to have that effect is after all the result of a
construction and inference drawn by the courts from the statute and is not the
subject of express legislation. The doctrine therefore of expressio unius est
exclusio alterius cannot, in my opinion, be applied to this case.
I
have come to the conclusion that the return of allotment mentioned in a section
75 of the Companies Act of 1956 does not cover the case of forfeiture where
shares are re-issued after forfeiture and this is so in all cases of
forfeiture, be they non-payment of calls or on other grounds. The provision
contained in section 75(5) of the Companies Act is a provision ex abundanti
cautelae. No such provision as section 75(5) of the Companies Act, 1956, occurs
in the corresponding section 53 of the English Companies Act, 1948. The English
practice without such a provision such a as section 75(5) of our Companies Act
does not indicate that where shares are re-issued after forfeiture they are
included in the return of allotment under section 52 of the English Companies
Act. Company law in
The
reason is this. Section 75 of the Companies Act, 1956, comes within Part III of
the Companies Act, 1956, dealing with “Prospectus and allotment and other
matters relating to issue of shares and debentures” and occurs in the
sub-heading of “allotment” covering the group of sections from sections 69 to
75. Section 69 of the Companies Act appearing in that context and dealing with
prohibition of allotment unless minimum subscription has been received opens
with the words “no allotment shall be made of any share capital of a company
offered to the public for subscription.” In other words, the allotment meant is
the first allotment or the original allotment which is made of the share
capital of a company and offered to the public for subscription. It is clear
that the statute makes a marked difference between the first or the original
allotment and the subsequent allotments. That will be clear from sub-section
(7) of section 69 of the Companies Act, 1956, which specifically excludes
practically the whole of the operation of that section except the provision
stipulating the minimum 5 per cent. of the nominal amount of share on
application for each share, to any allotment of shares subsequent to the first
allotment of shares offered to the public for subscription. Placed in that
context the words in section 75(1) of the Companies Act, 1956, “Whenever a
company having a share capital makes any allotment of its shares”, should, in
my opinion, be confined to the original or the first allotment or allotment of
new shares made of the share capital offered to the public for subscription and
should not be extended to include the case of subsequent re-issue of shares in
lieu of forfeited shares although such re-issue may loosely be called
allotment.
I
shall also support this interpretation of the words “makes any allotment of its
shares” in section 75(1) of the Companies Act, 1956, by construing the word
“allotment”. Allotment as such has not been defined in the Companies Act. In
the jurisprudence of company law as I understand it, allotment of shares has a
special technical meaning. It means, in my opinion, division of the entire share
capital into definite shares, each of particular value and also of different
classes and an assignment of such shares singly or numerously to different
persons. The central core of the word “allotment” is the notion of a “lot”. The
true meaning of the word “allot” must, therefore, be first the creation of lots
of shares and then the division of them into value and classes and, lastly,
allocation of them individually or numerously to particular applicant or
applicants. The word “allotment”, from this point of view, is inappropriate to
describe the act of forfeiture of one or more existing individual shares and
re-issue of such share of shares to other persons. That, to my mind, is not a
case of allotment at all but a case of re-issue of individual shares already
within the structure of share capital as provided in the articles of
association.
In
fact, an analysis of the different provisions of the Companies Act places
allotment of shares on a different category altogether and shows the true
meaning of allotment in company law. Section 41 of the Companies Act, 1956,
shows that subscribers of the memorandum of a company shall be deemed to have
agreed to become members of the company and on its registration shall be
entered as members in its register of members. In their case such subscribers
become shareholders without either the mode of transfer or by the mode of
allotment. What, in fact, the law does in their case is that their subscription
to the memorandum takes the place of an application for shares and the
registration of the memorandum operates as the acceptance of that application
by the company. The second mode of creating a shareholder is by way of transfer
of shares from one person to another as provided in section 108 of the
Companies Act, 1956. This is also different from allotment. The third mode of
creating shareholders is by allotment of shares offered to the public for
subscription as recognised in section 69 of the Companies Act, 1956. In that
context of the different modes of creation of new shareholders, it appears that
allotment is and should be confined to the case of new shares created out of
the shares created out of the share capital and offered to the public for
subscription. That means first the creation of a “lot” of new shares. It indicates
that allotment is an incident of a bulk transaction. Thereafter, the lots of
shares are grouped and divided into lotments of classes and series. What is
done is a certain number of shares out of those different lotments are
appropriated and “allotted” to individual shareholder or shareholders. The
portion of shareholder may be a single share or more than one share, but it is
always the result of the creation of a “lot” and the division thereof. I shall,
therefore, construe the words “makes an allotment of its shares” in section
75(1) of the Companies Act by limiting them to the case of creation of new
shares and issue of new shares out of the share capital of the company and
offered to the public for subscription, and not extending them to include the
case of a share re-issued after forfeiture but within the limit of existing
issued share capital.
This
interpretation is supported by the following observations of the court of
appeal in Calcutta Stock Exchange Association Ltd. v. S. M. Nandy : “When a share
is forfeited what happens is that the right of the particular shareholder to
hold the share and his interest in it are taken away and not that the share
itself as a unit of the share capital or an interest representing the money
paid upon it is extinguished. If it is extinguished at all, it is extinguished
only in the character of being a share held by a particular shareholder, i.e.,
his interest in the company measured by a sum of money and made up of various
rights and liabilities as explained by FARWELL J. in Borland’s Trustee v. Steel
Brothers Co. Ltd. But the share itself is a result of the share capital and as
an issuable part thereof remains.”
In
Nicol’s case the observations of CHITTY L. J. are quoted with approval in
Palmer’s Company Precedents, Part I, 15th Edition, at page 42, where the
learned Lord Justice said, “To my mind there is no magic whatever in the term
‘allotment’ as used in these circumstances. It is said that the allotment is an
appropriation of a specific number of shares. It is an appropriation, not of
specific shares, but of a certain number of shares.”
I
think the learned Lord Justice was striking the fundamental note in the idea of
allotment when his Lordship discountenanced the theory that allotment was an
appropriation of a specific number of shares. His Lordship said that it said
that it was not so but was an appropriation of a certain number of shares. The
case of a share forfeited and thereafter re-issued will be a case of a specific
share and not appropriation of a certain number of shares. It is an idea which
can agree only with the view where the company is making its first or original
allotment of shares out of the share capital offered to the public for
subscription or even thereafter where new classes of shares are created for the
first time and offered to the public for subscription.
I
shall, therefore, interpret the word “allotment” in section 75(1) of the
Companies Act, 1956, to mean only the original or the first allotment or even
subsequent allotments provided they are allotments of new shares and not
re-issue of shares in lieu of pre-existing shares which for some reason or
other had been forfeited.
This
interpretation is strengthened still further by a consideration of the real
object of calling for a return of allotments under section 75 of the Companies
Act, 1956. Its only object is to disclose the position of the company as
regards its issued shares. That is how Palmer put it in Part I of Palmer’s
Company Precedents, 15th Edition, page 56, while commenting on the similar
provisions contained in section 42 of the older English Companies Act, 1929.
But the idea becomes clearer still when the contents of such returns of
allotments under section 75(1) of the Companies Act are scrutinised. What does
this return of allotments require to state ? The return is to state (1) the
number, (2) the nominal amount of the shares comprised in the allotment, (3)
the names, addresses and occupation of the allottees and (4) the amount, if
any, paid or due and payable on each share. A glance at these details shows in
my opinion that they are more relevant and germane to allotment in the sense I
have interpreted than to a case of forfeiture. These details in the return
under section 75(1) of the Companies Act are obviously intended to inform the
Registrar or those who wish to search the Registrar’s office about the
structure of the share capital of the company and how it is divided, among what
allottees and for what consideration. That is why Palmer describes the object
of these returns to show the position of the company with regard to its issued
shares. But in the case of shares already issued but subsequently forfeited and
thereafter re-issued in place thereof, the structure of the company’s share
capital is not altered at all, and it is enough that the annual return shows
the total number of shares of each class forfeited and the total amount paid,
if any, on shares forfeited.
Re-issue
of shares in lieu of forfeited shares does not alter the quality or the
structure of the issue of share capital of the company. All that it means is
that the original holder whose share is forfeited is no longer the holder of
the share that is re-issued in lieu of the forfeited share. To show the change
of the personality of the shareholder is not in my view the object of the
return under section 75(1) of the Companies Act, because the object a I have
said, adopting Palmer’s view, is to show the structure of share capital of the
company in respect of its issued shares. The utility and occasion of filing
returns of forfeited shares under section 75(1) of the Companies Act are
considerable whittled down by the annual returns that the company has to file
in respect of the share capital under section 159 of the Companies Act, 1956.
That section provides inter alia that every company having a share capital
shall prepare and file with the Registrar a return containing the particulars
specified in Part I of Schedule V regarding among other things a register of
members as well as a list of members past or present. The Form is provided in
Part I of the Schedule of the Companies Act, 1956. Clause 5 of that Form
contains provisions for an elaborate list of names addresses, description and
occupation of the members of the company as well as the persons who have ceased
to be members. It is also to show under clause 3(1) the total number of shares
forfeited. Part II of the same Forum of Annual Return provides specific items
such as “total number of shares of each class forfeited” and “total amount
paid, if any, on shares forfeited”. It is true that this Annual Return while
indicating all the names and numbers of shareholders would not identify who is
the new shareholder to whom the forfeited share was re-issued. But that is not
either the object or the purpose in my view as I have said for furnishing
returns of allotment under section 75(1) of the Companies Act. Unless,
therefore, a statute expressly or by most compelling and necessary implication
requires in such case of forfeiture that a return should be made indicating to
whom the share re-issued in lieu of the forfeited share has been allotted, I am
not prepared by a process of inference to create a further burden of returns to
be furnished by the company. The Annual Return in this case has been duly
filed.
It
remains for me now to add that the form at present prescribed under section
75(1) of the Companies Act, 1956, does not even remotely indicate that the
re-issued of a share in lieu of the forfeited share is at all the subject
matter of such a return. The new form prescribed for return of allotments under
section 75(1) of the Companies Act, 1956, is one more argument why the return
of allotments of shares contemplated therein does not call for return of the
re-issue of shares in place of forfeited shares even though such forfeiture was
not made for non-payment of calls. I am conscious that forms prescribed cannot
affect the question of construction, but when forms prescribed support the
construction then there is no scope left for doubt on the point of construction.
This
interpretation is again fortified by the articles of association of the
respondent company in the present case. The most relevant article on this point
is article 27 which provides :
“Any
shares so forfeited shall be deemed to the property of the Association and the
Committee shall sell, re-allot and otherwise dispose of the same in such manner
as to the best advantage for the satisfaction of all debts which may then be
due and owing either to the Association or any of its members arising out of transactions
or dealings in stocks and shares.”
It
is not without significance that this article does not use the word “allot” but
uses the word “re-allot” and I am therefore satisfied that section 75(1) of the
Companies Act, 1956, applying to allotments cannot in any event apply to
“re-allotment” in this context of the article. These provisions make it clear
that the company cannot swallow the share forfeited and retain it. These
provisions indicate that the company must part with the forfeited share. Therefore
it is not really a case of allotment at all but essentially and substantially a
case of compulsory or forced transfer of a share from one shareholder to
another person.
The
share capital is not touched nor its structure or division altered. It is true
that when such a compulsory transfer is made the original shareholder’s rights
are forfeited and the expression “forfeiture” is used. But nevertheless the
particular type of forfeiture which is the subject matter of this application
and which is not for non-payment of calls is not usual in an ordinary trading
company but is really a method and process of enforcing obligations imposed on
members of an association like the stock exchange. Similar views on these
articles were expressed by HARRIES C.J. in Calcutta Stock Exchange Association
Ltd. v. S. N. Nandy & Co. I am, therefore, of the opinion that such an
occasion, although nominally called forfeiture under the articles of the this
association is not the type of forfeiture in any event which can be said at all
to come within the contemplation of section 75(5) of the Companies Act, 1956.
I
do not think it is necessary to say more on the question of construction.
I
need now refer only to another branch of the argument advanced not so much on
the point of construction but addressed mainly on the effect which such
construction will have. The whole object of the applicant is to know what
consideration was paid by the new shareholder and who purchased or obtained
each share issued in lieu of the forfeited shares. It was argued that although
the normal price of these shares was Rs. 1,000 each, they have been sold at
fabulous prices. I do not think this argument can at all affect the question of
construction or interpretation even assuming all what the applicant says is
true. But even then I shall deal with this argument on its merits. A share of a
joint stock company can enormously appreciate in value and may be very much
more than its normal price or face value. No law prevents as yet such
appreciation nor do I know of any law which puts any maximum limit to such
appreciation. This is not a case where any ceiling price for shares of the
Calcutta Stock Exchange has been laid down by any statute or ordinance or law.
In this case what happens is that the share is sold to meet the debts and
obligations which have been imposed upon a member whose share is about to be
forfeited. The membership of the Calcutta Stock Exchange Association is a
valuable status which entitles a member to do business involving large sums of money
and in so doing a member may have to incur huge liabilities. It is therefore
quite in the fitness of things that the share should be sold at the market
value and if the share is highly appreciated it is better to sell it at such
price, for by so selling it would be possible to liquidate the large
liabilities of the particular member whose share is being forfeited out of the
sale proceeds of such share. Then it was argued that the balance, if any, is
being appropriated by the respondent company without being given back to the
person whose share was sold. Formerly, I am told that the practice was
uncertain and the surplus left out of the sale proceeds after meeting the
obligations was paid back to the person whose share was forfeited. But then by
a decision of this court that practice was stopped. That decision is Shamchand
Nandy v. Calcutta Stock Exchange Association Ltd., where the learned Judge in
deciding the case observed at page 331 of the report :
“Payment
over of the surplus sale proceeds of a forfeited share to the expelled member
does not admittedly come within clause 3(n) of the memorandum or clause 19(17)
of the articles. Therefore, on a construction of the provisions of the
memorandum and the articles in accordance with the general principle of
interpretation and in the light of the judicial decision mentioned above I have
come to the conclusion and I hold that the alleged practice of paying the
surplus sale proceeds to the expelled member pleaded in paragraph 16 of the
plaint is ultra vires the respondent association and invalid.”
Since
that decision the surplus of the balance of the sale proceeds in such cases is
always added to the capital reserve in the balance sheet of the respondent
Association. I need only add that the balance sheet shows the value of the
forfeited shares at their face value. The 1955 balance sheet includes this
under the heading “Subscribed and paid up capital less values indicated against
forfeited shares” and then the value is also stated of the forfeited shares
issued as fully paid up for cash consideration of each share at Rs. 1,000. This
is, at best, a matter of accounting and not a matter of interpretation and
cannot affect the larger question on the meaning and ambit of section 75(5) of
Companies Act, 1956.
For
these reasons the application must fail and is dismissed with costs.
Application dismissed.
[1978] 48 COMP. CAS. 591 (
Sudarshan Talkies (
v.
Chief Controlling Revenue Authority,
T.V.R. TATACHARI C.J., PRITHVI
RAJ AND YOGESHWAR DAYAL JJ.
CIVIL WRIT NO. 1317 OF 1969.
NOVEMBER 16, 1977
T.N.
Sethi and Y.K. Sabharwal for the petitioner.
R.K.
Anand for the Respondents.
Prithvi
Raj J.—By this
civil writ petition the petitioner prays that the proceedings before the
Registrar of Companies ending with the order dated 30th September, 1969, passed
by the Chief Controlling Revenue Authority, Delhi (Annexure "E"), be
quashed and that a writ of prohibition be issued against the respondents
prohibiting them from making recoveries of the amount of stamp duty and penalty
imposed against the petitioner by the Collector of Stamps, respondent No. 2,
and confirmed by respondent No. 1, Chief Controlling Revenue Authority, Delhi,
by his impugned order, annexure "E".
Necessary
facts for the disposal of the writ petition are as follows. The petitioner took
over the business of Sudarshan Talkies, including its assets and liabilities,
owned by Sarvshri Brij Lal Chawla and Surinder Chawla, in lieu of which 1,440
equity shares of Rs. 100 each, fully paid up, of the petitioner were allotted
to them. The petitioner in pursuance of the provisions of section 75(1) of the
Companies Act, 1956 (1 of 1956), (herein called "the Companies Act")
filed a return (annexure "A") before the Registrar of Companies in
respect of the said shares allotted to Brij Lal Chawla and Surinder Chawla for
having acquired the business of Sudarshan Talkies for a total consideration of
Rs. l,45,354.58. Since no deed had been executed between the parties in respect
of this transaction, the particulars of the contract for allotment of the
above-said shares, required to be furnished under section 75(2) of the
Companies Act, were furnished in Form 3, prescribed under the Companies Act.
Stamp duty of Rs. 5 was paid on Form 3, by affixing the adhesive stamp of the
said value on it.
The
Assistant Registrar of Companies, on examining Form 3, was of the view that the
document was not properly stamped. He impounded the document, holding that it
was a conveyance deed and sent it for recovery of duty and penalty, etc., to
the Collector. It is alleged that the Collector, respondent No. 2, issued
notice to the petitioner (annexure "B"). After perusing the reply submitted
by the petitioner, the Collector rejected the same and by his order dated 17th
May, 1969 (annexure "C"), the petitioner is called upon to pay Rs.
11,627.75 as duty and an equal amount as penalty. The petitioner challenged the
said order of the Collector in revision before the Chief Controlling Revenue
Authority who rejected the contentions of the petitioner, vide his order dated
30th September, 1969 (annexure "E").
The
petitioner challenges the aforesaid orders on the ground that the impugned
orders are against law and beyond the jurisdiction of the authorities passing the said orders. The case of the
petitioner is that in Form 3, it was erroneously mentioned under some
misconception in the mind of the person preparing it that the allotment had
been made in satisfaction in part of the purchase price of the property and the
description of the property was given as building, furniture, machinery,
air-conditioner, electric power, cycle, stock in trade, security, neon signs,
etc. The petitioner's case is that the particulars filed by them under section
75 of the Companies Act did not amount to a sale deed and at best could only be
deemed to be an agreement to sell in that the property which purported to be
conveyed, which included immovable property, could not be conveyed otherwise
than by a registered sale deed, the particulars in the circumstances could not
be a substitute for a conveyance.
On behalf of the respondents a
reply affidavit was filed by Shri S.K. Sharma, Collector of Stamps, Vikas
Bhawan,
The petitioner in its rejoinder
controverted the contentions raised by the respondents in their
counter-affidavit and reiterated the contentions raised in the petition.
The preliminary objection urged
by the respondents is without any merit. On the failure of the Chief
Controlling Revenue Authority to refer the other questions, it was open to the
petitioner to file a petition for the issuance of mandamus calling upon him to
refer the said questions. If instead of resorting to that procedure, he filed
the present petition, it cannot be said that it may not be entertained. The
application made by the petitioner before the Chief Controlling Revenue
Authority raised substantial questions of law, and the authority was bound to
state the case in compliance with its obligations envisaged under section 57(1)
of the Stamp Act. In the circumstances, no useful purpose will be served in
driving the petitioner to file a writ for the issuance of mandamus. We
accordingly proceed to dispose of the present petition on merits.
In
Banarsi Dass Ahluwalia v. Chief Controlling Revenue Authority, AIR 1968 SC 497, it was observed that section 57(1) of the Stamp
Act imposes a duty on the authority to state the case when it raises a
substantial question of law. That duty is not affected by the question whether
a case is pending
before the authority or not. Section 57 affords a remedy to the citizen to have
his case referred to the High Court against an order of a revenue authority
imposing stamp duty and/or penalty provided the application involves a
substantial question of law and impose a corresponding obligation on the
authority to refer it to the High Court for its opinion. It was observed that
such a right and obligation cannot be construed to depend upon any subsidiary
circumstances such as the pendency of the case before the authority. When an
application is made under section 57(1) and it involves a substantial question
of law whether the case is pending or not, the authority is bound to state the
case in compliance with its obligation. It may bear mention here that in
Banarsi Dass Ahluwalia's case, AIR 1968 SC 497, their Lordships considered and
followed their earlier decision in Chief Controlling Revenue Authority v.
Maharashtra Sugar Mills Ltd., AIR 1950 SC 218, wherein it was held that the
power contained in section 57 of the Stamp Act is in the nature of an
obligation or is coupled with an obligation and can be demanded to be used also
by the parties affected by the assessment of the stamp duty. It was also held
in that case that power to make a reference under section 57 is not only for
the benefit of the authority but it is also coupled with a duty cast on it as a
public officer to do the right thing and when an important and intricate
question of law in respect of the construction of a document arises, as a
public servant, it is its duty to make the reference. If it omits to do so,
their Lordships observed, it is within the power of the court to direct it to
discharge that duty and make a reference to the court regardless of the fact
that the matter had ceased to be in the stage of assessment but had reached the
stage of collection of stamp duty.
Since
in the instant case a question of law in respect of the construction of the
document (Form 3) arises, the preliminary objection urged on behalf of the
respondents is without any force. In this view of the matter, the contention of
the respondents that the case before the Collector having been concluded and
there being no pending case, the matter having proceeded beyond the stage of
assessment and having reached the stage of recovery and the Chief Controlling
Revenue Authority having' declined to refer other questions than the one
referred to in Stamp Duty Reference No. 1 of 1970, the petitioner be not heard
on the question now sought to be urged in the writ petition is without any
merit.
Coming
to the merits of the case, with a view to appreciate the submission of the
petitioner it would be appropriate to note the relevant provisions of section
75 of the Companies Act. The said provisions read as under :
"75.
Return as to allotments.—Whenever a company having a share capital makes any
allotment of its shares, the company shall, within thirty days thereafter,
(a) file with the
Registrar a return of the allotments, stating the number and nominal amount of
the shares comprised in the allotment, the names, addresses and occupations of
the allotees, and the amount, if any, paid or due and payable on each share :
Provided
that the company shall not show in such return any shares as having been
allotted for cash if cash has not actually been received in respect of such
allotment ;
(b) in the case of
shares (not being bonus shares) allotted as fully or partly paid up otherwise
than in cash, produce for the inspection and examination of the Registrar a
contract in writing constituting the title of the allottee to the allotment
together with any contract of sale, of a contract for services or other
consideration in respect of which that allotment was made, such contracts being
duly stamped, and file with the Registrar copies verified in the prescribed
manner of all such contracts and a return stating the number and nominal amount
of shares so allotted, the extent to which they are to be treated as paid up,
and the consideration for which the have been allotted ; and
(c) file with the Registrar—
(i) in the
case of bonus shares, a return stating the number and nominal amount of such
shares comprised in the allotment and the names, addresses and occupations of
the allottees and a copy of the resolution authorising the issue of such shares
;
(ii) in the
case of issue of shares at a discount, a copy of the resolution passed by the
company authorising such issue together with a copy of the order of the court
sanctioning the issue and where the maximum rate of discount exceeds ten per
cent., a copy of the order of the Central Government permitting the issue at
the higher percentage.
(2) Where a
contract such as is mentioned in clause (b) of sub-section (1) is not reduced
to writing, the company shall, within thirty days after the allotment, file
with the Registrar the prescribed particulars of the contract stamped with the
same stamp duty as would have been payable if the contract had been reduced to
writing ; and those particulars shall be deemed to be an instrument within the
meaning of the Indian Stamp Act, ] 899 (2 of 1899), and the Registrar may, as a
condition of filing the particulars, require that the duty payable thereon be
adjudicated under section 31 of that Act".
According
to clause (b) of sub-section (1) of section 75, noted above, in the case of
shares (not being bonus shares) allotted as fully paid up or partly paid up
otherwise than in cash, the company is required to produce for the inspection
and examination of the Registrar a contract in writing constituting the title
of the allottee to the shares allotted to him together with any contract of
sale, or a contract for service or other consideration in respect of which the allotment of shares was made. Such
contract is required to be duly stamped. Further, the company has to file
copies of such contract verified in the prescribed manner, and a return stating
the number and nominal amount of shares so allotted, the extent to which they
are to be treated as paid up, and the consideration for which they have been
allotted. It is, therefore, evident that the return which is required to be
filed in pursuance of the provisions of sub-section (1), clause (b), must show
the number and the amount of shares allotted indicating the extent to which
they are to be treated as paid up, and the consideration for which they have
been allotted. The idea implicit in this provision is to ensure that the share
capital of the company reflects cash or other valuable assets.
Now, according to sub-section
(2), if a contract contemplated in clause (b) of sub-section (1) is not reduced
to writing, a duty is cast on the company to file with the Registrar of
Companies the prescribed particulars of the contract. These particulars are
required to be filed within "thirty days" after the allotment of
shares. The form in which these particulars are to be filed is to bear the same
stamp duty as would have been payable if the contract had been reduced to
writing. The particulars so furnished shall be deemed to be an instrument
within the meaning of the Stamp Act. Further, this sub-section envisages that
the Registrar may, as a condition of filing the particulars, require that the
duty payable thereon be adjudicated under section 31 of the Stamp Act.
In the instant case, 1,440
shares of Rs. 100 each fully paid up were allotted in consideration of the
assets and liabilities of the business of Sudarshan Talkies. The transfer of
the assets and liabilities of the business was effected by delivery of
possession. No agreement was reduced to writing between the parties. That being
so, the particulars of the agreement were required to be furnished to the
Registrar of Companies and indeed were furnished by the petitioner in Form 3.
These particulars are to be treated as an instrument within the meaning of the
Stamp Act. Form 3, on which the particulars have been furnished, was required
to be stamped with the same stamp duty as would have been payable if the
contract had been reduced to writing. The question accordingly is not whether
the document, Form 3, furnished by the petitioner is an agreement but whether the
prior oral contract between the parties, the particulars of which have been
specified in Form 3, would have been chargeable with duty as an agreement or as
a conveyance had it been reduced to writing. Where the shares are allotted
otherwise than in cash, as in the instant case, the Registrar of Companies has
to satisfy himself in respect of the title of the allottee to the allotment of
the shares. For so satisfying himself the Registrar must have before him the
evidence of the title of the allottee to the allotment.
In the case before us, the
evidence in this respect was the particulars furnished in Form 3 giving the
prescribed particulars of the contract between the parties. It cannot be denied
that the title of the allottees to the allotment of shares could be constituted
by a contract, and in no other way. Since the contract between the parties was
not reduced to writing, the information that was required to be filed with the
Registrar in terms of section 75(2) was in respect of the oral contract constituting
the title of the allottees to the allotment of the shares. It is, therefore,
evident that the form furnishing the particulars of the oral agreement, in law,
has to be deemed for the purposes of the stamp duty "to be the contract in
writing" by which the title to the allotment was constituted. Stamp duty
accordingly on the form furnishing the requisite particulars has to be
determined as if it was a contract made in writing. It is beyond the pale of
controversy that the particulars which are required to be furnished arc in
respect of the particulars of the contract constituting the title of the
allotment of shares and of the consideration of the contract. No title to
allotment would accrue in the absence of a contract. In the instant case, the
particulars that were furnished in Form 3 had to be and in fact were in respect
of the oral contract between the parties in respect of the title of the
allottees to the allotment of shares ; in the absence of such a contract they
would not derive any title to the allotment of shares. We are fortified in our
view from the judgment of the Allahabad High Court in Sri Raj Sachdeva v. Board of Revenue, AIR
1959 All 595 (SB).
We now proceed to examine Form
3, in the light of our above observation, filed by the petitioner giving the
information required to be furnished under section 75(2) of the Companies Act.
So read, it has to be held that the Form gives particulars of the conveyance
deed pertaining to the immovable property rather than particulars of "an
agreement to sell" as was sought to be made out by the learned counsel for
the petitioner. Information supplied by the petitioner against column 6 of the
Form is a clincher of the matter. Column 6 required the petitioner to give full
particulars of the property, which is the subject-matter of the sale, showing
in detail how the total purchase price was apportioned between the respective
heads. The said column also required particulars of the immovable property held
in absolute ownership of the company and fixed plants and machinery and other
fixtures thereon, to be given. It is pertinent to note that in answer to column
6 in the Form the petitioner gave the particulars of the property
(subject-matter of the sale) and immovable property held in absolute ownership
of the company as "building, furniture, machinery, air-conditioning plant,
electric fans, etc., cooler, neon sign, cycle" mentioning the approximate
value of the said items. Column 5 of the Form required the petitioner to give a
brief description of the property if the allotment of shares was made in
satisfaction or part satisfaction of the purchase price of the property,
besides giving the full particulars of the manner in which the purchase price
was satisfied. In answer to that the petitioner gave the brief description of
the property as "building, furniture, machinery, air-conditioners,
electric power, cycle, stock-in-trade, security and neon sign". The
purchase price of these shares was mentioned as Rs. 1,45,354.58 which was not
paid in cash but by conveying the property mentioned in Form 3 by giving
possession. In the premises the Chief Controlling Revenue Authority rightly
held that " the purchase price of the property including the immovable
assets of the partnership was a consideration for the allotted shares" and
that "the particulars filed under sub-section (2) of section 75 in Form 3
would attract stamp duty as prescribed for a conveyance of immovable
property".
The question of the payment of
transfer duty as surcharge payable under section 147 of the Corporation Act has
already been answered by us in Stamp Duty Reference No. 1 of 1970. This aspect,
therefore, is not required to be gone into over again.
In view of our above discussion
the writ petition fails and is hereby dismissed, leaving the parties, in the
circumstances of the case, to bear their respective costs.
(Full Bench)
[1968] 38 COMP. CAS. 165 (
v.
Registrar
of Companies.
Inder Dev
Dua, C.J.
S. K.
Kapur and T. V. R. Tatachari, JJ.
LETTERS PATENT APPEAL NO. 23-D OF
1966
OCTOBER 20, 1967.
S.V. Gupte, Ravinder Narain and Keshav Dayal for the
Appellant.
Prakash Narain and B.N. Kirpal for the Respondent.
S.K. Kapur, J.—Golconda Industries Private Limited (hereafter referred to as the
appellant company) allotted 496 shares of the face value of Rs. 100 each to
various persons, some of whom, at the time of allotment, were minors. It is
claimed on behalf of the appellant-company that all the allotments made to the
minors were in pursuance of contracts entered into by them through their
guardians. Pursuant to section 75(1) of the Companies Act, 1956, the
appellant-company submitted a return of the allotments of the said 496 shares to the
Registrar of Companies, respondent, on April 9, 1963. The Registrar of
Companies treated the return as defective on the ground that certain shares had
been allotted to minors and, therefore, declined to register the return. This
was done by the Registrar in pursuance of the purported exercise of power under
regulation 17(2) of the Companies Regulations framed by the Central Government.
The regulations have been framed under section 609 of the said Act which
empowers the Central Government to appoint Registrars, etc., and "make
regulations with respect to their duties". It is appropriate to read the
said regulation-
"17.(1) The Registrar shall
examine, or cause to be examined, every document received in his office which
is required or authorised by or under the Act to be registered, recorded or
filed by or with the Registrar.
(2) If any such document is
found to be defective or incomplete in any respect, the Registrar shall direct
the company to rectify the defect or complete the document and no such document
shall be registered, recorded or filed until the defect has been so rectified
or the document has been completed, as the case may be."
Aggrieved by this refusal by the Registrar, the
appellant-company filed a petition in the Punjab High Court under article 226
of the Constitution. By order dated 3rd December, 1965, Jindra Lal J. dismissed
the petition principally on the ground that there was no statutory obligation
on the Registrar to accept the return of allotment of 9th April, 1963. Jindra
Lal J. formulated two questions for consideration :
(1) Can shares be allotted to a minor ?
(2) Assuming
that no shares can be allotted to a minor, can a Registrar under the Act refuse
to accept a return which discloses that shares have been allotted to a minor ?
The learned judge answered the first question against the
appellant-company on the ground that under section 41 of the said Act a person
can become a member of a company only if he agrees to do so in writing and
since a minor cannot enter into a contract, no allotment can be made in favour
of a minor. It was, however, not disputed before the learned single judge that
a minor can be a shareholder of a company if the shares devolve upon him by
operation of law, or by inheritance, or by transmission. On the second question,
the learned single judge decided that regulation 17(2) was of sufficient
amplitude and entitled the Registrar to decline the registration of the return.
The very two questions raised before the learned single
judge have been agitated before us at the bar. Mr. S.V. Gupte, the learned
counsel for the appellant-company, relying mainly on Srikakulam Subrahmanyam v.
Kurra Subba Rao
argued that if the contract is one made by the guardian on behalf of the minor
within the competence of the guardian, it would be valid and binding on the
minor provided the contract is for the benefit of the minor. According to Mr.
Gupte, there is no absolute bar to a guardian entering into a contract on
behalf of a minor and he can do so if the contract is for the minor's benefit
and consequently it was not open to the Registrar to scrutinise and pronounce
upon the validity of the contract or to decline to register the return. Mr.
Gupte also relied on section 8 of the Hindu Minority and Guardianship Act,
1956, in support of his plea that the guardian could validly enter into a
contract for the benefit of the minor or for the realization, protection or
benefit of the minor's estate. The learned counsel for the respondent, on the
other hand, said that, after the enactment of the Hindu Minority and
Guardianship Act, the powers of guardians were circumscribed by the said
statute and since under that Act "the guardian can in no case bind the
minor by a personal covenant", the allotment in this case, which was of
partly paid shares, was, on the face of it, outside the competence of the
guardian. Mr. Gupte's answer was that, if the Registrar had no competence to
pronounce upon the validity of the contracts, the question whether or not the
contracts were binding on the minors did not arise for decision in this case.
Mr. Gupte also suggested that the words" by a personal covenant "did
not mean that partly paid shares, even though for the benefit of a minor, could
not be acquired by a guardian and these words were limited to covenants giving
rise to obligations of personal nature. Various decisions were cited at the bar
for and against the proposition that a minor could become a shareholder. On the
view that I am taking on the second question, I would rather abstain from
expressing any opinion on the
point whether or not a guardian can, in given circumstances, bind the minor by
a contract for purchase of shares and whether or not such minor can be placed
on the register of members.
That takes me to the second question. The return of
allotment, as I have said earlier, was filed under section 75(1) of the said
Act. Under clause (a) of sub-section (1) of section 75, a company is required
to file with the Registrar a return of the allotments, stating the number and
nominal amount of the shares comprised in the allotment, the names, addresses
and occupations of the allottees, and the amount, if any, paid or due and
payable on each share. Clause (b) of the said sub-section (1) of section 75
makes a further provision in the case of shares (not being bonus shares)
allotted as fully or partly paid up otherwise than in cash. The said clause (b)
requires the company to produce for the inspection and examination of the
Registrar a contract in writing constituting the title of the allottee to the
allotment together with any contract of sale, or a contract for services or
other consideration in respect of which that allotment was made and file with
the Registrar copies verified in the prescribed manner of all such contracts
and a return stating the number and nominal amount of shares so allotted, the
extent to which they are to be treated as paid-up, and the consideration for
which they have been allotted. Clause (c) of sub-section (1) of section 75
enjoins the company to file with the Registrar certain documents in case of
allotments of bonus shares or shares issued at a discount. Non-compliance with
section 75 is made punishable. The return under section 75, it appears, is only
expected to disclose the real state of facts and must correspond to the factual
position in the matter of allotment of shares. The form of allotment has been
prescribed by the Companies (Central Government's) General Rules and Forms,
1956, being Forms Nos. 2 and 3. Return of allotment pursuant to section 75(1)
has to be filed in Form 2 and there is no obligation on the company to state in
that form whether or not an allottee is a minor. Under section 234 of the said
Act, the Registrar is empowered to call for information or explanation with
respect to any matter to which a document, required to be submitted by the
company, relates. Mr. Gupte, the learned counsel for the appellant-company,
disputed even the power of the Registrar to ask for information from the
company whether or not any one of the allottees included in the return of
allotment was a minor. Mr. Prakash Narain, the learned counsel for the
respondent, on the other hand, contended that section 234 not only conferred
that power on the Registrar but also the power to ascertain facts in relation
thereto, and pronounce on the validity of the allotment. Mr. Prakash Narain's
argument was that inherent in the very power to call for information and
explanation with respect to a return of allotment was the power to scrutinise
the information supplied and come to a conclusion in the light thereof whether
or not the return incorporated valid or proper transactions and if the
Registrar had that power he had necessarily the power to reject the defective
return under regulation 17. According to Mr. Prakash Narain, the legislature
could not have authorised the.Registrar to call for information and explanation
if the Registrar was not competent to take further steps in the matter beyond
gathering information. So far as section 234 is concerned, I am of the opinion
that the Registrar is competent to call for any information or explanation with
respect to the matters to which various documents, including the return of
allotment, which a company is required to submit to him under the Act, relate.
The power to call for information under section 234 is "with respect to
any matter to which such document purports to relate". The return of
allotment is a document required to be filed with the Registrar and calling for
information whether or not any allottee is a minor would be an information with
respect to a matter to which the said return purports to relate. That, however,
is not the end of the respondent's difficulties for the question still remains
as to what the Registrar can do after the return has been filed and information
received. As I look at section 75(1) of the said Act, it appears to me that
the requirement thereof is to file a return of allotment corresponding to the
actual position of the allotment made. If, therefore, an allotment has been
made to a minor, the return must show the minor as an allottee. Under
regulation 17 the Registrar is required to examine or cause to be examined the
document received in his office. His duty, therefore, extends to the
examination of the return of the allotment and if the return accords with the
actual facts and is also otherwise complete, it cannot be termed as
"defective or incomplete" within clause (2) of regulation 17, The
Registrar must in that situation register the document. If the Registrar is
conceded the resources to examine the legality or validity of a transaction
incorporated in the return of allotment, logically such resources must extend
not only to a case where the allottees are minors but also to a case where they
are alleged to be lunatic. Can it then be visualised that the legislature
conferred the power on the Registrar to call for information and come to a
conclusion that an allottee is a lunatic and decline to register the return ? I
think not. It must be remembered that the powers under regulation 17 have been
given to the Registrar not only to examine but also "cause to be examined
every document received in his office". The Registrar may, therefore,
depute even a clerk in his office to examine the validity of the transaction
returned in a document. No appeal is provided against "the order of the
Registrar. It is logical to think that, if the Registrar had been constituted
as an authority with powers to decide such vital questions, he would not have
been given power to delegate the functions and some appeal or review by a
superior authority would also have been provided in the Act. In my opinion, the
powers conferred under regulation 17 are of ministerial nature. Under section
155 of the said Act, power is given to the court to rectify the register of
members and that provision further shows that a similar power was not, and
could not have been intended to be conferred on the Registrar. It is said on
behalf of the respondent that the power of the Registrar to decline to register
a return is not a power to rectify the register. That may be so, but when the
substance of the matter is looked at, it would appear that the Registrar by
declining to register the return can compel the company to rectify its register
of members by removing the names of the minors therefrom. Considerable reliance
was placed by Mr. Prakash Narain on an unreported decision of Sinha J. of the
Calcutta High Court in Choudhury's Estates (Private) Ltd. v. B. P. Roy dated
July 2, 1958. In that case the question was about issue of debenture by way of
mortgage in violation of law and the Registrar had declined to issue
certificate under section 114 of the Indian Companies Act, 1913. Sinha J.
observed:
"In other words, if those provisions are not carried
out, there is no valid mortgage or debenture in the eye of law. When it comes
to registration under the Indian Companies Act, the provision is that a
mortgage or debenture shall be registered ; that means a valid mortgage or
debenture and not an invalid mortgage or debenture. If it is a mortgage or
debenture which is invalid in the eye of law, then neither is the company
called upon to register it nor is the Registrar called upon to register it, or
to issue a certificate of registration. It follows, therefore, that it is well
within the competence of the Registrar, when he finds that as a result of the
violation of an imperative provision in a statute an alleged mortgage or
debenture is no mortgage or debenture in law, to refuse to register it and he
may certainly refuse to issue a certificate of registration."
May be that the position with respect to registration of
mortgages and issue of certificate under section 114 of the Indian Companies
Act, 1913, corresponding to section 132 of the Companies Act, 1956 is different
and the Registrar is competent to refuse a certificate of the registration of
any charge if the charge is invalid in the eye of law. Sections 125 to 132 of
the said Act show that a company is required to file with the Registrar the
prescribed particulars of the charge together with the instrument creating the
charge for registration and the certificate of the Registrar is conclusive
evidence that the requirements of the provisions of the Act as to registration
have been complied with. Having regard to the nature of particulars to be
registered and to the fact that the certificate is made conclusive, it may be
possible to say that the Registrar can decline to issue such a certificate if
the particulars are not accurate or the charge not legal, but the nature of the
return, as I have already indicated, required under section 75 shows that the
Registrar is not competent to enquire into the validity of the transactions
covered thereby. I need not, however, express my opinion on the argument raised
by Mr. Gupte that the
Coming now to the argument of Mr. Prakash Narain that the
legislature could not have intended that the Registrar should call for information
and, even though satisfied that allotment in favour of a particular allottee is
void, he should still not insist on the defect being removed. According to Mr.
Prakash Narain, that will lead to defective returns being registered with the
Registrar and may be a source of misguidance to the public at large which have
to deal with companies. The power of the Registrar to call for information
extends to all documents including the balance-sheets and if the Registrar
finds that the information supplied calls for investigation, it is open to him
to have recourse to section 235 of the said Act. Again, the information
supplied to the Registrar may show the return is defective or incomplete within
regulation 17 and he may decline to register the same. He may also apply under
section 614 to the court for direction upon the company to file a proper or
complete return. If the transaction incorporated in the return is illegal, the
shareholders may also take up the matter in the appropriate form ; but I am not
convinced that the Registrar can sit in judgment over the validity or
invalidity of the transaction. No provision is made for hearing of the party
affected by the impugned transaction and the Registrar may pronounce upon the
transaction without even hearing such a party. It is difficult to interpret the
law in a manner that concedes such a power to the Registrar. In my opinion,
therefore, the learned single judge was in error in taking the view that the
Registrar could, in the circumstances of this case, decline to register the
return. I am further of the opinion that there is a statutory obligation on the
part of the Registrar to register the return if it is not defective or
incomplete in the sense explained by me hereinbefore. Regulation 17 must be
interpreted in the light of the source from which it stems and the combined
reading of the statute and regulation 17 shows that the Registrar was, in the
circumstances of this case, obliged to register the return. Regulation 17 has
been framed under section 609 of the said Act under which the Regulations may
prescribe "duties" of the various officers including the Registrar.
The power to decide the validity of such like transactions must, therefore, be
found elsewhere and in the Act I find no such power in the Registrar. In these
circumstances, I would allow the appeal and issue direction to the Registrar of
Companies to register the return of allotment. There would, in the circumstances,
be no order as to costs.
Inder Dev Dua C.J.-I
agree.
T.V.R. Tatachari J.-I agree.
v.
P.C. Wadhawa
Mrs. H.K. Sandhu J.
crl. Miscellancous No. 4041-M of 1993
March 31, 1994
Rajiv Kataria and K.S. Ruppal
for the Petitioner.
P.C. Wadhawa for the Respondent.
JUDGMENT
Mrs. Harmohinder Kaur Sandhu J.—Shri S.C. Bhatia, director, Indana Spices and Food Industries Ltd.,
72, Janpath, New Delhi, has filed this petition under section 482 of the
Criminal Procedure Code, for quashing complaint annexure "P-7”, summoning
order annexure "P-8" and the proceedings arising therefrom pending in
the court of Shri T.R. Bansal, Judicial Magistrate, 1st Class, Chandigarh. The
brief facts of the case relevant for the disposal of this petition are that
P.C. Wadhawa, respondent, filed a complaint under section 73 of the Companies
Act, 1956, against the petitioner alleging that Indana Spices and Food
Industries Limited floated debentures in August, 1991. He applied for 40
debentures the company and issued
cheque for a sum of Rs. 3,000 bearing No. 569179, dated August 9, 1991, on
Haryana State Co-operative Apex Bank Limited, Sector 28-D,
After hearing counsel for the complainant and going through the record,
the Chief Judicial Magistrate,
The petitioner alleged that the complaint, annexture "P-7",
was in abuse of the process of law having been filed with a malicious intention
to tarnish the image of the company in the eyes of the general public and the
respondent had no locus standi to file the same. The complaint could not have
been filed against the petitioner as section 73 of the Companies Act stipulated
that criminal liability shall be that of the company and every director of the
company who was an officer in default. No act of negligence or mens rea
regarding commission of an offence by the petitioner was disclosed.
No return was filed by the respondent.
I have heard Mr. Rajiv Kataria, learned counsel for the petitioner, and
Mr. P.C. Wadhawa, respondent and have perused the record.
It was argued on behalf of the petitioner that the complaint annexure
"P-7" was liable to be quashed as the allegations made therein did
not disclose the commission of any offence by the petitioner nor did the
complainant have any locus standi to file the complaint. The petitioner against
whom the complaint had been filed could not be punished under section 73 of the
Companies Act, as the complaint was not maintainable against him. He referred
to section 621 of the Act, which runs as under:
"(1) No court shall take
cognizance of any offence against this Act (other than an offence with respect
to which proceedings are instituted under section 545), which is alleged to
have been committed by any company or any officer thereof, except on the
complaint in writing of the Registrar, or of a shareholder of the company, or
of a person authorised by the Central Government, in that behalf:
Provided that nothing in this sub-section shall apply to a prosecution
by a company of any of its officers.
(1A) Notwithstanding anything contained in the Criminal Procedure Code,
1898 (5 of 1898), where the complainant under sub-section (1) is the Registrar
or a person authorised by the Central Government, the personal attendance of
the complainant before the court trying the offence shall not be necessary
unless the court for reasons to be recorded in writing requires his personal
attendance at the trial.
(2) Sub-section (1) shall not
apply to any action taken by the liquidator of a company in respect of any
offence alleged to have been committed in respect of any of the matters
included in Part VII (sections 425 to 560) or any other provisions of this Act
relating to the winding up of companies.
(3) A liquidator of a company
shall not be deemed to be an officer of the company, within the meaning of
sub-section (1)."
It was urged that according to the provisions of the above section, the
court could not take cognizance of any offence under section 73 of the Act,
unless the complaint was filed in writing by the Registrar or by a shareholder
of the company or by a person authorised by the Central Government in that
behalf. The respondent was neither a shareholder nor was he authorised by the
Central Government to file the complaint. Even if debentures had been allotted
to him still he could not become a shareholder of the company unless he held
shares.
The contention of learned counsel for the petitioner is quite tenable.
Under the Act, protection is given to companies from frivolous and malicious
prosecution hatched by any person who has no locus standi to file a complaint.
In case any person is aggrieved of any act of the company and he is not a
shareholder of the company, then the only remedy open to him is to approach the
Registrar of Companies, who shall file the complaint in a court of law, if any
offence was committed by the company. The only exception to section 621 of the
Act is when the prosecution for the offence happens to be under section 545 of
the Act, then the person filing the complaint need not be a shareholder or a
person duly authorised by the Central Government but this provision is not
applicable to the present case as that is available during the course of
winding up of a company.
The respondent contended that whereas all other acts which provide for
criminal prosecution referred to the offences "under the Act",
section 621 provided for offence against the Act. So section 621 was not
attracted and he was competent to file a complaint for an offence punishable
under section 73 of the Act. This submission of the respondent is, however, not
valid. The only grouse of the complainant was that the company had failed to
refund his money within the time period stipulated under section 73, and,
therefore, the company had committed an offence by acting against the mandatory
provisions of section 73(2A) punishable under section 73(2B). The words
"against the Act" or "under the Act" connote the same
meaning and the respondent failed to distinguish the two by showing as to what
were the offences "against the Act" and which were "under the
Act". In the light of the express bar under section 621 of the Act, the
respondent had no locus standi to file the complaint.
Section 73(2B) stipulated that the company and every officer of the
company who was an "officer in default" shall be punished. An officer
in default has been defined in section 5 of the Act, which is as under:
"5. Meaning of 'officer who is in default'.-For the purpose of any
provision in this Act which enacts that an officer of the company who is in
default shall be liable to any punishment or penalty, whether by way of
imprisonment, fine or otherwise, the expression 'officer who is in default'
means all the following officers of the company, namely:—
(a) the managing director or managing directors;
(b) the whole-time director or whole-time directors;
(c) the manager;
(d) the secretary;
(e) any person in accordance
with whose directions or instructions, the board of directors of the company is
accustomed to act;
(f) any person charged by the board with the responsibility of
complying with that provision:
Provided that the
person so charged has given his consent in this behalf to the board;
(g) where any company does not
have any of the officers specified in clauses (a) to (c) any director or
directors who may be specified by the board in this behalf or where no director
is so specified, all the directors:
Provided that where
the board exercises any powers under clause (f) or clause (g),it shall, within
thirty days of the exercise of such powers, file with the Registrar a return in
the prescribed form.”
The petitioner does not fall under any of the categories mentioned in
the above section. He is neither a managing director nor a whole-time director
nor manager nor secretary. In order to prosecute the petitioner it was
necessary for the respondent to mentioned in the complaint whether the
petitioner was a managing director or a whole-time director as it is only those
tow type of director who could be termed as officer in default. A person who is
simply a director cannot be prosecuted under section 73 of the Act. In the
instant case, neither the respondent had a locus standi to file the complaint nor
the petitioner was liable for the commission of any offence and the complaint
is liable to the quashed on these grounds.
As a result, I allow this petition and quash the complaint, annexure
“P-7”, summoning order, annexure “P-8”, and all subsequent proceedings arising
therefrom pending in the court of the Judicial Magistrate, Ist Class,
[1995] 83 COMP. CAS. 762 (PUNJ. & HAR.)
HIGH COURT OF PUNJAB AND HARYANA
v.
C.T.
Scan Research Centre (P.) Ltd.
ASHOK BHAN, J.
Company Petition No. 64 of 1994
FEBRUARY 9, 1995
JUDGMENT
ASHOK BHAN, J. - The
petitioner for shares had invested a sum of Rs. 5,74,333. Out of this amount a
sum of Rs. 2,50,000 was returned prior to the filing of this petition. The
present petition has been field under section 433(e) and (f) of the Companies
Act, 1956 (hereinafter referred to as "the Act"), for claiming the
balance amount of RS. 3,24,333.
Notice
in this petition was issued in response to which a written statement was filed
admitting the liability to pay Rs. 3,24,333. On the last date of hearing, the
respondents were directed to bring the amount of admitted liability on this
date. Counsel for the respondent has handed over the two drafts the details of
which are as under:
No. and date drawn on Amount
(Rs.)
11315
dated February 8, 1995
RBM 260396 dated January 11, 1995
----------
Total
3,24,333
----------
In
view of the payment made today of the admitted liability, this petition has
become infructuous.
The
petitioner is not entitled to the interest claimed as he was a shareholder and not
a creditor of the respondent-company as per the law laid down by this court in
Pritam Singh Batra v. Deol Agro Oil Ltd. [1995] 82 Comp Cas 685, 687 which
reads as under:
"The
amount was not a deposit and had been paid by the petitioners on their own for
the purchase of shares. It is not that the company had invited applications
from the general public for the purchase of its shares and, therefore, the
amount was never intended to carry and interest thereon. Moreover, the demand
for its return was made through the statutory notice in July, 1994, and the
amount was paid back on October 11, 1994. Thus, there has been no unreasonable
delay on the part of the company in returning the money though, of course, the
petitioners had to file the present petition. It appears that the
promoter-directors of the company have fallen out and the present petition is
the outcome of the dispute between the two groups. I, therefore, hold that the
company is not liable to pay any interest on the share application money which has
since been returned to the petitioners."
The
point involved herein is squarely covered by the above-referred decision.
Accordingly, the petition stands disposed of.
High Court of
v.
Registrar of Companies
D.K. Jain, J.
Crl. Misc. (
March 29, 2000
Section 73 of the Companies Act, 1956, read
with sections 468, 472 and 482 of the Code of Criminal Procedure, 1973 - Shares
- Allotment of shares and debentures to be dealt in stock exchange - Whether
once period stipulated under sub-section (2A) is over, liability of company to
pay interest commences and continues so long as refund with interest is
actually paid and so long as excess amount is not repaid, default under sub-section
(2A) continues and offence under sub-section (2B) also continues - Held, yes -
Whether offence under section 73(2B) being continuing offence within meaning of
section 472 of Code of Criminal Procedure, fresh period of limitation begins to
run at every moment of time during which offence continues and, therefore,
period of limitation as prescribed by section 468 of Code does not have any
application - Held, yes - Whether in its jurisdiction under section 482 High
Court cannot make enquiries into disputed question of fact and record its own
findings thereon and, therefore, in proceeding to quash complaint under section
73(2B) of Companies Act Court cannot express any opinion with reference to
claim that there was no delay in refund of excess amounts along with interest
as envisaged under section 73(2A) - Held, yes
Facts
In November, 1991, the petitioner-company came
out with a public issue of 14% partially convertible debentures and 17% non-convertible
debentures. Subscription list of the issue was to close on 18-11-1991.
Permission under section 73 was granted to the petitioner by the Delhi Stock
Exchange for dealing in the said debentures on 27-1-1992 and, hence, under
section 73(2A), the liability to repay the monies received from the applicants
in excess of the aggregate of the application monies relating to the debentures
in respect of which allotments had been made, arose on 27-1-1992 and the said
excess monies were to be repaid to the applicants within eight days thereof.
According to the petitioner all the shares/debenture certificates, refund
warrants, brokerage and underwriting commission cheques had been mailed on
27-1-1992 itself whereas the statutory date by which the refund orders were to
be sent under section 73(2A) was 4-2-1992. However, on 17-12-1992, a notice
under section 73 was received by the petitioners to show cause as to why action
as contemplated under section 73(2B) should not be taken against them for
committing default under section 73(2A), of not refunding the excess
application monies within the stipulated time. The petitioners replied to the
show-cause notice, denying the allegations. The petitioners received yet
another show-cause notice, dated 30-9-1993, on similar lines and not being
satisfied with the explanation furnished by the petitioners, the Registrar of
Companies filed a complaint against the company, its chairman, Managing
Director and the Secretary, the petitioners herein, on 30-11-1993 under section
73(2B).
The petitioners filed petition under section
482 of the Code of Criminal Procedure, 1973, praying for quashing the
complaint, inter alia, on the grounds that : (i) since the alleged default was
punishable only with fine under section 73(2B), the period of limitation for
filing the complaint had expired on 16-8-1992 and, therefore, the complaint
filed on 30-11-1993 was hopelessly time-barred; and (ii) that the allegations
made out in the complaint did not make out a case for an offence under section
73(2B).
Held
Since it is well settled that the High Court,
in exercise of its jurisdiction under section 482 of the Code of Criminal
Procedure, cannot make inquiries into the disputed questions of fact and record
its own findings thereon, it was not possible to express any opinion with
reference to the alternative plea of the petitioner that there was no delay in
refund of excess amounts along with interest as envisaged under section 73(2A).
This was to be established before the Trial Court.
Section 468 of the Code lays down that a Court
cannot take cognizance of an offence after the expiry of the period of
limitation provided in sub-section (2) of that section. In the instant case,
where the offence was punishable with imprisonment for a term which may extend
to one year, the period of limitation prescribed under clause (b) of
sub-section (2) was one year. However, section 472 of the Code provides that in
the case of a continuing offence, a fresh period of limitation shall begin to
run on every moment of the time during which the offence continues. It is
common ground that if the offence alleged in the instant case was
non-continuing, the complaint would be barred by limitation.
Sub-section (2B) section 73 provides for
punishment for default in not complying with the requirement of sub-section
(2A), namely, non-payment of excess money received. Failure to repay excess
money, as required by sub-section (2A), visits the company and other officers
of the company, who are in default, with the stipulated punishment. Needless to
say that the punishment under sub-section (2B) does not wipe out the liability
to pay interest under sub-section (2A). This is in addition to the payment of
prescribed interest.
When the subscription lists are closed, the
excess money is ascertained with reference to the actual allotments made and it
becomes repayable. The company has no right to retain it and is required to
refund the excess amount forthwith. Once the period stipulated under
sub-section (2A) is over, the liability of the company to pay the interest
commences and continues so long as the refund with interest is actually paid
and so long as the excess amount is not repaid, the default under sub-section
(2A) continues and the offence under sub-section (2B) also continues. Having
regard to the avowed object and purpose of the legislation, namely, that the
company should not be permitted to retain the excess amount received from a
subscriber to his detriment, the offence under section 73(2B) is a continuing
offence within the meaning of section 472 of the Code, according to which a
fresh period of limitation begins to run at every moment of the time during
which the offence continues, and, therefore, the period of limitation as
prescribed by section 468 of the Code does not have any application.
For the foregoing reasons, the petition was
devoid of any merit.
Cases referred to
State of
Judgment
Jain, J. - A short but interesting question that arises for consideration in the
instant case is whether the offence under section 73(2B), read with section
72(2A) of the Companies Act, 1956 (‘the Act’) is a continuing offence within
the meaning of section 472 of the Code of Criminal Procedure, 1973 (‘the Code’)
for that if it is held to be so, then the bar of limitation under section 468
of the Code, to take cognizance of the offence alleged, would not apply.
2. In
November 1991, petitioner No. 1, an incorporated company (of which petitioners
No. 2, 3 and 4 are the Chairman, Managing Director and the Company Secretary,
respectively), came out with a public issue of 14 per cent partially
convertible debentures and 17 per cent non-convertible debentures. Subscription
list of the issue was to close on 18-11-1991. Permission under section 73 of
the Act was granted to the petitioner No. 1 by the Delhi Stock Exchange for
dealing in the said debentures on 27-1-1992 and hence, under section 73(2A),
the liability to repay the monies received from the applicants in excess of the
aggregate of the application monies relating to the debentures in respect of
which allotments had been made arose on 27-1-1992 and the said excess monies
were to be repaid to the applicants within eight days thereof. According to the
petitioner all the shares/debenture certificates, refund warrants, brokerage
and underwriting commission cheques had been mailed on 27-1-1992 itself
whereas the statutory date by which the refund orders were to be sent under
section 73(2A) was 4-2-1992. However, on 17-12-1992, a notice under section 73
was received by the petitioners to show cause as to why action as contemplated
under section 73(2B) should not be taken against them for committing default
under section 73(2A), for not refunding the excess application monies within
the stipulated time. It is averred that the petitioners replied to the
show-cause notice, denying the allegations. In October 1993, the petitioners
received yet another show-cause notice, dated 30-9-1993, on similar lines,
which is said to have been duly replied to. Not being satisfied with the
explanation furnished by the petitioners, the Registrar of Companies filed a
complaint against the company, its Chairman, Managing Director and the Secretary,
the petitioners herein, on 30-11-1993 under section 73(2B). The Trial Court
took cognizance of the complaint and summoned the petitioners to appear before
it. The challenge in this petition under section 482 of the Code is to this
complaint.
3. The
petitioners pray for quashing of the complaint, inter alia, on the grounds that
: (i) since the alleged default was punishable only with fine under section
73(2B), the period of limitation for filing the complaint had expired on
16-8-1992 and, therefore, the complaint filed on 30-11-1993 was hopelessly
time-barred; (ii) the complainant had suppressed material facts, particularly
the issue of the first show-cause notice dated
17-12-1992, with a view to mislead the court with respect to the period of
limitation; and (iii) the allegations in the complaint do not make out a case
for an offence under section 73(2B).
The petition is opposed by the
respondent-Registrar of Companies, mainly on the ground that the present case
for quashing the complaint does not fall in any of the contingencies spelt out
in the decision of the Supreme Court in State of Haryana v. Ch. Bhajan Lal AIR
1992 SC 604 and further, before approaching this Court, the petitioners have
not moved the Trial Court for dropping the proceedings initiated against them.
4. I
have heard Mr. Rakesh Sawhney, the learned counsel for the petitioners and Mr.
Sachin Dutta on behalf of the Registrar of Companies.
5. It
is submitted by Mr. Sawhney that offence under section 73(2B) for contravening
the provisions of section 73(2A) is not a continuing offence and, therefore,
the complaint having been filed beyond the period of limitation as prescribed
under sub-section (2) of section 468 of the Code, the Court should not have
taken cognizance. Alternatively, it is also urged that even on the facts, there
being no delay in refunding the excess amount etc., no case for complaint under
section 73(2B) is made out.
6. On
the contrary Mr. Sachin Dutta, the learned counsel for the respondent,
contended that the offence under section 73(2B), for default under section
73(2A), is a continuing offence; section 468 of the Code is not attracted and,
as such the learned Magistrate was justified in entertaining the complaint and
taking cognizance of the offence. In support, reliance is placed on a few
judicial pronouncements dealing with : section 113 of the Act -(failure to
issue certificates); sections 162(1) and 220(3) - (failure to submit balance
sheet etc., within time); section 454 - (non-filing of statement of affairs in
time) and sections 159 and 162 - (failure to file the annual return), holding
that breach of any of these provisions was a continuing offence and, on this
analogy, it was contended that the period of limitation provided by section 468
of the Code did not have any application in the instant case as well and the
offence under section 73(2B) of the Act will be governed by section 472 of the
Code. However, no direct pronouncement on the issue has been cited.
7. Since
it is well settled that this Court, in exercise of its jurisdiction under
section 482, cannot make inquiries into the disputed questions of fact and
record its own findings thereon, it is neither possible nor do I propose to
express any opinion with reference to the alternative plea of the learned
counsel for the petitioner that there was no delay in refund of excess amounts
along with interest as envisaged under section 73(2A). This is to be
established before the Trial Court.
8. Section
468 of the Code lays down that a Court cannot take cognizance of an offence
after the expiry of the period of limitation provided in sub-section (2) of
that section. In the instant case, where the offence is punishable with
imprisonment for a term which may extend to one year, the period of limitation
prescribed under clause (b) of sub-section (2) is one year. However, section
472 provides that in the case of a continuing offence, a fresh period of
limitation shall begin to run on every moment of the time during which the
offence continues. It is common ground that if the offence alleged in the
present case is non-continuing, the complaint would be barred by limitation.
9. The
expression ‘continuing offence’ has not been defined in any Statute, including
the Code, where it appears. However, the Supreme Court had the occasion to
consider the question as to whether a particular offence is a continuing
offence. In Bhagirath Kanoria v. State of M.P. AIR 1984 SC 1688, while
considering the question whether failure to pay the employer’s contribution to
the provident fund within the time prescribed therefor was a continuing offence
for the purpose of section 14(2A) of the Employees Provident Fund and Family
Pension Act, 1952, the Supreme Court observed that the question whether a
particular offence is a continuing offence must necessarily depend upon the
language of the statute which creates that offence, the nature of the offence
and the purpose which is intended to be achieved by constituting the particular
act as an offence.
10. Again
in Maya Rani Punj v. CIT [1986] 157 ITR 330/24 Taxman 1 (SC), while construing
the provisions of section 271(1)(a) of the Income-tax Act, 1961 and considering
the question whether the default of non-filing of the return within the time
stipulated by law was a continuing offence, the Supreme Court held as follows :
“The imposition of penalty not confined to the
first default but with reference to the continued default is obviously on the
footing that non-compliance with the obligation of making a return is an
infraction as long as the default continued. Without sanction of law, no
penalty is imposable with reference to the defaulting conduct. The position
that penalty is imposable not only for the first default but as long as the
default continues and such penalty is to be calculated at a prescribed rate on
monthly basis is indicative of the legislative intention in unmistakable terms
that as long as the assessee does not comply with the requirements of law, he
continues to be guilty of the infraction and exposes himself to the penalty
provided by law.” (p. 341)
It was thus held that if a duty continues from
day to day, the non-performance of that duty from day to day was a continuing
wrong and the concept of continuing offence does not wipe out the original default
and it keeps the contravention alive day by day till the breach continues. It
is significant to note that though in the case of Maya Rani Punj (supra) one of
the factors taken into consideration for holding the default of non-filing of
return as a continuing offence was the prescription of rate of penalty on
monthly basis but section 14(2A) of the Employees Provident Fund and Family
Pension Fund Act does not prescribe for payment of fine for every day or every
month for which the default in paying the employer’s contribution to the fund
continues. Yet the Supreme Court in Bhagirath Kanoria’s case (supra) had held
that the offence of which the appellants were charged, namely, non-payment of
the employer’s contribution to the provident fund before the due date, was a
continuing offence, considering the object and purpose of that Act.
11. In
the light of the above broad test, I take up the question whether the offence
under section 73(2B) is a continuing offence. Section 73, as it stood prior to
1975, did not contain any specific provision compelling the company or its
directors to repay the amounts received in excess of the aggregate of the
application money relating to shares or debentures in respect of which
allotments have been made. Therefore, in order to protect the interests of the
applicants, who would be subscribing to the issue, elaborate procedure has been
laid down to ensure that the company and its directors do not retain the
over-subscribed subscription for unusually long period and derive undue benefit
therefrom.
12. Sub-sections
(2A) and (2B) to section 73 were inserted by the Companies (Amendment) Act,
1974 with effect from 1-2-1975 and after the omission of proviso to sub-section
(2A) and further amendments carried out by the Companies (Amendment) Act, 1988
with effect from 15-6-1988, the
sub-sections read as under :
“(2A) Where permission has been granted by the
recognised stock exchange or stock exchanges for dealing in any shares or debentures
in such stock exchange or each such stock exchange and the moneys received from
applicants for shares or debentures are in excess of the aggregate of the
application moneys relating to the shares or debentures in respect of which
allotments have been made, the company shall repay the moneys to the extent of
such excess forthwith without interest, and if such money is not repaid within
eight days, from the day the company becomes liable to pay it, the company and
every director of the company who is an officer in default shall, on and from
the expiry of the eighth day, be jointly and severally liable to repay that
money with interest at such rate, not less than four per cent and not more than
fifteen per cent, as may be prescribed, having regard to the length of the
period of delay in making the repayment of such money.
(2B) If default is made in complying with the
provisions of sub-section (2A), the company and every officer of the company
who is in default shall be punishable with fine which may extend to five
thousand rupees, and where repayment is not made within six months from the
expiry of the eighth day, also with imprisonment for a term which may extend to
one year.”
Sub-section (2A) was inserted to cover cases
where permission of the stock exchange has been obtained, but the shares or debentures
have been over-subscribed and the company is consequently in possession of
excess amounts. The sub-section makes the company and its directors liable to
repay the excess amounts forthwith. If the excess amount is not repaid within
eight days from the date the company becomes liable to pay it, the company and
the directors are made jointly and severally liable to repay such amount with
interest at such rate, as may be prescribed, which may vary between 4 per cent
to 15 per cent, having regard to the length of the period of delay in making
repayment of such money. Vide rule 4D of the Companies (Central Government)
General Rules and Forms, 1956, the rate of interest has been prescribed at 15
per cent per annum.
Sub-section (2B) provides for punishment for
default in not complying with the requirement of sub-section (2A), namely,
non-payment of excess money received. Failure to repay excess money, as
required by sub-section (2A) visits the company and other officers of the
company, who are in default, with the stipulated punishment. Needless to say
that the punishment under sub-section (2B) does not wipe out the liability to
pay interest under sub-section (2A). This is in addition to the payment of
prescribed interest.
As noted above, under sub-section (2A), the
company and its officers are obligated to repay the over-subscribed amount paid
by the persons who have responded to the prospectus issued by the company. When
the subscription lists are closed, the excess money is ascertained with
reference to the actual allotments made and it becomes repayable. The company
has no right to retain it and is required to refund the excess amount
forthwith. Once the period stipulated under sub-section (2A) is over, the
liability of the company to pay the interest commences and continues so long as
the refund with interest is actually paid. So long as the excess amount is not
repaid, the default under sub-section (2A) continues and the offence under
sub-section (2B) also continues. Having regard to the avowed object and purpose
of the legislation, namely, that the company should not be permitted to retain
the excess amount received from a subscriber to his detriment, I am of the
considered view that the offence under section 73(2B) is a continuing offence
within the meaning of section 472 of the Code, according to which, a fresh
period of limitation begins to run at every moment of the time during which the
offence continues, and, therefore, the period of limitation as prescribed by
section 468 of the Code does not have any application.
13. For
the foregoing reasons, the petition is devoid of any merit and the same is
accordingly dismissed. Interim orders stand vacated. There will, however, be no
order as to costs.
14. The
Trial Court shall now proceed with the trial in accordance with law,
uninfluenced by the observations, if any, made in this judgment on the merits
of the case.
15. Before
parting with the case, I must record my deep appreciation of the assistance
rendered by Mr. Sachin Dutta, a young Advocate, who, appearing for his senior,
argued the matter on behalf of the Registrar of Companies. His preparation and
presentation of the case was impressive.
[1937] 7
COMP. CAS. 230 (
v.
SIR DOUGLAS
YOUNG, C.J. AND MONROE, J.
LETTERS PATENT APPEAL NO. 3 OF
1936
IN CIVIL APPEAL NO. 566 OF 566 OF
1935
APRIL 20,
1937
Madan Gopal, for the Appellant.
I.K. Kaul, for the Respondent.
Douglas Young —These
are appeals under the Letters Patent from the Judgment of a single Judge of
this Court, sitting in appeal from the District Judge,
The Mumtaz Bank Ltd. was ordered to be wound up by the
learned District Judge, and the name of Syed Masud Ali Chishti was placed on
the list of contributories. He filed an objection, alleging that the one
hundred shares standing in his name had been duly transferred to two persons
one called Mohammad Abdulla and the other Taj Din, fifty each. In his judgment
the learned District Judge directs attention to two important points: (a) No
instrument of transfer such as is required by the articles of the Company was
executed in either case, (b) Neither Mohammad Abdulla nor Taj Din made an
application to the Company to have the shares registered in his name.
What the learned District Judge found did happen was
this:—The objector wanted to get rid of his shares and the shares were
surrendered to the Bank in the expectation that they might later be alloted to
Mohd. Abdulla and Taj Din: the Directors sanctioned an allotment but there was
no evidence that Mohammad Abdulla or Taj Din wanted to have the shares allotted
to them: there was no instrument of transfer, stamped and signed by the
transferees. The learned Judge held that the surrender was illegal and that
there was certainly no transfer duly made as alleged by the objector. The
learned appellate Judge distinguished between the two cases. He also discussed
some facts, which by reasons of the view that the learned District Judge took
of the illegality of the so-called surrender it was unnecessary for the latter
to consider. For the purpose of settling a dispute between rival factions among
the Directors a meeting of the Board was held on the 22nd of May 1930 and it
was then decided that Masud Ali's share should be transferred to Mohammad
Abdulla and another gentleman, 50 shares to each: and it was recorded that the
purchasers (though the name of one was not mentioned) had paid Rs. 250 each.
On the same day Masud Ali signed two transfer forms each
for 50 shares the shares are not identified by their numbers and though the
name Mohammad Fazil appears in the space designed for the transferee's
signature, there is written over it in red ink, ' Transferee's name withheld':
these transfers are not stamped (and, we may add, neither are nor ever were of
any legal significance whatever). On the 30th of May, 1930 at a meeting of the
Board of Directors the resolution of the 22nd May 1930 was affirmed and the
transfer of fifty shares in the name of Mohammad Abdulla, retired Engineer of
Pasrur was sanctioned. On the 10th of October 1930 a return of allotment was
sent to the Registrar of Joint Stock Companies in which Mohammed Abdulla's name
appeared as allottee (not as stated by the learned appellate Judge as
transferee) of fifty shares.
The learned appellate Judge found that it did not appear
that fifty of Masud Ali's shares had been allotted by the Bank to another
person and he held that in respect of these shares Masud Ali still remanied a
share-holder. He held that the remaining fifty shares had been transferred to
Mohammad Abdulla and that "in the peculiar circumstances of the case he
(i.e., Masud Ali) ceased to be a share-holder in respect of these shares on the
30th of May 1930 the date on which the transfer legally took place.
Against this order both the Official Liquidator and Masud
Ali appealed.
In our opinion, the learned appellate Judge was correct in
holding that in respect of the first fifty shares Masud Ali continued to be
member of the Company: and was incorrect in holding that in respect of the
remaining fifty a transfer had taken place. Misunderstanding seems to have
arisen in this case by a failure to distinguish between a transfer and an
allotment. The document sent to the Registrar of Joint Stock Companies was a
return of allotments: this return was made pursuant to Section 104 of the
Indian Companies Act 1913 and ought to have been made in respect of each set of
shares allotted within one month after allotment: an allotment of shares is an
act of the Company by which applicant for shares becomes the holder of
unappropriated shares: shares standing in the name of A cannot be allotted to B
by the Company, even with A's consent: such shares may be transferred by A to
B, the Company's powers of interference in respect of such transfer being
determined by its Articles of Association.
What the objector has relied on in the present case is a
transfer by him to Mohammad Abdulla: and in our view the sole question is
whether there was a transfer to him. Article 30 of the Articles of Association
provides that "The instrument of transfer of any share shall be executed
by both the transfer or and the transferee etc."
It is, therefore, essential that there should be an
instrument of transfer, i.e., a. written instrument purporting to transfer
shares from one person to another. The only document produced as an instrument
of transfer of Masud Ali's shares is the Transfer form which has already been
mentioned. It is clear, therefore that these shares have not been transferred
to Mohammad Abdulla.
This finding is sufficient to dispose of the case. But it
appears also from the evidence that the case put forward by the objector is
false. His own witness Dr. Sultan Mohammad, Secretary of the Company, swore
that the shares were not, as alleged by the objector and recorded in the
Minutes of the 22nd of May 1930, sold to Mohammad Abdulla and Taj Din: that
though the shares were allotted to them, they did not pay anything for them and
that attempts to get money from them made by the Bank failed. Taj Din was
already a share-holder, but there is nothing to show that Mohammad Abdulla is a
real person.
There is a further point which throws doubt on this whole
transaction. The name of the transferee which has been struck out in the
Transfer form is Mohammad Fazil Naik. The share certificate of Masud Ali is an
exhibit. On the back of it, there is a space for noting any transfer: there are
two entries, the first struck out with the words "withheld 27-3-31"
over written:—
|
Certification No. |
Date of transfer |
Name of transferee |
Distinctive numbers. |
Date of meeting |
Passed by |
|
186. |
23-3-31 |
B. Mohd Fazil Naik. |
934-1033 |
23-3-31 |
Board of Director. |
|
185. |
8-6-31 |
Khan Niamat Ullah Khan. |
934-1033 |
8-6-31 |
Do |
The application for the winding up of the Company was made
on the 25th May 1931. No explanation of these entries has been given: they are
inconsistent with the alleged transfer to Mohammad Abdulla and Taj Din: and
there can be no doubt that the forms of Transfer which have been produced
relate not to transfers to Mohammad Abdulla and Taj Din, but to an intended
transfer to Mohammad Fazil Naik which was never carried out.
The most favourable view towards the objector that receives support from the record is that it was represented to him that Mohammad Abdulla and Taj Din would take over his shares and had paid for them. If the objector did receive Rs. 500 as consideration for a transfer, the money did not come from Mohammad Abdulla and Taj Din: it was Malik Lal Khan, who paid it, if the objector's evidence is believed and Malik Lal Khan has not been called as a witness.
We allow the appeal of the Official Liquidator, dismiss the appeal of Masud Ali, the objector, and restore the judgment of the learned District Judge. Masud Ali will pay the costs of the Official Liquidator of the appeal to the learned Single Judge and of both appeals under the Letters Patent.
[1948] 18 Comp Cas
201 (PC)
In the Privy Council
v.
The Electric Wire Co. of
Palestine, Ltd.
Lord Simonds, Lord Morton of Henryton and Sir
Madhavan Nair
March 8, 1948
Sir V. Holmes, K.C, and Buckley, for the appellant.
R. Jennings, K. C., and Phineas Quass, for the respondent.
Lord Simonds. —In this appeal, which is brought from a judgment Supreme Court, sitting as a Court of Appeal, Jerusalem, affirming the judgment of the; District Court of Haifa a number of questions have been raised which their Lordships do not think it necessary to discuss. They concur in the view of the Supreme Court that the appellant's case can be shortly disposed of and, agreeing as they do with that Court's reasons and conclusion, do not propose to examine at length faces and contentions which are not strictly relevant to the question now to be considered.
The respondent is a public company registered in
On the 12th April, 1935, the eight shareholders purported to pass a resolution which provided that of the unissued share capital of the company L.P. 11,000 should be issued as preference shares carrying the dividend the rights set out therein. The validity of this resolution and of the subsequent issue of preference shares has been challenged on diverse grounds. Without determining that question their Lordships will assume for the purpose of this appeal that the issue was invalid.
On 19th April 1935, the appellant made a formal application for L.P. 775 of the said preference shares to be paid for by Reichsmarks in Germany and such shares were allotted to her on the 7th July, 1935, after which the relevant certificate was issued to her, and she was duly registered as the proprietor thereof. The transaction was somewhat complicated by the fact that, in consequence of an arrangement made between the respondent company and a company which was conveniently called "Haavara" and of the assumption by the appellant of the obligation to pay certain so-called "transfer fees," she paid in Germany a sum of R.M. 11,039.24, of which R.M. 9,403.75 represented L.P. 775 at the then rate of exchange of R.M. 12.25 to L.P. 1 and the balance of R.M. 1,545.49 the fees which she had agreed to pay, and by the further fact that upon the footing that she had been overcharged in respect of those fees "Haavara" credited the respondent company and the respondent company in turn credited her with a certain sum of R.M. which was satisfied by the allotment to her of 38 ordinary-shares of the company. In considering the question, to which they must shortly come, whether the appellant is entitled to recover iron; the respondent company the money paid by her for the preference shares upon the footing of a total failure of consideration, their Lordship are content to ignore and treat as the outcome of a separate transaction the receipt by her of the 38 ordinary shares.
The appellant held her shares for four years and then sold her 775 preference shares and also her ordinary shares, of which she had increased her holding to 50, through the Holland Bank Union for L P. 116,250 and L.P. 3,750 respectively. The transaction is somewhat obscure but it is not in doubt that she executed transfers in blank which were ultimately on 28th September, 1941, completed as to the preference shares in favour of the Palestine Independent Trust Association, Ltd., and as to the ordinary shares in favour of one Bromberger and that these transfers were duly registered with the respondent company and the old certificates cancelled and new once issued and the transferees placed on the register of members of the company in place of the appellant.
It has not been suggested that at this time any doubt had arisen in the mind of the appellant as to the validity of the is issue of preference shares but in the same year another original allottee of such shares commenced an action against the company and certain of its directors claiming repayment of the money paid by her for such shares upon the ground (to put it shortly) that they had no been validly issued. And in these proceedings on the 18th February, 1943, an order was made confirming terms of compromise by which, inter alia, the company admitted that the resolution of 12th April 1935, was not properly passed and that the allotment of preference shares to the plaintiff in those proceedings was void. Shortly thereafter the respondent company circularised the then registered holders of preference shares offering to repay them the amounts paid by them for their shares.
No similar offer having been made to the appellant who had previously disposed of her shares, on the 28th march 1943, her advisers wrote to the company demanding repayment of the sums paid by her for her 775 preference shares and stating that she withdrew her application for preference shares as there had been a delay for nearly 8 years, and that she would repudiate any allotment of shares the company might be advised to make in the future.
At the same time they wrote a letter to the Holland Bank Union (to which, since learned consel for the appellant relies on it, it is proper to refer) enclosing a copy of their letter to the company and saying "Now we wish to make it clear that our client does not desire to collect from the company the amount due to her from it and at the same time to retain the sum she received from you in 1939." It cannot, however, fail to be observed that there is an implication that, if for any reason the appellant cannot recover from the company, she will not relinquish the money received from the bunk.
The company having refused to accede to the appellant's demand, she brought the action out of which this appeal arises. By it she claimed a refund of the sum paid by her for the. 775 preference shares alleging that she "did not receive the consideration which she bargained for or any consideration." Her action in simplest terms was for money had and received upon a total failure of consideration and it was frankly admitted by her learned counsel upon this appeal that, if she could not sustain that plea, her action was rightly dismissed and this appeal must fail.
The question then is whether there was a total failure of consideration moving from the respondent company. Their Lordships would at once dismiss as irrelevant to the determination of this question the fact that, the appellant spontaneously offered in a certain event to refund to the bank the money she had received upon the sale of her shares. Equally irrelevant is the fact that she obtained substantially less than she had paid for her shares. Her rights against the company must be the same whether she sold them at their par value or for more or less. Their Lordships agree with the learned Judges of the Supreme Court in thinking that the relevant plea can by no means be sustained. It appears to them that, having been duly registered as a shareholder and having parted for value with her shares by a sale which the company recognised by issue of a share certificate to, and registration of, her transferee, she got exactly that which she bargained to get. Whether that transferee, finding that the shares had not been validly issued would have any claim against her is a question which does not fall to be determined. But it appears to their Lordships to be idle to suggest that one who has parted with her shares for value can at a later date (it may be against the wish and against the interest of her transferee) challenge the validity of the issue and, succeeding in that challenge, then claim that she received something of no value and that there was a total failure of consideration. On the contrary, whether the issue was valid or invalid, a matter no longer important to her but vitally important to her transferee, she received something from the company which was worth to her just what she got for it. Their Lordships do not question the general proposition, that, where an ultra vires issue of shares has been made, the subscribers are entitled to get their money back, but this does not justify the claim of one, who has sold her shares, at a later date to assert that they have not been lawfully issued, much less to assert, contrary to the plain fact, that there has been, so far as she was concerned, a total failure of consideration. Learned counsel for the appellant relied on the authority of Rowland v. Divall. That case might have assisted him, if the fact was that the appellant still held the shares, even though she had received a dividend upon them. Upon this their Lordships express no opinion. But it does not avail him in a case where the shareholder has sold his shares.
For these reasons it is unnecessary to investigate the question whether or not the issue was for any reason invalid—a question indeed which it would, as their Lordships think, in any case be improper to discuss in the absence of the transferee, the party truly interested. Upon the broad ground that the appellant has failed to sustain the plea of total failure of consideration, their Lordships are of opinion that this appeal should be dismissed with costs and they will humbly advice His Majesty accordingly.
[1995]
82 COMP. CAS. 591 (SC)
v.
Subhash
Himatlal Desai
M. N. VENKATACHALIAH, CJI
P. B. SAWANT AND S. MOHAN, JJ.
CIVIL APPEAL NOS. 1750 AND 1751 OF 1994
SEPTEMBER 9, 1994
S. MOHAN, J. - Leave
granted.
All
these matters can be dealt with under a common judgment since the issue
involved in one and the same.
The
appellant-company was incorporated as a public limited company on March 23, 1992,
in the name of Bloom Decoratives Limited. Subsequently, its name was changed to
Bloom Dekor Limited. The registered office was formerly located at 1/F,
Dhanlaxmi Chambers, Ashram Road, Ahmedabad. It was shifted to No. 8, National
Highway, Oran, District Sabarkantha, North Gujarat, with effect from November
10, 1993. However, it continues to have its corporate office in Ahmedabad.
The
company received an industrial licence on June 21, 1993, from the Government of
India for the manufacture of decorative Industrial laminates. The company went
for public issue of 23,65,000 equity shares of which 4 lakhs equity shares have
been reserved for NRIs of Rs. 10 each for cash at par aggregating to Rs. 236.50
lakhs. The company made applications to the Ahmedabad Stock Exchange and the
Bombay Stock Exchange for permission to deal in and for an official quotation
of the equity shares being offered in terms of its prospectus dated August 10,
1993. The company has filed a copy of its prospectus under section 60 of the Companies
Act, 1956 (for short “the Act”), with the Registrar of Companies, Gujarat, for
registration. The issue opened on September 9, 1993. It was over subscribed.
Therefore, it was closed on September 14, 1993, being the earliest closing
date. The latest closing date announced in the prospectus was September 20,
1993.
Hereafter,
strange happenings take place. A group of persons, Viren Thakkar and his
associates, seem to have entered into large scale out of the ring transactions
in the sale and purchase of company shares. On that account, they would be
required to make good their speculative losses once the company’s shares are
listed and traded in the market. To delay this the first suit, C. S. No. 90 of
1993, was filed at Morvi. This place was chosen because Viren Thakkar’s
sister’s husband (brother-in-law), Ramniklal Thakkar, resides there. The same
Ramniklal Thakkar appears to be familiar with the court proceedings. In the
said suit, C. S. No. 90 of 1993, the plaintiff, Bharat Kherajbhai Chandrana, through
his advocate, Mr. Tarun V. Shah of Ahmedabad, obtained late in the evening an
ex parte order dated November 20, 1993, restraining the company from making
allotment of the shares of the public issue or to take any further proceedings
in relation thereto including issue and despatch of share certificates.
The
appellant moved the High Court. This order of November 30, 1993, was stayed on
December 8, 1993.
Viren
Thakkar’s wife’s brother, Ramesh Thakkar, filed a Civil Suit No. 6630 of 1993,
before the City Civil Court at Ahmedabad. He also obtained therein an ex parte
ad interim order in terms similar to the ad interim order of Morvi Court dated
November 30, 1993. The same advocate, Mr. Tarun V. Shah, appeared for the
plaintiff. The said order was served upon the appellant-company after 6.30 p.m.
on December 9, 1993. Thereupon, the company filed an appeal A. O. No. 527 of
1993, before the Gujarat High Court. This was filed on December 10, 1993.
December 11 and 12, 1993, were holidays. Hence, the appeal was circulated on
December 13, 1993, for orders. On that very date the same advocate, Mr. Tarun
V. Shah, filed Special Civil Application No. 13891 of 1993, on behalf of Grahak
Suraksha Samiti before the Gujarat High Court. Inter alia, an injunction
restraining the Ahmedabad and Bombay Stock Exchanges from granting any
permission for trading/dealing in equity shares of the company in other stock
exchanges in any manner and restraining the company and its directors from
issuing transferring or dealing in any manner with the equity shares of the
company, was sought.
On
December 14, 1993, A. O. No. 527 of 1993 was admitted and the ex parte ad
interim order was stayed.
On
the same day, other associates Arvind B. Sheth and Kirtibhai Ghadiya filed
Civil Suit No. 6683 of 1993, before the City Civil Court at Ahmedabad at about
7.45 p.m. on December 14, 1993. An ex parte ad interim order came to be passed.
The same advocate, Mr. Tarun V. Shah, appeared. A notice of the said order was
made returnable on December 20, 1993.
On
December 15, 1993, the High Court took up Special Civil Application No. 13891
of 1993. Notice was ordered to the respondent returnable on December 20, 1993.
The application for interim relief was directed to be posted on December 18,
1993.
After
midnight of December 17, 18, 1993, Rashmin Ghadiya, who is stated to be a
relative of the said Viren Thakkar, filed a plaint through the advocate, Mr.
Tarun V. Shah, before the Civil Judge (J. D.) at Prantij for a declaration that
the company’s issue was void since the requisite permission of the stock
exchange under section 73 of the Act was not obtained. An application for
interim injunction restraining the company, the stock exchanges at Ahmedabad,
Jaipur, Bombay, Rajkot Shareholders Association and Rajkot Share Dealers
Association from issuing, transferring, selling or dealing in any manner in the
equity shares of the company and restraining the company for utilising the
funds of the public issue in any manner till the disposal of the suit.
On
this day (December 18, 1993), the Morvi Court dismissed the application for
interim relief for default. However, Mr. Tarun V. Shah applied for restoration
on the ground that he was delayed in reaching the court on account of the
farmers’ agitation. This application stood adjourned to January 20, 1994.
On
December 20, 1994, it appears that the learned judge of the High Court who was
dealing with Special Civil Application No. 13891 of 1993, specifically asked
Mr. Tarun V. Shah whether any suit had been filed. The answer was given in the
negative. This was countered by the appellant’s advocate that three suits had
been filed one at Morvi and two in Ahmedabad. Thereupon, Tarun V. Shah had
stated that he had nothing to do with those suits nor was he concerned in any
manner.
It
requires to be mentioned that Mr. Tarun V. Shah appeared in the city civil
court in Civil Suit No. 6683 of 1993, during the second sitting when the
question of extension of the ad interim ex parte order came up for
consideration.
Notwithstanding
all the above, another suit, Special Civil Suit No. 25 of 1994, came to be
filed before the learned Civil Judge (Senior Division) Baroda, on January 8,
1994. An ex parte order was obtained.
The
Ahmedabad City Civil adjourned the hearing of the application for interim
relief in Civil Suit No. 6683 of 1993 to January 12, 1994, till the date the ex
parte order came to be extended notwithstanding the opposition of the
appellant-company. On January 12, 1994, the application could not be taken up
for hearing for want of time and the matter was adjourned to January 19, 1994.
On
January 13, 1994, the company filed its counter to the application for interim
relief in Baroda, Suit No. 25 of 1993. Here again, Mr. Tarun V. Shah appeared
before the Baroda Court and sought time for publication of notice under Order
I, rule 8 of the Civil Procedure Code. On this score, the court was disinclined
to adjourn the matter. Therefore, time was sought for a rejoinder whereupon the
court adjourned the matter to January 17, 1994.
The
ground on which the various suits and the writ petition came to be filed was
that the appellant-company did not obtain the necessary permission from the
Ahmedabad and Bombay Stock Exchanges to deal in shares or debentures as
contemplated under section 73 of the Act. In support of this averment reliance
was placed on certain letters addressed by the stock exchanges of Ahmedabad and
Bombay to share brokers that the share of the company had not been listed on
the exchange for dealing. It was also alleged that the Registrar to the issue
had not made allotments in accordance with the SEBI guidelines. There were
irregularities both in the matter of applications for shares and making
allotments. Further, there was violation of section 33 of the Act. It is under
these circumstances questioning the propriety and the correctness of these
interim orders that the civil appeal out of SLP(C) No. 878 of 1994, against the
judgment dated January 9, 1994, by the City Civil Judge (Senior Division),
Baroda, in Special Civil Suit No. 25 of 1984, and the civil appeal arising out
of SLP(C) No. 874 of 1994, passed by the City Civil Judge, Ahmedabad, in C. S.
No. 6683 of 1993, have come to be preferred.
T.
P. Nos. 26 to 30 of 1994 have been filed for transferring Special Civil Suit No.
90 of 1993, Civil Suits Nos. 6630 and 6683 of 1993, Civil Suit No. 85 of 1993,
and Special Civil Suit No. 25 of 1994, to the High Court of Gujarat at
Ahmedabad or in the alternative for an order for transferring the said suits
pending at Morvi, Prantij and Baroda to the city civil court at Ahmedabad.
Learned
counsel for the appellant vehemently argues that all the suits and the writ
petition are frivolous and vexatious in nature. They have been resorted to by a
caucus of individuals with a view to defeat or delay their liability in illegal
speculative transactions in the shares of the company. They are determined to
see that the company shares are not dealt in on the Ahmedabad and Bombay Stock
Exchanges or that no quotations for them are available with a view to see that
the prices of the company’s shares go down in the transactions at the stock
exchanges.
What
is surprising in this case is that the suits were filed before courts which
have no jurisdiction whatever, namely, Morvi and Vadodara, though in the name
of different persons, all backed by Ramlal Thakkar. No part of the cause of
action has arisen within the jurisdiction of either of these courts. Then
again, the courts are approached at the last minute. Yet an order of ad interim
injunction came to be passed without even notice to the appellant. The
principles governing the grant of ad interim injunction in matters of this kind
have been completely ignored. As a matter of fact, this court in Morgan Stanley
Mutual Fund v. Kartick Das [1994] 81 Comp. Cas. 318; JT 1994 (3) SC 654 has
clearly indicated such principles. Tested on those principles, the impugned
orders are unsupportable.
The
main grievance of the respondent was that the requisite permission to deal in
debentures and shares had not been obtained from Ahmedabad and Bombay Stock
Exchange. Firstly, the statements of the respondent are clearly false in Civil
Suit No. 6683 of 1993. The Ahmedabad Stock Exchange filed a statement that it
had approved the list of this appellant for dealing in the exchange on November
22, 1993. The company secretary of the Ahmedabad Stock Exchange by his letter
dated November 24, 1993, informed the company that the basis of allotment of
the public issue of equity shares of the company was approved by the Ahmedabad
Stock Exchange. It also conveyed to the appellant its no objection of the stock
exchange for utilisation of the issue funds. Again, on January 7, 1994, the
Ahmedabad Stock Exchange approved the appellant’s application seeking
permission for the listing of the equity shares and to deal in the exchange and
granted the necessary permission under section 73 of the Act with effect from
November 22, 1993. The Ahmedabad Stock Exchange by its circular dated January
7, 1994, notified the new enlistment for information of the members of the
stock exchange.
Likewise,
the Bombay Stock Exchange by its letter dated November 23, 1993, informed the
appellant-company that the exchange was pleased to approve the company’s
listing application seeking permission for equity shares of the company to be
dealt in on the exchange and that in order to facilitate commencing of normal
and regular trading in the company’s equity shares on the exchange the company
should complete without any further delay the formalities mentioned in the enclosure
to their earlier letter dated September 27, 1993. An affidavit, exhibit 48,
dated January 8, 1994, has been filed in the said Civil Suit No. 6683 of 1993
of J. J. Bhat, Joint General Manager of the Bombay Stock Exchange, stating,
inter alia, that the stock exchange took a decision to approve the listing
application seeking permission for the equity shares of the company to be dealt
in on the stock exchange and that the stock exchange accordingly wrote a letter
dated November 23, 1993, to the company informing the latter of the said
decision, that earlier the stock exchange had written a letter dated September
27, 1993, to the company enclosing therewith the list of formalities to be
completed by the appellant.
Even
as a question of law in order to comply with the requirements of section 73 of
the Act the actual listing is not required.
By
resorting to successive suits and obtaining the impugned interim orders the
respondents have caused immense damage to the appellant and thereby prevented
the appellant-company’s recovery of further call money which comes to about Rs.
63 lakhs. Therefore, this is a clear case in which this court should award
heavy costs to the appellant.
In
meeting these submissions, learned counsel for the respondents submits that where
the respondents had a genuine grievances about the non-compliance with the
provisions of the Act certainly they are entitled to approach the court. There
case is that section 73 of the Act has been violated. The court while granting
interim orders was satisfied that there was a prima facie case. The fact that
the same advocate appeared is of little consequence. It cannot be said that the
Morvi and Baroda Courts did not have jurisdiction since the applicants for the
shares were residing in those respective places. In any event, these are
interim orders. This court normally does not interfere under article 136 of the
Constitution of India with interim orders since final adjudication can be had
from the courts below.
From
the above narration, it is clear that the respondents have been clearly
indulging in judicial adventurism. A string of suits comes to be filed one
after the other. Late orders are obtained and that too on applications filed
without notice to the appellant. Unfortunately, the courts below wittingly or
otherwise have aided this judicial adventurism without even determining whether
they had jurisdiction. Take for instance, the suit in Morvi Court. How does the
said court get jurisdiction ? What is the cause of action ?
By
“cause of action” it is meant every fact, which, if traversed, it would be
necessary for the plaintiff to prove in order to support his right to a
judgment of the court. (Cooke v. Gill [1873] 8 CP 107). In other words, a
bundle of facts which it is necessary for the plaintiff to prove in order to
succeed in the suit. This court had occasion to refer to the case in Cooke v.
Gill [1873] 8 CP 107 in A. K. Gupta & Sons Ltd. v. Damodar Valley
Corporation, AIR 1967 SC 96. At page 98, it is stated thus :
“The
expression ‘cause of action’ in the present context does not mean ‘every fact
which it is material to be proved to entitle the plaintiff to succeed’ as was
said in Cooke v. Gill [1873] 8 CP 107, 116, in a different context, for if it
were so, no material fact could ever be amended or added and, of course, no one
would want to change or add in immaterial allegation by amendment. That
expression for the present purpose only means, a new claim made on a new basis
constituted by new facts. Such a view was taken in Robinson v. Unicos Property
Corporation Ltd. [1962] 2 All ER 24 (CA) and it seems to us to be the only
possible view to take. Any other view would make the rule futile. The words
‘new case’ have been understood to mean ‘new set of ideas’ : Dornan v. J. W.
Ellis & Co. Ltd. [1962] 1 All ER 303 (CA). This also seems to us to be a
reasonable view to take. No amendment will be allowed to introduce a new set of
ideas to the prejudice of any right acquired by any party by lapse of time.”
If
the matter is viewed as a contract no part of the cause of action has arisen
within the jurisdiction of Morvi Court. The same principle will be applicable
to the suit before the Civil Court (Senior Division), Baroda, more so, in the
light of the Explanation to section 20 the appellant-company having its
registered office in Ahmedabad. Therefore, we could expect the court to examine
these aspects before granting an interim order. So much for cause of action.
The
gravamen of the charge by the plaintiffs in the various suits and the writ
petition before the High Court was that the Ahmedabad and Bombay Stock
Exchanges mentioned in the prospectus of the appellant-company have not granted
permission for the shares or debentures to be dealt in on the stock exchanges
as contemplated under section 73 of the Act. For making this statement reliance
is placed on three letters written to a stock broker dated December 13, 1993,
December 9, 1993, and December 24, 1993, by the Ahmedabad and Bombay Stock
Exchanges, respectively. Barring the statement that such information is
obtained from reliable sources, the source of information is not specified.
Leave alone that, the court had not even cared to examine the aspect whether
actual listing under section 73 of the Act is necessary.
A
factual examination reveals that on November 24, 1993, the Ahmedabad Stock
Exchange wrote the following letter to the appellant :
“We
refer to the basis of allotment of your company, approved by our stock
exchange.
As
desired, we wish to convey the no objection of the stock exchange for
utilization of issue funds.”
The
counter-affidavit of the executive director (M. L. Soneji) of the Ahmedabad
Stock Exchange, inter alia, states :
“Since
defendant No. 3 has already approved the listing application for defendant No.
5 seeking permission for its equity shares to be dealt with on Stock Exchange,
Ahmedabad, on November 22, 1993. The prayer for ad interim injunction to that
extent cannot be and may not be granted. Defendant No. 3 has also received by
FAX a letter No. List/HVD/5238/93, dated November 23, 1993, addressed by the
Stock Exchange, Bombay, to defendant No. 5 informing the latter that the Stock
Exchange, Bombay, was pleased to approve the listing application of defendant
No. 5 seeking permission for its equity share to be dealt with on the said
exchange.”
Again,
in paragraph 4, it is stated thus :
“On
November 22, 1993, the governing board of defendant No. 3 resolved to approve
the listing application of defendant No. 5 seeking permission for its equity
shares to be dealt with on the Stock Exchange, Ahmedabad. It is the practice of
defendant No. 3 that after the grant of such permission under section 73 of the
Companies Act, 1956, members of the stock exchange are informed by a notice for
allowing them to deal in the said equity shares in the market with effect from
date specified in such notice. Such notice is given after a company complies
within a reasonable time with the general listing requirements. As per the FAX
message received by defendant No. 3, defendant No. 4 has also approved the
listing application of defendant No. 5 seeking permission for their equity
shares to be dealt in on the Bombay Stock Exchange. On November 24, 1993,
defendant No. 3 wrote to defendant No. 5 and informed them that the basis of
allotment was approved by the Ahmedabad Stock Exchange and conveyed the no
objection of the Ahmedabad Stock Exchange for utilisation of issue funds.”
This
is besides the following letter dated January 7, 1994 :
“The Director,
Bloom Dekor Limited,
1/F, Dhanlaxmi Chambers,
Ashram Road,
Ahmedabad-380 009.
Sub. : Listing of equity shares of your
company on our stock exchange.
Dear Sir,
We are in receipt of your letter dated
December 31, 1993, along with the enclosures and wish to inform you that the
stock exchange is pleased to approve your application seeking permission for
the above referred equity shares to be dealt in on the exchange and to grant
such permission under section 73 of the Companies Act, 1956, with effect from
November 22, 1993, and that members of our stock exchange have been allowed to
deal in equity shares of your company with effect from January 10, 1994, in the
market unit of trading of 100 shares.
Kindly acknowledge receipt.
Thank you,
Yours faithfully
For the Stock Exchange,
(Sd.) K.K. Mishra,
Company Secretary.”
Similarly,
Jagdish Jayashankar Bhatt, Joint General Manager of the Stock Exchange, Bombay,
states :
“I
say that as per the practice followed by defendant No. 4, the stock exchange
has already granted permission under section 73 of the Companies Act, 1956, for
the equity shares of defendant No. 5 to be dealt with on the Stock Exchange,
Bombay. The actual trading in the said shares has yet not commenced. As per the
practice adopted by the stock exchange, a notice permitting the actual trading
in the said shares is given thereafter and members are intimated accordingly. I
say that in reply to a letter dated December 2, 1993, that the shares of
defendant No. 5 were not yet listed on the exchange for dealings.”
Therefore,
an analysis of the facts on this aspect was warranted.
This
court had occasion to lay down the principles governing the grant of injunction
in such matters in Morgan Stanley Mutual Fund [1994] 81 Comp Cas 318. At page
336, it is stated thus :
“As
a principle, ex parte injunctions could be granted only under exceptional
circumstances. The factors which should weigh with the court in the grant of ex
parte injunctions are :
‘(a)
whether irreparable or serious
mischief will ensue to the plaintiff;
(b) whether
the refusal of the ex parte injunction would involve greater injustice than the
grant of it would involve;
(c) the
court will also consider the time at which the plaintiff first had notice of
the act complained of so that the making of the improper order against a party
in his absence is prevented;
(d) the
court will consider whether the plaintiff had acquiesced for some time and in
such circumstances it will not grant the ex parte injunction;
(e) the
court would expect a party applying for ex parte injunction to show utmost good
faith in making the application;
(f)
even if granted, the ex parte
injunction would be for a limited period of time; and
(g) general
principles lime prima facie case, balance of convenience and irreparable loss
would also be considered by the court.”
In
this connection reference was made to United Commercial Bank v. Bank of India
[1981] 2 SCC 766; [1982] 52 Comp Cas 186 and Shiv Kumar Chadha v. Municipal
Corporation of Delhi [1993] 3 SCC 161.
As
to venue restrictions, the observations of this court in Morgan Stanley Mutual
Fund [1994] 81 Comp. Cas. 318 at page 339 are apposite. Paragraph 50 reads thus
:
“As
far as India is concerned, the residence of the company is where the registered
office is located. Normally, cases should be filed only where the registered
office of the company is situate. Courts outside the place where the registered
office is located, if approached, must have regard to the following :
Invariably,
suits are filed seeking to injunct either the allotment of shares or the
meetings of the board of directors or again the meeting of the general body.
The court is approached at the last minute. Could an injunction be granted even
without notice to the respondent which will cause immense hardship and
administrative inconvenience ? It may be sometimes difficult even to undo the
damage done by such an interim order. Therefore, the court must ensure that the
plaintiff comes to the court well in time so that notice may be served on the
defendant and he may have his say before any interim order is passed. The
reasons set out in the preceding paragraphs of our judgment in relation to the
factors which should weigh with the court in the grant of ex parte injunctions
and the rulings of this court must be borne in mind.”
It
is not difficult to perceive that all these actions are nothing but attempts by
a caucus of persons to baulk the appellant-company from issuing or dealing with
shares or debentures; the plaintiffs or the petitioner in the writ petition
having little stake. It is also evident from the orders of this court dated
January 28, 1994, and January 31, 1994, and the cross-examination of Mr. Kirit
T. Gadhia by this court. It is not a matter of coincidence that the same
advocate had appeared in all the cases at some stage or other. The statement
before the High Court during the hearing of the writ petition that the civil
court had not been moved for the same relief was false and was clearly intended
to mislead the court. In the circumstances, we maintain the order dated January
19, 1994, which is to the following effect :
We
direct the courts below to examine the case on all the relevant aspects stated
above.
The
action of the respondents calculated to harm the interests of the
appellant-company must be viewed with serious concern and must be totally
disapproved.
All
the said suits mentioned in T. P. (C) Nos. 26 to 30 of 1994 will stand
transferred to the file of senior most Civil Judge at the City Civil Court,
Ahmedabad, and be tried along with the Ahmedabad suit, C. S. No. 6630 of 1993.
The transfer petitions are ordered accordingly.
As
a token of our disapproval we direct the payment of Rs. 10,000 by each of the
contesting respondents, Subbash Himatlal Desai (respondent No. 1 in Civil
Appeal No. 1751 of 1994, arising out of SLP(C) No. 878 of 1994), Arvind B.
Sheth and Kirit Tulshibhai Gadhia (respondents Nos. 1 and 2 in Civil Appeal No.
1750 of 1994, arising out of SLP(C) No. 874 of 1994, respectively) to the
appellant, Bloom Dekor Limited.
The
civil appeals are disposed of accordingly.
[1989] 66 COMP. CAS. 577 (SC)
v.
Indian
Express Newspapers (Bombay) (P.) Ltd.
SABYASACHI MUKHARJI AND S.
RANGANATHAN JJ.
CIVIL MISCELLANEOUS
PETITIONS. NOS. 21903 TO 21906 OF 1988
IN TRANSFER PETITIONS
NOS. 192 AND 193 OF 1988
SEPTEMBER 23, 1988
F.S. Nariman. V.C. Kotwal and M.H. Baig, Harish N. Salve,
P.S. Shroff, S.A. Shroff, V.K. Desai and S.S. Shroff, for the Petitioner.
G. Ramaswamy, Ram Jethmalani, C.V. Subba Rao, A.
Subhashini, Mrs. Sushma Suri, P. Parmeshwaran, Mukul Rohtagi, Ms. Bina Gupta,
Ms. Madhu Khatri Parveen Anand, Anip Sachthey, B.L. Bagaria, P.K. Jain, P.S.
Goyal, Arun Jetley, R.F. Nariman, Rajan Karanjawalla and Manik Karanjawalla, for the Respondent.
JUDGMENT
Sabyasachi
Mukharji J.—At this stage, we are
concerned with the question whether there is need for the continuance of the
order of injunction passed by this court on August 25, 1988. In order to appreciate
the question, it is necessary to state a few facts. A petition was moved before
this court on August 19, 1988, under the Contempt of Courts Act, 1971, for
initiation of contempt proceedings against the proprietors of Indian Express
Newspapers, Bombay Pvt. Ltd., Shri Arun Shourie, Indian Express Newspapers,
Bombay Pvt. Ltd., Shri Hari Jaisingh, resident editor, Indian Express
Newspapers Bombay Pvt. Ltd., Shri A.C. Saxena, news editor, Indian Express
Newspapers Pvt. Ltd., Delhi, Shri H.K. Dua, Chief, New Delhi Bureau, Indian
Express Newspapers Pvt. Ltd., New Delhi, and Shri V. Ranganathan, Indian
Express Bombay Pvt. Ltd. The petition was moved on behalf of Reliance
Petrochemicals Ltd. (hereinafter called "Reliance Petrochemicals").
It was stated therein that this court should take cognisance of the contempt
alleged to have been committed by the respondents and it was further prayed
that, pending the consideration of the question of criminal contempt, this
court should pass an order restraining the Express Group of Newspapers and
their related publications from publishing any materials or articles in
relation to the subject matter of the proceedings in Transfer Petitions Nos.
192 and 193 of 1988 which was sub-judice issue in Writ Petition No. 1276 of
1988 in the Karnataka High Court, Writ Petition No. 1791 of 1988 in the Delhi
High Court, Writ
Petition No. of 1988 Radhey Shyam Goel v. Union of India, Suit No. 1172 of 1988
K.S. Brahmabhatt v. Reliance Petrochemicals Ltd.
and MRTP proceedings instituted in J.P. Sharma v. Reliance Petrochemicals Ltd.
as the same was alleged to be calculated to affect the reliance debenture issue
which was to open on August 22, 1988, till the decision of the transfer
petitions pending herein.
The
subject-matter of the dispute related to the public issue by the
petitioner-company of 125% secured convertible debentures of Rs. 200 each for
cash at par aggregating to Rs. 593.40 crores (inclusive of retention of 15%
excess subscription of Rs. 77.40 crores). It was stated that Reliance Petrochemicals
was to set up what was claimed to be the largest petrochemical complex in the
private sector for the manufacture of critically scarce raw material known as
Mono Ethylene Glycol (MEG) and plastic raw materials like High Density
Polyethylene (HDPE) and Poly Vinyl Chloride (PVC) which are used for making
various articles from films to pipes, auto parts to cable coating, and
containers to furnishings. It was asserted that the issue was of global and
national importance. It was claimed that Reliance's public issue was the
largest public issue in India till date and the second largest issue in the
world. The public issue was due to open on Monday August 22, 1988, and was
scheduled to be closed on August 31, 1988.
It
was the claim of the petitioner that the debentures were being issued after
obtaining the consent of the Controller of Capital Issues and on the basis of
the schedule indicated therein, and after complying with all the requirements
of the Companies Act and otherwise. Certain writ petitions and a suit had been
filed in some High Courts, namely, Karnataka, Bombay, Rajasthan, Delhi and
later on in Allahabad challenging the grant of consent or sanction for the
issue of debentures. Such applications in the different High Courts and the
courts were filed at the last moment when enormous amount of money had already
been spent, it was claimed. It was stated that enormous monies on publicity had
been spent. In some of these proceedings, orders of injunction had been
obtained. It was contended that the issue was prima face legal and valid and
that the consent and permission of the necessary authorities, specially, the
Controller of Capital Issues had been obtained properly. In such circumstances,
an application for transfer of these proceedings under article 139A of the
Constitution of India read with Part IV-A of the Supreme Court Rules, 1966, was
moved by Reliance Petrochemicals Ltd., against the Union of India, Controller
of Capital Issues and the petitioner in the suit in Bangalore and writ petition
in Delhi. It was stated that the certificate of incorporation was granted to
the petitioner on or about January 11, 1988, and the Certificate of
Commencement of Business was granted on January 21, 1988. On May 4, 1988, an
application was made to the Controller of Capital Issues for raising Equity
Share Capital/Cumulative Convertible Preference Shares/Convertible Debentures
for financing the proposed projects for manufacture of PVC, HDPE and MEG. On
July 4, 1988, as mentioned before, the consent of the Controller of Capital
Issues wa9 granted to the petitioner for capital issue of 5,75,00,000 equity
shares of Rs. 10 each inclusive of retainable excess subscription of Rs. 75
crores and for 2,96,70,000 12.5% secured fully convertible debentures of Rs.
200 each for cash at par to public. It is not necessary for the present purpose
to set out the details of the same. It is stated that the consent of the
Controller of Capital Issues was given on July 4, 1988, on certain terms which
are again not relevant to be set out for the present purpose. The consent order
of the Controller was modified and further condition of obtaining Reserve Bank
of India's permission for allotment of debentures to non-residents as required
under the Foreign Exchange Regulation Act, 1973, and for allotment of
debentures to employees on certain terms was imposed on July 19, 1988. On July
27, 1988, a prospectus was filed with the Registrar of Companies, Gujarat,
Ahmedabad, for the public issue of 12.5% secured fully convertible
debentures of Rs. 200 each for cash at par, as indicated before.
A
petition was filed in the Karnataka High Court on August 17, 1988, by one Shri
Balakrishna Pillai. In the Delhi High Court another writ petition was filed on
August 18, 1988. On August 18, 1988, a transfer petition was filed in this
court. It was claimed that any injunction order, after the satisfaction of the
Central Government through the Controller of Capital Issues, would make the
public issue stillborn and sums in excess of Rs. 4.5 crores had already been
incurred for the public issue as pre-issue expenses and a sum of Rs. 20 crores was allocated as issue expenses for
what was popularly known as "Mega Issue" as mentioned hereinbefore.
It was claimed that grave prejudice would be caused to the petitioner company
as well as the public at large who were investing in the issue, if the issue is
not allowed to go through. It was claimed that there was no ground for the High
Court to grant an injunction or a stay order in the facts and circumstances of
this issue and this court should vacate those orders and transfer the
applications pending in different courts to this court.
On
that application being moved on August 19, 1988, this court issued notices to
all concerned making the same returnable on September 9, 1988, in terms of
prayer (a) and paragraphs 2 and 4 of the affidavit of Mr. Balkrishna Bhandari
affirmed on August 18, 19, 1988. This court further directed as follows :
"The
issue of 2,96,70,000, 12.5% secured convertible debentures of Rs. 200 each by
the petitioner company under the prospectus dated July 27, 1988, filed with the
Registrar of Companies, Gujarat and with the stock exchanges at Ahmedabad and
Bombay to be proceeded with, without let or hindrance, notwithstanding any
proceedings instituted or that may be instituted in or before any court or
Tribunal or other authority.
Any
order, direction or injunction of any court, Tribunal or authority in any
proceeding already passed or which may be passed will, by operation of this
order, be and remain suspended till further orders of this court."
In
substance, the order was that the issue be proceeded "without let or
hindrance", notwithstanding any proceedings instituted or that may be
instituted in or before any court or Tribunal or other authority. This court
vacated all orders of injunction in respect of the said issue. It was asserted
on behalf of the petitioner that this court must have been prima facie
satisfied that there was no legal infirmity which should stand in the way of
the public issue of the said debentures going through and further, in any
event, must have been satisfied that there should not be any let or hindrance
to the said public issue. The petitioner had drawn our attention to an article
published on August 25, 1988, under the heading, "Infractions of Law has
Unique Features RPL Debentures". It is not necessary for the present
purpose to set out the said article. It was claimed in the said article that
the Controller of Capital Issues had not acted properly and legally in granting
sanction to the issue for various reasons stated therein. It was further stated
that the issue was not a prudent or a reliable
venture. It was contended that by this article the respondents have commented
on a matter which is sub-judice and was intended to undermine the effect of the
interim order passed by this court and the ultimate decision of the court and
they threatened to publish such articles unless restrained by this court. It
was contended that trial by newspapers on issues which are sub judice is one of
the grossest modes of interference with the due administration of justice and
any threat of that interference should be prevented by both punitive action of
contempt and preventive order of injunction of the wrong anticipated to be
committed by the delinquent. The publication threatened or expected to be
published would cause very grave interference with the due administration of
justice, and should, therefore, be prohibited.
On
that application being moved on August 25, 1988, this court directed that cognizance
of contempt would only be considered after the necessary sanction from the
Attorney-General is obtained. This court, on the facts of the alleged contempt,
declined to take cognizance on that application without the views of the
Attorney-General. This court, however, issued an order of injunction
restraining all the six respondents mentioned therein from publishing any
article, comment, report or editorial in any of the issues of the Indian
Express or their related publications questioning the legality or validity of
any of the consents, approvals or permissions to which the petitioners in the
Transfer Petitions Nos. 192-193 of 1988 have made reference in the prospectus
dated July 27, 1988, for the issue of 12.5% secured fully convertible debentures.
Notice of that application was made returnable on September 9, 1988, and the
same was to come up with other related matters. The respondents were further
given liberty to move this court for variation or vacation of the order upon
notice to the petitioner. Upon that, the six respondents had filed an
affid-davit-in-opposition on August 26, 1988, the very next day, asking for
variation or vacation of the interim order passed by this court on August 25,
1988. The attention of the court was drawn to an article proposed to be
published in the Indian Express which was annexure "B" to the said
affidavit. Submissions were made on the validity or the propriety of the
interim order. Upon hearing learned counsel for both the parties, this court
observed that it was sufficient to say that the article proposed to be
published and forming part of annexure "B" did not violate the order
of injunction passed by this court on August 25, 1988. In other words, this
court was of the view that the article in question which was intended to be
published and shown to this court on August 26, 1988 did not question the
legality or the validity of the order which was in issue in the proceedings in
this court. In those circumstances, no question of variation or vacation of the
said interim order arose. The said article proposed at that time has since been
published before August 31, 1988. It was stated in the affidavit as well as in
the submissions made from the Bar that the shares have been over-subscribed but
the day of allotment, of course, has not yet expired and before the allotment,
the subscribers, it was submitted, could withdraw their subscriptions. In those
circumstances, this court was invited to consider the question whether there
was any necessity for the continuance of the order of injunction granted by
this court on August 25, 1988. On behalf of the petitioner, it was submitted
that the danger still persists and that the injunction should continue. On the
other hand, on behalf of the respondents, it was submitted that the injunction
should be vacated.
Elaborate
arguments were advanced by counsel for both sides. It was contended that there
was no contempt of court involved herein and furthermore, it was contended that
pre-stoppage of a newspaper article or publication on matters of public
importance was uncalled for and contrary to the right of freedom of the press
enshrined in our Constitution and in our laws. The publication was on a public
matter, so that a public debate cannot and should not be stopped. On the other
hand, it was submitted that due administration of justice must be unimpaired.
We have to balance, in the words of Lord Scarman, in the House of Lords in
Attorney-General v. British Broadcasting Corporation [1981] AC 303, 354,
between the two interests of great public importance, freedom of speech and
administration of justice. A balance, in our opinion, has to be struck between
the requirements of free press and fair trial in the words of Justice Black in
Harry Bridges v. State of California, (86 L. Ed. 252 at page 260).
Therefore,
in considering the question posed before us, as to whether there should be
continuance of the order of injunction, we have to bear in mind and apply the
basic principles of law to the facts and circumstances of this case. The point
at issue has been canvassed very ably and vehemently on behalf of the
petitioner by Shri M.H. Beg, assisted as he was by Shri S.S. Shroff and Smt.
P.S. Shroff. They submit that the danger still persists and the publication of
any article which would jeopardise the allotment of those debentures, should be
prevented. On the other hand, Shri Ram Jethmalani and Shri Anil P. Diwan,
senior counsel assisted as they were by Shri R.F. Nariman and Shri C.S.
Karanjawalla, urged before us that the injunction should no longer continue. In
view of the delicacy of the problem in the
question posed before us, it is well to remember the legal background. We may
refer to our constitutional provisions in article 19(1) and (2) which provide
as follows:
"19. Protection of certain rights regarding freedom of
speech, etc.—
(1) All
citizens shall have the right—
(a) to
freedom of speech and expression;
(b) to
assemble peaceably and without arms;
(c) to
form associations or unions ;
(d) to
move freely throughout the territory of India ;
(e) to
reside and settle in any part of the territory of India;
(f) (Omitted). Before its omission,
sub-clause (f) read as follows : "to acquire, hold and dispose of
property; and")
(g) to
practise any profession, or to carry on any occupation, trade or business.
(2). Nothing in sub-clause (a) of clause (1) shall
affect the operation of any existing law, or prevent the State from making any
law, in so far as such law imposes reasonable restrictions on the exercise of
the right conferred by the said sub-clause in the interests of the sovereignty
and integrity of India), the security of the State, friendly relations with
foreign States, public order, decerfcy or morality or in relation to contempt
of court, defamation or incitement to an offence."
The
effect of article 19 on the freedom of the press was analysed in the decision
of this court in Express Newspapers (Pvt.) Ltd. v. Union of India [1959] SCR
12, where at page 120 onwards of the report, Bhagwati J. referring to the
decision of this court in Ramesh Thapar v. State of Madras [1950] SCR 594 at p.
597, referred to the observations of Justice Patanjali Sastri, and further
referred to the decision of this court in Brij Bhushan v. State of Delhi [1950]
SCR 605. Referring to these two decisions, Bhagwati J. expressed his view that
these were the only two decisions which evolved the interpretation of article
19(1)(a) of the Constitution and they only laid down that freedom of speech and
expression included freedom of propagation of ideas which freedom was ensured
by the freedom of circulation and that the liberty of the press consisted in
allowing no previous restraint upon publication. Referring to the fact that
there is a cosiderable body of authority to be found in the decisions of the
Supreme Court of America bearing on this concept of the freedom of speech and
expression, Justice Bhagwati observed that it was trite knowledge that the
fundamental right to the freedom of speech and expression
enshrined in our Constitution was based on the provisions in the first
amendment to the Constitution of the U.S.A. and, hence, it would be legitimate
and proper to refer to those decisions of the Supreme Court of the U.S.A., in
order to appreciate the true nature, scope and extent of this right in spite of
the warning administered by this court against the use of American and other
cases in State of Travancore-Cochin v. Bombay Co. Ltd. [1952] SCR 1112 and
State of Bombay v. R.M.D. Chamarbaugwala [1957] AIR 1957 SC 699 (at p.
717-718).
Our
Constitution is not absolute with respect to freedom of speech and expression,
as enshrined in the first amendment to the American Constitution. Our attention
was drawn to the decision of this court In re : P. C. Sen's case [1969] 2 SCR
649 where this court upheld the order of conviction against the Chief Minister
of West Bengal for broadcasting a speech justifying an order the validity of
which was challenged in proceedings pending before the court. The West Bengal
Government had issued an order under rule 125 of the Defence of India Rules,
placing certain restrictions upon the right of persons carrying on business in
milk products. The validity of this order was challenged by a writ petition.
After rule nisi had been issued on the petition and served on the State
Government, the State Chief Minister broadcast a speech seeking to justify the
propriety of the order. The High Court issued rule requiring the Chief Minister
to show cause as to why he should not be committed for contempt of court. The
High Court found him guilty of contempt and fined him. The matter came up
before this court and the conviction was upheld. It was held that the speech
was ex facie calculated to interfere with the administration of justice. This
court reiterated that in all cases of comment on pending proceedings, the
question is not whether the publication did interfere, but whether it tended to
interfere with the due course of justice. The question is not so much of the
intention of the contemnor as to whether it is calculated to interfere with the
administration of justice. But, for the instant case, this decision cannot be
of much assistance. Firstly, the contents of the speech of the Chief Minister
were entirely different. The Chief Minister, in his speech, had characterised
the preparation of any food with milk product as amounting to a crime. There
was a tendency, in the speech of the Chief Minister, of intimidating the
litigants or the potential litigants in respect of the issue pending in the
court.
In
the instant case, we are, however, not concerned directly with the question
whether the respondents have in fact committed contempt
of court by interfering with the due administration of justice. The question
whether comments on an issue, directly or indirectly, in court amount to
pre-judging of an issue and transferring a trial by court to trial by
newspapers, is another matter which will be decided when the contempt
application is taken up. At the moment, we are concerned with the short but
difficult question, i.e., whether there is a need for preventing publication of
an article on a matter of public interest but on an issue which is sub-judice.
In this case, as at this stage, we are not dealing with the question of
punitive action of having a committal for contempt of court for publication,
pending trial of an issue in court, the decision of this court in P.C. Sen's
case [1969] 2 SCR 649 in view of the facts involved, is not of much aid to us.
The case of gross contempt was discussed by this court in C.K. Daphtary v. O.P.
Gupta [1971] Suppl SCR 76. However, in view of the facts involved therein, that
decision cannot give us much guidance at present.
The
law on this aspect has been adverted to in the decision of this court in Indian
Express Newspapers (Bombay) Pvt. Ltd. v. Union of India [1985] 1 SCC 641, where
at page 659 of the report, Justice Venkataramiah referred to the importance of
freedom of the press in a democratic society and the role of courts. Though the
Indian Constitution does not use the expression "freedom of press"in
article 19, it is included as one of the guarantees in article 19(1)(a). The
freedom of the press, as noted by Venkataramiah J., is one of the items around
which the greatest and the bitterest of constitutional struggles have been waged
in all countries where liberal constitutions prevail. Article 19 of the
Universal Declaration of Human Rights, 1948 declares the freedom of the press
and so does article 19 of the International Covenant on Civil and Political
Rights, 1966. Article 10 of the European Convention on Human Rights, provides
as follows:
"Article
10—(1) Everyone has the right to freedom of expression. This right shall
include freedom to hold opinions and to receive and impart information and
ideas without interference by public authority and regardless of frontiers.
This article shall not prevent States from requiring the licensing of
broadcasting, television or cinema enterprise.
(2)
The exercise of these freedoms: since it carries with it duties and
responsibilities, may be subject to such formalities, conditions, restrictions
or penalties as are prescribed by law and are necessary in a democratic
society, in the interests of national security, teritorrial integrity or public
safety, for the prevention of disorder or crime, for the protection of health
or morals, for the protection of the reputation or rights of others, for
preventing the disclosure of information received in confidence, or for
maintaining the authority and impartiality of the judiciary."
The
First Amendment to the Constitution of the U.S.A. provides as follows:
"Amendment 1—Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances."
Keeping
the constitutional requirements of the Indian law in the background, it would
be appropriate to refer to certain American decisions to which our attention
was drawn. We have mentioned the observations of Justice Black in the Case of
Harry Bridges v. State of California 86 L Ed 252. There, Justice Black observed
that free speech and fair trial are the two most cherished values of our
civilisation and it would be a trying task, and if we may say so, a difficult
one to choose between them. But in case of need, a choice has to be made. He
emphasised that a public utterance or publica-cation is not to be denied the
constitutional protection of freedom of speech and press merely because it
concerns a judicial proceeding still pending in the courts, upon the theory
that in such a case it must necessarily tend to obstruct the orderly and fair
administration of justice. In America, in view of the absolute terms of the
First Amendment, unlike the conditional right of freedom of speech under
article 19(1)(a) of our Constitution, it would be worthwhile to bear in mind
the “present and imminent danger" theory.
Justice
Black quoted from the observations of Justice Holmes in Abrams v. United States
[1963] L Ed. 1173 at p. 1180, where the latter observed that to justify
suppression of free speech, there must be a reasonable ground to fear that
serious evil will result if free speech is practised. There must be reasonable
ground to believe that the danger apprehended is imminent. Justice Black
concluded that there must be clear and present danger and that would provide a
workable principle in preventing publication consistent with the First
Amendment. But, in our case, Mr. Baig submitted that under our article
19(1)(a), as it is termed, anything that interferes with the due administration
of justice should be prevented if it is a threat to the due administration of justice. His submission was that the
article, published or proposed to be published herein, undermines the effect or
pre-empts the effect of the order of injunction which was to help or boost up
the chances of the debentures being subscribed.
Mr.
Baig drew our attention to page 282 of the said report where Justice Frankfurter
had observed that free speech was not so absolute or irrational a conception as
to imply paralysis of the means for effective protection of all the freedoms
secured by the Bill of Rights. The administration of justice by an impartial
judiciary has been basic to the concept of freedom ever since the Magna Carta.
Justice Frankfurter further reiterated that the dependence of society upon an unswerved judiciary is
such a commonplace in the history of freedom that the means by which it is
maintained are too frequently taken for granted without heed to the conditions
which alone make it possible. (emphasis supplied).
The rule of courts of justice in our society has been the theme of statesmen
and historians and constitution-makers, and best illustrated in the
Massachusetts Declaration of Rights as the right of every citizen to be tried
by judges as free, impartial and independent as the lot of humanity will admit.
Justice
Frankfurter in his dissenting judgment, with whom Justice Stone, Justice
Roberts and Justice Byrnes agreed, reiterated at page 284 of the report that
the Constitution is an instrument of Government and is not conceived as a
doctrinaire document, nor was the Bill of Rights intended as a collection of
popular slogans. It is well to remember that Justice Frankfurter recognised
that we cannot read into the 14th Amendment the freedom of speech and of the
press protected by the First Amendment and at the same time leave out the
age-old means employed by States for securing the calm course of justice. He
emphasised that the 14th Amendment does not forbid a State to continue the
historic process of prohibiting expressions calculated to subvert a specific
exercise of judicial power. So, to assure the impartial accomplishment of
justice is not an abridgement of freedom of speech or the press, as these
phases of liberty have heretobefore been conceived even by the stoutest
libertarians. Actually, these liberties themselves depend "upon an
untrammelled judiciary whose passions are not even unconsciously aroused and
whose minds are not distorted by extrajudicial considerations".
The
test of imminent and present danger as the basis of Justice Holmes' ideas has
been referred to by this court in P.N. Duda v. P. Shiv Shanker, AIR [1988] SC
1208.
This
question again cropped up in John D. Pennekamp v. State of Florida [1945] 90 L
Ed 331 and Justice Frankfurter reiterated that the "clear and present
danger" conception was never used by Mr. Justice Holmes to express a
technical legal doctrine or to convey a formula for adjudicating cases. It was
a literary phrase not to be distorted by being taken away from its context. He
reiterated that the judiciary could not function properly if what the press
does is reasonably calculated to disturb the judicial judgment in its duty and
capacity to act solely on the basis of what is before the court. A judiciary is
not independent unless courts of justice are enabled to administer law by
absence of pressure from without, whether exerted through the blandishments of
reward or the menace of disfavour. A free press is vital to a democratic
society for its freedom gives it power.
In 1976, in Nebraska Press Association v. Hugh Stuart 49 L
Ed. 683, where the facts of the case were
entirely different from the present case, Chief Justice Burger delivered the
opinion of the court saying that to the extent that the order prohibited the
reporting of evidence adduced at the open preliminary hearing in a murder
trial, it was bad. Chief Justice Burger reiterated that a responsible press has
always been regarded as the handmaiden of effective judicial administration,
especially in the criminal field. The observations of Learned Justice Hand
referred to at page 683 indicate "the gravity of the evil, discounted by
its improbability, justifies such invasion of free speech as is necessary to
avoid the danger", as the test. Hence, we must examine the gravity of the
evil. In other words, a balance of convenience in the conventional phrase of
Anglo-Saxon common law jurisprudence would, perhaps, be the proper test to
follow.
In
this background, it would be appropriate to refer to some of the English
decisions to which our attention was drawn. Mr. Jethmalani relied on the
observations of Lord Denning in the Court of Appeal in Attorney-General v. British Broadcasting
Corporation [1979] 3 All ER 45, where the
Master of Rolls, Lord Denning, characterised some of these similar types of
injunctions as "gagging injunctions". Mr. Baig, however, protested
that in view of the terms in which the injunction was issued in the instant
case, the order did not "gag" anything that was legitimate. The House
of Lords, however, did not approve the observations of Lord Denning. We may
refer to the observations of the House of Lords in Attorney-General v. British
Broadcasting Corporation [1981] AC 303, wherein the Attorney-General brought
proceedings for an injunction to restrain the defendants from broadcasting a programme dealing with matters which related
to an appeal pending before a local valuation court on the ground that the
broadcast would be a contempt of court. The Divisional Court of the Queen's
Bench Division, on the single issue before it, held that a local valuation
court was a court for the purposes of the powers of the High Court relating to
contempt. On appeal, the Court of Appeal, by a majority, affirmed that
decision. The House of Lords, however, allowed the appeal and held that the
jurisdiction of the Divisional Court in relation to contempt did not extend to
a local valuation court because it was a court which discharged administrative
functions and was not a court of law and the Divisional Court's jurisdiction
only extended to courts of law and when R.S.C. Order 52, r. 1 referred to
"inferior courts", it must be taken to mean inferior courts of law
and though the local valuation court has some of the attributes of the
long-established "inferior courts", public policy required, in the
interests of freedom of speech and freedom of the press, that the principles
relating to contempt of court should not apply to it or to the host of other
modern tribunals which might be regarded as "inferior courts".
There,
however, Lord Scarman emphasised that the due administration of justice should
not, at all, be hampered. Lord Denning, in the Court of Appeal, referred to
Borrie and Lowe, The Law of Contempt (1973) and mentioned that professionally
trained judges are not easily influenced by publications. This is a point which
was emphasised before us also. Lord Denning referred to the question whether
there was contempt of court by the British Broadcasting corporation. He
emphasised that there was no accused. The House of Lords, however, in appeal,
held that the valuation court is not a court where the concept of contempt of
court would apply. But it did make observations that such broadcasting or
publication might influence a judge. Viscount Dilhorne, at page 335 of the
report, observed as follows :
"It
is sometimes asserted that no judge will be influenced in his judgment by
anything said by the media and consequently that the need to prevent the
publication of matter prejudicial to the hearing of a case only exists where
the decision rests with laymen. This claim to judicial superiority over human
frailty is one that I find some difficulty in accepting. Every holder of a
judicial office does his utmost not to let his mind be affected by what he has
seen or heard or read outside the court and he will not knowingly let himself
be influenced in anyway by the media, nor, in my view, will any layman experienced in the discharge of judicial duties.
Nevertheless, it should, I think, be recognised that a man may not be able to
put that which he has seen, heard or read entirely out of his mind and that he
may be subconsciously affected by it. As Lord Denning M.R. said, the stream of
justice must be kept clean and pure. It is the law, and it remains the law
until it is changed by Parliament that the publication of matter likely to
prejudice the hearing of a case before a court of law will constitute a
contempt of court punishable by fine or imprisonment or both.
In
this appeal, we do not have to pronounce on whether the proposed broadcast
would have prejudicially affected the hearing before the local valuation court.
Although it clearly was likely to have aroused hostility to the Exclusive
Brethren, it by no means follows that it would have prejudiced their claim to
relief from rates. The mere assertion in the course of the broadcast that they
were not entitled to that relief was in my view unlikely to have affected in
any way a decision on whether their meeting room was a place of public
religious worship coming within section 39."
Lord
Edmund-Davies, at page 344 of the report, emphasised that only a very short
question arose, namely, whether the local valuation court comes within the
jurisdiction of the High Court or not. Before that, Lord Scarman had occasion
to refer to the observations of the European Court of Human Rights which
criticised the judgment of the House of Lords in Attorney General v. Times
Newspapers Ltd. [1974] AC 273 and emphasised that neither the convention nor
the European Court's decision, which related to article 10(2) of the Convention
for the Protection of Human Rights and Fundamental Freedoms, was part of the
English law.
In Attorney General v. Times Newspapers Ltd. [1974] AC 273
(HL) between 1959 and 1961, a company made and
marketed under licence a drug containing thalidomide. About 450 children were
born with gross deformities to mothers who had taken that drug during
pregnancy. In 1968, 62 actions against the company, begun within three years of
the births of the children, were compromised by lump sum payments conditional
on the allegations of negligence against the company being withdrawn.
Thereafter, leave to issue writs out of time was granted ex parte in 261 cases,
but apart from a statement of claim in one case and a defence delivered in 1969
no further steps had been taken in those actions. A further 123 claims had been
notified in correspondence. In 1971 negotiations began on the company's
proposal to set up a Ł3Ľ million charitable trust fund for those children
outside the 1968 settlement conditional on all the parents accepting the
proposal. Five parents refused. An application to replace those parents by the
Official Solicitor as next friend was refused by the Court of Appeal in April,
1972. Negotiations for the proposed settlement were resumed. On September 24,
1972, a national Sunday newspaper published the first of a series of articles
to draw attention to the plight of the thalidomide children. The company
complained to the Attorney-General that the article was a contempt of court
because litigation against them by the parents of some of the children was
still pending. The editor of the newspaper justified the article and at the
same time sent to the Attorney-General and to the company for comment an
article in draft, for which he claimed complete factual accuracy, on the testing,
manufacture and marketing of the drug. On the Attorney-General's motion, the
Divisional Court of the Queen's Bench Division granted an injunction
restraining publication on the ground that it would be contempt of court. After
the grant of the injunction on November 17, 1972, and while the newspaper's
appeal was pending, the thalidomide tragedy was, on November 29, debated in
Parliament and speeches were made and reported which expressed opinions and
stated facts similar to those in the banned article. Thereafter, there was a
national compaign in the press and among the general public directed to
bringing pressure on the company to make a better offer for the children and
their parents; and the company in fact made a substantially increased offer.
The
Court of Appeal, having discharged the injunction, the Attorney-General
appealed to the House of Lords. It was held that the contempt of court to
publish material which prejudged the issue of pending litigation or was likely
to cause public pre-judgment of that issue, and accordingly the publication of
this article, which in effect charged the company with negligence, would
constitute a contempt, since negligence was one of the issues in the
litigation. The House of Lords granted an injunction prohibiting the Times
newspaper from publishing the proposed publication. Reference was made to
Oswald's Contempt of Court, third edition (1910), where it was emphasised that
contempt of court involves three objects, namely, (i) to enable the parties to
come to the courts without interference ; (ii) to enable the courts to try
cases without interference ; and (iii) to ensure that the authority and
administration of the law is maintained. There was no room for the balancing suggested by the
respondents between the public interest in free discussion of matters of Public
concern and the public interest that judicial proceedings should not be interfered with. (Emphasised by Mr.
Baig).
Lord
Reid referred to the observations of Chief Justice Jordan in Ex parte Bread Manufacturers
Ltd.'s case [1937] 37 SR (NSW) 242 to the
following effect:
"It
is of extreme public interest that no conduct should be permitted which is
likely to prevent a litigant in a court of justice from having his case tried
free from all matters of prejudice. But the administration of justice,
important though it undoubtedly is, is not the only matter in which the public
is vitally interested; and if in the course of the ventilation of a question of
public concern matter is published which may prejudice a party in the conduct
of a law suit, it does not follow that a contempt has been committed. The case
may be one in which as between competing matters of public interest the
possibility of prejudice to a litigant may be required to yield to other and
superior considerations. The discussion of public affairs and the denunciation
of public abuses, actual or supposed, cannot be required to be suspended merely
because the discussion or the denunciation may, as an incidental but not
intended by-product, cause some likelihood of prejudice to a person who happens
at the time to be a litigant. It is well settled that a person cannot be
prevented by process of contempt from continuing to discuss publicly a matter
which may fairly be regarded as one of public interest, by reason merely of the
fact that the matter in question has become the subject of litigation, or that
a person whose conduct is being publicly criticised has become a party to
litigation either as plaintiff or as defendant, and whether in relation to the
matter which is under discussion or with respect to some other matters."
Lord
Reid made certain observations upon which Mr. Baig relied, i.e., at page 300,
which are as follows :
"I
think that anything in the nature of prejudgment of a case or of specific
issues in it is objectionable, not only because of its possible effect on that
particular case but also because of its side effects which may be far-reaching.
Responsible ‘mass media' will do their best to be fair, but there will also be
ill-informed, slapdash or prejudiced attempts to influence the public. If
people are led to think that it is easy to find the truth, disrespect for the
processes of the law could follow, and, if mass media are allowed to judge,
unpopular people and unpopular causes will fare very badly. Most cases of
prejudging of issues fall within the existing authorities on contempt. I do not think that the freedom of the press would suffer ;
and I think that the law would be clearer and easier to apply in practice if it
is made a general rule that it is not permissible to prejudge issues in pending
cases" (Emphasis supplied)
Lord Diplock stated at page 309 of the report that the due administration of justice requires first that all citizens should have unhindered access to the constitutionally established courts of criminal or civil jurisdiction for the determination of disputes as to their legal rights and liabilities secondly, that they should be able to rely upon obtaining in the courts the arbitrament of a Tribunal which is free from bias against any party and whose decision will be based upon those facts only that have been proved in evidence adduced before it in accordance with the procedure adopted in courts of law ; and thirdly that, once the dispute has been submitted to a court of law, they should be able to rely upon there being no usurpation by any other person of the function of that court to decide it according to law.
Lord
Simon of Glaisdale, at page 315, emphasised as follows :
"The
first public interest involved is that of freedom of discussion in a democratic
society. People cannot adequately influence the decisions which affect their
lives unless they can be adequately informed on facts and arguments relevant to
the decisions. Much of such fact-finding and argumentation necessarily has to
be conducted vicariously, the public press being a principal instrument. This
is the justification
for investigative and campaign journalism. Of course it can be abused—but so
may anything of value. The law provides some safeguards against abuse : though
important ones (such as professional propriety and responsibility) lie outside
the law " (Emphasis supplied)
Lord
Cross of Chelsea, at page 322 of the report, observed as follows:
"
'Contempt of court’ means an interference with the administration of justice and
it is unfortunate that the offence should continue to be known by a name which
suggests to the modern mind that its essence is a supposed affront to the
dignity of the court. Nowadays when sympathy is readily accorded to anyone who
defies constituted authority the very name of the offence predisposes many
people in favour of the alleged offender. Yet the due administration of justice
is something which all citizens, whether on the left or the right or in the
centre, should be anxious to safeguard. When the alleged contempt consists in giving utterance either publicly or
privately to opinions with regard to or connected with legal proceedings,
whether civil or criminal, the law of contempt constitutes an interference with
freedom of speech, and I agree with my noble and learned friend that we should
maintain the rule that any 'prejudging' of issues, whether of fact or of law,
in pending proceedings—whether civil or criminal—is in principle an
interference with the administration of justice although in any particular case
the offence may be so trifling that to bring it to the notice of the court
would be unjustifiable. "
Mr.
Baig emphasised that there is an inherent jurisdiction to restrain by
injunction any publication that interferes with a fair trial or a pending case
or with the administration of justice in general. He further urged that trial
of a newspaper in a sub judice matter is wrong. Publication is permissible
provided it does not amount to prejudgment or prejudice of a matter in court.
Liberty or freedom of the press must subserve the due administration of
justice. He submitted that there is need to continue the injunction because
contribution to the debentures could be withdrawn as the final allotment has
not yet been made.
On
the other hand, Mr. Diwan submitted that there is no jury-trial involved here
and no likelihood of the trial being prejudiced because trial is by
professionally trained judges. The public have a right to know about this issue
of debentures which is a matter of public concern. It affects the public
interest, and so the public have a right to know and the newspapers have an
obligation to inform.
We
must see whether there is a present and imminent danger for the continuance of
the injunction. It is difficult to lay down a fixed standard to judge as to how
clear, remote or imminent the danger is. The order passed on August 19, 1988,
as reiterated on August 25, 1988, stated that there must be no legal impediment
in the issue of the debentures or in the progress of the debentures, taking
into account the overall balance of convenience and having due regard to the
sums of money involved and the progress already made. It is necessary to
reiterate that the continuance of this injunction would amount to interference
with the freedom of the press in the form of preventive injunction and it must,
therefore, be based on reasonable grounds for the sole purpose of keeping the
administration of justice unimpaired. In the words of Mr. Justice Brandeis of
the American Supreme
Court concurring in Charlotte Anita Whitney v. People of the State of
California, 71 L. Edn. 1095 at p. 1106, there must be reasonable ground to believe that the danger apprehended is real and
imminent. This test we accept on the basis of balance of convenience. This
court has not yet found or laid down any formula or test to determine how the
balance of convenience in a situation of this type, or how the real and
imminent danger should be judged in case of prevention by injunction of the
publication of an article in a pending matter. In the context of the facts of
this case, we must judge whether there is such an imminent danger which calls
for continuance of the injunction. Incidentally, it may be mentioned that the
so-called informed press may misrepresent the court proceedings. We must
remember that the people at large have a right to know in order to be able to
take part in a participatory development in the industrial life and democracy.
The right to know is a basic right which citizens of a free country aspire to
in the broader horizon of the right to live in this age in our land under
article 21 of our Constitution. That right has reached new dimensions and
urgency. That light puts greater responsibility upon those who take upon
themselvts the responsibility to inform.
The
question of contempt must be judged in a particular situation. The process of
the due course of administration of justice must remain unimpaired. Public
interest demands that there should be no interference with the judicial process
and the effect of the judicial decision should not be pre-empted or
circumvented by public agitation or publication. It has to be remembered that
even in turbulent times through which the developing countries are passing,
contempt of court means interference with the due administration of justice.
In
the peculiar facts of this case, now that the subscription to the debentures
has closed and, indeed, the debentures have been oversubscribed, we are
inclined to think that there is no such imminent danger of the subscription
being withdrawn before the allotment and so as to make the issue vulnerable by
any publication of article. On a balance of convenience, we are of the opinion
that continuance of the injunction is no longer necessary.
In this
peculiar situation, our task has been difficult and complex. The task of a
modern judge, as has been said, is increasingly becoming complex. Furthermore,
the lot of a democratic judge is heavier and thus nobler. We cannot escape the
burden of individual responsibilities in a particular situation in view of the
peculiar facts and circumstances of the case. There is no escape in the
absolute. Having regard, however, to the different aspects of law and the ratio
of the several decisions, by which though we are not bound, except the
decisions of this court referred to hereinbefore, about which we have mentioned, there is no decision dealing with this
particular problem, we are of the opinion that as the issue is not going to
affect the general public or public life nor any injury is involved, it would
be proper and legal, on an appraisal of the balance of convenience between the
risk which will be caused by the publication of the article and the damage to
the fundamental right of freedom of knowledge of the people concerned and the
obligation of the press to keep the people informed, that the injunction should
not continue any further.
In
the aforesaid view of the matter, we direct that there is no further need for
the continuance of the injunction. Publications, if any, however, would be
subject to the decision of the court on the question of the contempt of court,
namely, prejudging the issue and thereby interfering with the due
administration of justice. Preventive remedy in the form of an injunction is no
longer necessary. Whether punitive remedy will be available or not, will depend
upon the facts and the decision of the matter after ascertaining the consent or
refusal of the Attorney-General.
The
application for the present purpose is, therefore, disposed of with the
direction that the injunction against publication in the order dated August 25,
1988, need not continue further.
Ranganathan
J.—I agree. I would, however, like to add
a few words, having regard to the range of the arguments addressed before us.
The
principal ground urged in support of the prayer for the continuance of the
injunction already granted is that it was very restricted in terms and
injuncted only the publication of articles, comments and reports on the
validity or legality of the various consents, approvals and permissions
obtained by "Reliance" in relation to the debenture issue. This is
precisely the subject-matter of the writ petitions and suit withdrawn to this
court in the transfer petitions. It is urged, strongly relying on the speeches
of the various Law Lords in the Thalidomide case Attorney-General v. Times
Newspapers Limited [1974] AC 273, the observations of this court in Re : P. C.
Sen [1969] 2 SCR 649 and the provision contained in section 2(c)(iii) of the
Contempt of Courts Act, 1971, that any such publication would tend to interfere
with the fair administration of justice and so constitute criminal contempt and
would be liable not merely to punitive action after publication but also to
stoppage by a preventive order before publication. On the other hand, for the
respondents, it is contended that, in the decisions relied upon for the
petitioners, the publications alleged to constitute contempt were of such a
nature that they were seen to affect the course of actions actually pending in
courts, that even otherwise the decision of the House of Lords has been widely
criticised and should not be followed and that the views expressed by Lord
Denning, M.R. in Attorney-General v. British Broadcasting Corporation [1979] 3
All ER 45—though reversed by the House of Lords in [1981] AC 303—and by the
American courts in Bridges v. State of California (86 LEd 252) and in John D.
Pennekamp v. State of Florida (90 L Ed 1295) should be preferred as more
appropriate to the present-day conditions, particularly in the context of the
freedom of press guaranteed under articles 19(1)(a) of the Constitution of
India, and also incorporated in article 19 of the Universal Declaration of
Human Rights, 1948, article 10 of the European Convention of Human Rights and
article 19 of the International Convention on Civil and Political Rights, 1966.
I do not think we are called upon to decide this wider question at this stage.
As already pointed out, the contempt petition filed by the petitioners in
respect of the article published by the respondents on August 25, 1988, has not
been taken cognisance of by us in the absence of the consent of the learned
Attorney-General. At the moment, we have to assess whether any article that may
be published by the respondents, even assuming that it touches on the issues of
validity or legality of the approvals, consent and permissions referred to in
our order of August 19,1988, will so clearly and obviously prejudice or tend to
prejudice the course of the proceedings, now pending in this court, that such
publication should be injuncted by, what the respondents describe as, a
"gagging order". I agree with my learned brother that there is no
such imminent danger or apprehension in the circumstances present here, as calls
for such an extreme step curtailing the freedom of a newspaper. It is
sufficient, I think, to clarify, if at all any such clarification were needed,
that should any newspaper publish any such matter, it will be doing so at its
own risk and subject to its liability for being proceeded against by the
petitioner or others for defamation, contempt of court or otherwise.
A
somewhat narrower ground, as I understand it, put forward for the petitioner
was that the grant of ex parte injunction by us on August 19, 1988, and August
25, 1988, was the result of our prima facie conclusion that consents, approvals
or permissions from the concerned authorities for the debenture issue had been
duly and validly obtained by the petitioner and that any article, liberty for
the publication of which is sought for by the vacation of the interim order,
would contain views contrary to or inconsistent with the prima facie view of
this court. Persons reading the newspaper might be taken in by, and believe in,
the statements made by the respondents in such articles and, if they start
acting upon such beliefs, then the effect of the order of this court,
upholding, prima face, the validity of the debenture issue on the above aspects
would stand undermined. In my view, this contention is untenable. I do not
think that the contention proceeds on a correct analysis of the ratio of our
order dated August 25, 1988, or the earlier order dated August 19, 1988. It
should be remembered that the proceedings which gave rise to the transfer
applications were writ petitions and a suit filed in various courts
challenging, inter alia, the validity or the regularity of the debenture issue
of the petitioner company. If these matters had been heard by the various High
Courts or other subordinate courts, there was a possibility that one or more of
the courts, satisfied with the prima facie tenability of the contentions of the
petitioners therein, might issue an order staying the debenture issue pending
disposal of the suit or writ petition. In fact, it seems also, that interim
orders of this nature had been obtained. The petitioner was apprehensive that,
if any such interim order was passed, all the time, labour and money expended
in floating the debenture issue might be nullified at the last moment. The
petitioner, therefore, moved for the transfer of all the various proceedings to
this court and for an interim order permitting it to issue the debentures as
planned without let or hindrance and without being hampered by any interim stay
order from any court. I do not think it would be correct to say that, when we
passed the order dated August 19, 1988, we formed any prima facie opinion on
the question whether the debenture issue had been validly approved or consented
to by the various authorities. Though it is true that there were averments in
the transfer petitions stating that all the legal formalities had been properly
complied with, what predominantly influenced us to pass the order dated August
19, 1988, was that, even assuming, prima facie, as contended in the various writ
petitions and suit, that there could be some doubt regarding the validity or
otherwise of the consent orders, etc., the restraint by any court or Tribunal
on the issue of debentures at a late stage might prove catastrophic and cause
irreparable loss or damage to the petitioner. We were also of the opinion that,
pending adjudication on the issue of validity raised in the various suits, the
balance of convenience required that there should be no order of any court or
Tribunal staying the debenture issue.
Now,
I shall turn to the circumstances in which the orders dated August 25, 1988,
were passed. Subscriptions to the debenture issue were open between August 23,
1988, and August 31, 1988. It was during this interim period that the first
article was published by the respondent newspaper attacking the validity of the
consent granted by the Controller of Capital Issues to the issue of the
debentures. I do not go into the merits of the article. But, when it was
pointed out to us that this article had been published at a very crucial time
when the subscription to the issue had started flowing in, we saw that it would
have the indirect effect of achieving exactly what this court wanted to prevent
by its order dated August 19, 1988. Though this court, in view of the
allegations raised in the transfer petitions, referred in its order only to
stay orders from courts restraining the progress of the debenture issue, it was
the intention of this court that the debenture issue should go ahead without
any obstacles placed in the way of the collection of subscriptions therefor on
the grounds on which stay orders had been sought to be obtained from courts.
The article published by the respondents, though not violative of the terms of
the injunction granted by this court, could have the effect of circumventing
the order of this court and rendering it ineffective. It had prima facie, a
tendency to affect the efficacy of, and defeat the object with which this court
had passed the interim order dated August 19, 1988. This is the reason why we
passed the second order dated August 25, 1988, and also declined to modify or
vary it at the request of counsel for the newspapers on the next day. I am of
opinion that the said order was rightly passed and that the contention of
learned counsel for the respondent that no such injunction ought to have been
granted at all is not acceptable.
The
position today, however, has radically changed. We are told that the issue has
been over-subscribed. In my opinion, this stage having been completed, there is
no necessity to continue the interim order passed by us on August 25, 1988.
Counsel
for the petitioner, however, vehemently contended that there has been no
material change in the situation. He submitted that many lakhs of people have
subscribed to the debentures and, within a strict time schedule laid down by
the statute, the petitioner is bound to scrutinise all the applications, decide
on the issue of allotment and send out allotment letters or refund the
application moneys received. It is submitted that even at this stage there is a
potential danger that continued publication of articles by the respondents
attacking the validity of the debenture issue will have the effect of causing a large number of applicants for the
debentures to panic and to seek refund of the application moneys already paid
by them. In fact, it is said, a writ petition of that nature has already been
filed in the Allahabad High Court. Counsel submitted that, in a sensitive
matter like issue of debentures, even the request for return of money by any
one person could trigger off several applications of the same type and that the
danger, that the petitioner company might be asked to refund moneys sent in
respect of subscriptions already made on the basis of the allegations in such
articles as the one already published, is real and imminent. He submitted that
it is therefore as much necessary today to continue the injunction as it was
when it was granted on August 25, 1988.
I have given careful thought to this contention urged on behalf of the petitioner company. It is of course difficult in the absence of any reliable data for any person to come to a conclusion as to how exactly the publication of articles of the type published by the respondents would cause prejudice in the manner contended for by the petitioner. It seems to me, however, that the danger apprehended by the petitioner company is not so real or substantial as to warrant the continuance of the injunction order passed by us on August 25, 1988. Even if, for the purpose of argument, one were to assume that such claims for refund will be made, they cannot straightaway harm the interests of the petitioner company. There is no possibility that, pending determination of the issues raised, any court will order interim relief to such applicants by way of grant of such refunds. The petitioner will be liable to make any such refund only if it is ultimately decided by this court or any other court that the issue of debentures is invalid and that the application moneys have to be refunded. That, of course, the company will have to do in any event. There is however, no immediate cause for any apprehension on the part of the petitioner that the publication of any such article could abort the debenture issue in the manner it could have done before August 31, 1988. I, therefore, agree that there is no justification for the continuance of the interim order dated August 25, 1988, any longer.
COMPANIES ACT
v.
Securities and Exchange
Board of India
P. SHANMUGAM, J.
ORIGINAL PETITION NO. 25273 OF
1998-H
FEBRUARY 11, 1999
Section
72 of the Companies Act, 1956 read with sections 269SS and 40A(3) of the
Income-tax Act, 1961 - Allotment of shares - Application for -Company in letter
of offer for allotment of share mentioned that any application effected in cash
amounting to Rs. 20,000 would be returned -Petitioner paid Rs. 21,000 in cash
as application money - Company rejected petitioner's application - Whether conditions
laid in letter of offer was is consonance with section 269SS - Held, yes -
Whether payments of share application money is covered by word 'expenditure'
and same can be disallowed if they are made in cash in sums exceeding amount
specified in section 40A(3) - Held, yes - Whether allotment of share in a
contract and any breach of it can be raised in a civil suit only and as such a
writ petition would not lie - Held, yes - Whether SEBI's jurisdiction being
limited to that of a guidance and petitioner aggrieved by SEBI's order in
complaint against
non-allotment of shares, could appeal to the appellate authority under SEBI Act
and writ petition could not be maintained - Held, yes
The petitioner in pursuance of an offer of the 2nd
respondent company, applied for 144 equity shares and paid Rs. 21,600 in cash
being the application money. The company rejected the application on the ground
that the offer was made by effecting payment in cash in violation of section
269SS. When complaint was made, the SEBI affirmed the company's decision.
On writ petition :
The company in their letter offer had clearly mentioned
under general instructions para that any application effected in cash amounting
to Rs. 20,000 would be refunded. Similar applications appeared to have been
rejected. The general instructions para was in consonance with section 269SS.
In Attar Singh Gurmukh Singh v. ITO [1991] 191 ITR 667/59 Taxman 11 the Supreme
Court hold that such payments made would also be covered by the word
'expenditure' and such payments could be disallowed if they were made in cash
in the sums exceeding the amount specified under section 40A(3).
Further there was no violation of Company Rules in relation
to failure to allot shares. The remedy must lie within the framework of the
Companies Act, 1956 and by way of civil suit. An allotment of shares is a
contract and any breach of it can be raised in a civil suit. The SEBI's
jurisdiction is limited to that of a guidance and in any event if the
petitioner was aggrieved by the SEBI's order there was a provision for appeal
under section 20 of the SEBI Act, 1992. The petitioner could move the Civil
Court or the appellate authority under the SEBI Act.
Therefore, no grounds were made out to grant the relief and
the petition was dismissed.
CASES REFERRED TO
Attar Singh Gurmukh Singh v. ITO [1991] 191 ITR 667/59
Taxman 11 (SC), Pandian Graphites (India) Ltd. v. Lovvuri Lakshmi [1996] 87
Comp. Cas. 323 (AP) and Poonamchand Kothari v. Rajasthan Tube Mfg. Co. Ltd.
[1996] 87 Comp. Cas. 842 (Raj.).
C.K. Karunakaran and P.K. Vijayamohan for the Petitioner. P.V.
Lohithakshan, Satish M., U.K. Ramakrishnan, P.K. Ravindranatha Menon and George
K. George for the Respondent.
JUDGMENT
1. The
petitioner is a shareholder of 2nd respondent company. This original petition
is filed under article 226 of the Constitution for a direction to the company
to allot rights share and direction to the 1st respondent to perform its statutory
duty.
2. The
petitioner is pursuance of an offer of the 2nd respondent company applied for
144 equity shares and paid Rs. 21,600 being the application money in Indian
Overseas Bank on 6-12-1997. The company rejected the application and refunded
the amount by their letter dated 7-2-1998. By a subsequent communication dated
6-3-1998 the petitioner was informed of the reason for rejection, viz., that
the offer was made by effecting payment in cash in violation of section 269SS
of the Income-tax Act, 1961 ('the Act'). A complaint made before the 1st
respondent Board was rejected confirming the decision of the company. The
original petition is filed at this stage.
3. I
have heard the counsel and considered the matter carefully. It is found that
the company in their letter offer dated 16-10-1997 had clearly mentioned under
general instructions para that any application effected in cash amounting to
Rs. 20,000 will be refunded. Similar applications appear to have been rejected.
The general instructions para is in consonance with section 269SS. The Supreme
Court dealing with disallowance as expenditure under section 40A(3) of the Act
held that will include expenditure for purchasing of stock-in-trade in Attar
Singh Gurmukh Singh v. ITO [1991] 191 ITR 667/59 Taxman 11. Their Lordships
observed as follows :
". . . It will be clear from the provisions of section
40A(3) and rule 6DD that they are intended to regulate business transactions
and to prevent the use of unaccounted money or reduce the chances to use black
money for business transactions. [see Mudiam Oil Company v. ITO [1973] 92 ITR
519 (AP)]. If the payment is made by a crossed cheque drawn on a bank or a
crossed bank draft, then it will be easier to ascertain, when deduction is
claimed, whether the payment was genuine and whether it was out of the income
from disclosed sources. In interpreting a taxing statute, the Court cannot be
obivious of the proliferation of black money which is under circulation in our
country. Any restraint intended to curb the chances and opportunities to use or
create black money should not be regarded as curtailing the freedom of trade or
business.
. . .The payments made for purchases would also be covered
by the word 'expenditure' and such payments can be disallowed if they are made
in cash in the sums exceeding the amount specified under section 40A(3). We
have earlier observed that rule 6DD has to be read along with section 40A(3).
The rule also contemplates payments made for stock-in-trade and raw
materials..." (p. 673)
4. Secondly,
I do not find any statutory violation of the company rules or by 1st respondent
in reference to failure to allot shares. The remedy must lie within the frame
work of the Companies Act, 1956, and by way of civil suit. An allotment of
share is a contract and any breach of it can be raised in a civil suit. [Vide
Pandian Graphites (India) Ltd. v. Lovvuri Lakshmi [1996] 87 Comp. Cas. 323 (AP)].
Poonamchand Kothari v. Rajasthan Tube Mfg. Co. Ltd. [1996] 87 Comp. Cas. 842
(Raj.). In Guide to the Companies Act by A. Ramaiya, 14th edn. 1998, page 779
in reference to the allotment of shares it is stated as follows :
"Irregular allottment not dispute under Consumer
Protection Act—Failure on the part of a company to give to the shareholder his
proportion of the rights shares does not constitute a consumer wrong and,
therefore, no consumer action lies against it either under Consumer Protection
Act, 1986 or MRTP Act, 1969. The action in this case was under section 12B of
the MRTP Act, 1969 for compensation for denial of rights shares. The remedy
lies within the framework of the Companies Act and also by way of a civil suit.
Harish Sood v. Videocon International Ltd. [1996] 8 SCL 28 (MRTPC)."
[Emphasis supplied]
The 1st respondent's jurisdiction is limited to that of a
guidance and in any event if the petitioner is aggrieved by the 1st
respondent's order, there is a provision for appeal under section 20 of the
Securities and Exchange Board of India Act, 1992.
For these reasons, no grounds are made out to grant the relief and the original petition is dismissed. The civil court or the appellate authority, if moved, will dispose of it on merits uninfluenced by any of the observations contained in this judgment.
[1995] 5 SCL 82
(MAD.)
Kothari Industrial Corpn. Ltd.
v.
Maxwell Dyes & Chemicals (P.) Ltd.
GOVARDHAN, J.
APPLICATION NOS. 7151 AND 7153 OF 1994
AND 220, 435,436, 1312, 1628 AND 1631 OF 1995
MAY 16, 1995
Section 166 of the Companies
Act, 1956 - Annual general meeting - Whether, where funds raised from
shareholders for specific project by issuing letter of offer were later
deployed for another project and resolution approving deployment of funds for
such project had been approved by majority of shareholders, such resolution was
a valid resolution which could be implemented and it could not be said to be
invalid and unenforceable for reasons, that originally funds had been raised
for some other purpose and such money was not kept in separate bank account -
Held, yes
Section 81(1A), read with
section 166, of the Companies Act, 1956 - Issue of further capital - Company
proposed issue of shares by private placement to NRIs and Overseas Corporate Bodies
(OCBs) entirely at discretion of directors - It further proposed to issue
certain number of shares to promoters' group subject to limit of 51 per cent of
share capital - In annual general meeting shareholders by overwhelming majority
passed resolution - Only a group of minority shareholders opposed resolution -
Whether when majority of shareholders passed resolutions approving issue of
preferential shares, resolution in question was valid and could be implemented
and it could not be said to be invalid merely on ground that preferential
shares were issued to strengthen promoters hold in company as long as such
issue did not violate guidelines issued by SEBI - Held, yes - Whether since law
laid down in Needle Industries (India) Ltd. v. Needle Industries Newey (India)
Holdings Ltd. AIR 1981 SC 1298 was not applicable to public limited company, it
would be wrong to hold resolution in question to be invalid on ground that
resolution encouraged allotment of shares to particular section of shareholders
- Held, yes
Section 166, read with
section 176, of the Companies Act, 1956 - Annual general meeting - Notice for
adjourned meeting was sent with new proxy forms to enable shareholders who had
purchased shares after date of originally scheduled meeting up to date of
adjourned meeting to exercise their choice - Validity of resolution passed in
adjourned meeting with overwhelming majority was challenged on ground that old
proxies were used in meeting -Whether meeting in question being adjourned
meeting, it would be incorrect to say there was any impropriety in using old
proxies already furnished to shareholders and therefore resolution was validly
passed in adjourned meeting and it could not be said to be invalid - Held, yes
- Whether, even otherwise, since shareholders could have used new proxy forms
issued along with adjourned meeting notice if any shareholders wanted to change
proxy, it would be incorrect to say that notice was invalid so as to hold that
resolution passed was invalid - Held, yes
FACTS
The company gave notice for its
annual general meeting wherein, inter alia, three resolutions, viz., resolution
Nos. 10, 11 and 12 were proposed to be passed. Resolution No. 10 sought
approval of change in the purpose of utilisation of the proceeds of partly
convertible debentures and equity shares, originally raised for some other
purposes, for a new project viz., the beer project; resolution No. 11 sought
approval of offer and allotment of equity shares to NRIs and Overseas Corporate
Bodies (OCBs) at the absolute discretion of the board of directors; and
resolution No. 12 sought approval of allotment of shares at a premium to
defendant No. 2 (who was chairman and managing director of defendant No. 1) and
his associates, subject to the condition that the allotments did not exceed the
limit of 51% of the share capital of the company.
Two suits were filed by a
minority group of shareholders for a declaration that the notice issued by the
company calling for the annual general meeting on 12-9-1994 for passing the
above-said resolutions was illegal and unenforceable and for permanent
injunction restraining the company from considering and passing the resolutions
in question. However, by an order of the Supreme Court, the meeting was
conducted as scheduled and resolution Nos. 10 and 11 were considered but
consideration of resolution No. 12 was deferred to a future date as the
financial institutions which had given their approval earlier withdrew the
approval prior to the holding of the annual general meeting. Eventually resolution
No. 12 was considered in an adjourned general meeting as per the orders of the
Court. All the above-said resolutions were passed by the shareholders by an
overwhelming majority, the plaintiffs (minority group) voting against the
resolutions. The Supreme Court ordered that the resolutions could be permitted
to be implemented only after the High Court gave its decision on the validity
of the resolutions.
While the company filed an
application before the High Court for permission to implement the resolutions,
the plaintiffs sought injunctions restraining the defendant-company from
implementing the resolutions on various grounds.
The main objection to resolution
No. 10 was that the funds were originally raised for some specific project
mentioned in the letter of offer to the shareholders but these were proposed
vide the resolution to be used for an entirely new project regarding which no
particulars were given in the letter of offer and that, therefore, it was an
invalid resolution, even if passed with a majority. The plaintiffs also
contended that the Central Government had ordered a limited inspection under
section 209 in respect of the end-use of the funds on the ground that even
though the beer project had been conceived long back even prior to the issue of
the PCDs, it was not disclosed to the shareholders and the company had thus
suppressed material facts from its shareholders. The plaintiffs also contended
that the company ought to have kept the monies raised for specific purposes in
a separate bank account so long as those purposes were not sought to be
implemented; further the beer project was proposed in the State of Andhra
Pradesh where prohibition was in force and, consequently, all monies diverted
to the beer project would go waste.
Resolution No. 11 was challenged
on the ground that the offer of PCDs had been made to a select group, viz.,
NRIs, to the detriment of the minority shareholders. The NRIs were alleged to
be close associates of the promoters and offering shares to them would
allegedly result in diluting the percentage of shareholding of the plaintiffs.
The legality of resolution No.
12 was challenged on the ground that the passing of the resolution on 20-3-1995
was improper when a notice had been issued to hold the meeting on 12-9-1994,
that there was no proper notice for the meeting dated 20-3-1995 inasmuch as no
fresh proxy forms had been issued; that the promoters could not issue 51% of
shares to select groups and that the financial institutions while approving the
resolution for allotment of preferential shares to the select group, did not
consider such factors as the past record of the company, productive use of
funds, source of the promoters for funding the additional shares proposed to be
allotted to them and family disputes among the promoters.
HELD
The Supreme Court has held in Narendra Kumar Maheshwari v.
Union of India AIR 1989 SC 2138 that the approval obtained for the change in
the scope of the project from a financial institution, viz., the ICICI, which
was a Government Organisation, was acceptable. It was also held that deviation
from the earlier proposal for the deployment of funds to a project other than
that for which a proposal was made, is neither illegal nor void In the case of
Madan Gopal Jajoo v. Union of India AIR 1992 Delhi 253 the Supreme Court has
held that where the resolutions in the shareholders and debenture-holders
meeting were passed with overwhelming majority, any order by the Court that the
debenture issued may be recalled would result in an unsettling effect on the
capital market and it would affect the right of almost the whole of the
investing public. The Supreme Court has, therefore, not encouraged any
deviation from the resolutions passed by a majority of the shareholders.
In the instant case, the
defendant company had addressed the authorities viz., the Central Government,
the State Government, financial institutions like ICICI, UTI, GIC LIC and also
the RBI for obtaining their consent and approval of issue of debenture/shares
in favour of the NRIs towards the beer project and the beer project had been
approved by the Government of India as well as the Government of Andhra
Pradesh. The correspondence filed by the applicant also showed that the Andhra
Pradesh Government had even allotted plots for the factory to enable the
defendant to start the beer project in Andhra Pradesh in pursuance of the
sanction given by them subject to the approval by the shareholders. Resolution
No. 10 approved the deployment of the funds to the beer project with a certain
'percentage of shares to the NRIs, and the objections raised by the plaintiff
to hold that the deployment was not proper and, therefore, the resolution was
illegal, could not be given any credence at all.
It was not possible to hold
resolution No. 10 to be invalid on the ground on prohibition in Andhra Pradesh.
Just because prohibition had been introduced in Andhra Pradesh, it could not be
said that the manufacture of beer itself was prohibited, and that manufacture
was to be distinguished from consumption.
It was for the plaintiff to
prove that there was an investigation pending against the company. The letter
written by the Regional Director of Company Law Affairs, Madras to the Director
of Company Law relied on by the plaintiff ended with a note that it might
appear that the diversion of PCDs for modernization of textile units to the
beer project had been requested by obtaining the approval from debenture-holders and members. This
observation by the Regional Director would derive one to the conclusion that
the Regional Director had been satisfied that the deployment funds were quite
regular in view of the requisite approval of the debenture-holders and members
having been obtained Therefore, the proposed inspection under section 209A
could not be considered an investigation pending against the company,
preventing them from implementing the resolutions passed on the beer project.
The provisions of section 73
would be applicable only if the prospectus had been issued calling for
applications for shares and not in cases where a notice of issue had been sent
to the shareholders. Letters of the Stock Exchange dated 12-3-1993 and
24-9-1993 revealed that the shares had been listed in the Stock Exchange at
Madras. Therefore, the contention of the plaintiff, that the amount raised had
not been kept in a separate bank account and therefore the resolutions could
not be permitted to be implemented, was not convincing or acceptable.
Thus, the resolution No. 10 was
valid on all counts.
As regards the challenge to the
validity of resolution No. 11, the offer to NRIs had been made to comply with
the conditions imposed in the letter of intent given by the Government of India
and it had been approved by the ICICI who were the trustees of the
debenture-shareholders. The SEBI guidelines did not prohibit transfer of
debenture shares to NRIs. The Securities (Contract) Regulation Act, the Reserve
Bank of India, the financial institutions, etc., encourage the transfer of
shares up to 20% of the purchase cost in favour of the NRIs. The offer to NRIs,
therefore, did not appear to be an offer made to increase the percentage of
holding of the share with the second defendant, diluting the percentage holding
of the plaintiffs. Resolution No. 11 being consequent upon resolution No. 10,
the reason given by the plaintiffs to hold that this resolution was invalid and
therefore, it should not be permitted to be implemented, was, therefore not
sustainable. When the plaintiffs contended that the issue of shares could not
be against law and yet the first defendant proposed to issue shares in favour
of NRIs, it was for the plaintiffs to show how the issue of debentures in
favour of NRIs was against law.
There was no such evidence
placed before the Court. Further, the defendant-company being a public listed
company, the law laid down in the Needle Industries (India) Ltd. v. Needle
Industries Newey (India) Holdings Ltd. AIR 1981 SC 1298 could not be made
applicable. Therefore, the contention of the plaintiff that resolution No. 11
encouraged allotment of debentures in favour of particular sector people and,
therefore, it could not be implemented, was untenable. Therefore resolution No.
11 was to be permitted to be implemented.
Regarding the validity of
resolution No. 12 passed in the adjourned meeting, the defendants had produced
the original minutes of 12-9-1994. The plaintiffs had also participated in the
said meeting held on 12-9-1994. There were entries in the minutes which would
show that the plaintiffs had expressed their opinion when the second defendant
had sought for postponing the meeting to a future date. After a discussion on
the subject, it had been decided by the shareholders who were present on
12-9-1994 to have the meeting with regard to resolution No. 12 postponed to a
future date. The Supreme Court was also aware of the adjournment of resolution
No. 12 to a future date and it had also given directions. In this Court also,
the adjournment of the meeting for considering resolution No. 12 had been
considered and a direction had been given to hold the meeting on 20-3-1995.
When the plaintiffs were parties to the proceedings dated 12-9-1994, and the
meeting was adjourned to a future date for considering resolution No. 12, the
contention of the plaintiffs that the adjournment was improper and illegal and,
therefore, the resolution passed on 20-3-1995 was an illegal resolution, could
not be given any weight at all.
The plaintiffs had also
contended that two letters addressed by he financial institutions, which were
the reason for the adjournment sought by the second defendant, had not been
placed before the shareholders and, therefore, there was a suppression of a
material fact before passing the said resolution and on that ground also, the
resolution had to be held invalid. As per the members of the meeting, the two
letters of the financial institutions had been considered by those who had
assembled in the meeting and only after a detailed discussion with regard to
the necessity for postponing the meeting, the meeting had been adjourned; therefore,
it could not be stated that there was any suppression of a material fact before
the shareholders who had assembled to pass resolution No. 12. The meeting held
on 20-3-1995 was a meeting which had been adjourned from 12-9-1994. Since, it
was held after 30 days, a notice had also been sent enclosing the proxy forms
to enable such of those shareholders who had purchased the shares subsequent to
12-9-1994 to participate in the meeting. The meeting being a continuation of
the original meeting, the notice contained the same form of resolution and
explanatory statement as was given in the original notice and there was nothing
improper to hold that there was no valid notice.
As regards the use of old proxy
forms, since the meeting held on 20-3-1995 was only an adjourned meeting, there
was nothing improper in using the proxies already furnished to the
shareholders. At any rate, when the subsequent notice had been issued, new
blank proxy forms had been sent to the shareholders, and if anybody had desired
to change the proxy, they could have done it. Even though fresh proxy forms had
been sent for the meeting on 20-3-1995 to enable the purchasers of shares
subsequent to 12-9-1994 to exercise their option, the previous shareholders
also could have utilised the same if they had an intention to change the proxy.
Therefore, it could not be a ground to hold that the meeting had not been
properly held as old proxies had been used.
None of the above-mentioned
reasons canvassed by the plaintiffs could be a valid reason for holding that
the resolution passed on 20-3-1995 was an improper and illegal one. The main
ground on which resolution No. 12 had been challenged by the plaintiffs was
that there were disputes between two groups and one could not defeat the other
by increasing the shareholding against the guidelines issued by the Government
regarding the promoters' right to the detriment of the other. According to the
plaintiffs' the promoters' right to increase the shareholding was only up to
20% and in the present case, as per the notice and resolution, the promoters'
intention was to issue equity shares numbering 1,01,04,000 at Rs. 10 each and
it was against the guidelines issued by the Government.
The expression used in the
notice as well as the resolution was as 'not exceeding'. It did not necessarily
mean that the minimum issue was 1,01,04,000 shares; the maximum only was
mentioned and, therefore, it was always open to the shareholders to reduce the
same in the meeting after discussion. But the results of the meeting had
disclosed that except the plaintiffs, none other had opposed this proposal In
the notice itself, it was mentioned that the proposal was subject to the
guidelines of the SEBI. The lock-in-period was also stated as five years. When
the notice referred to the guidelines issued by the SEBI and the lock-in-period
was also mentioned, the shares, even if issued, could not be utilised by the
person in whose name they were issued to the detriment of others.
It was also brought it to the
notice of the Court that a number of companies of the group, of which the
plaintiffs also formed part, had also increased their share capital to the
maximum and the contention of the plaintiffs that the promoter could not be
issued with 51% of shares was only an attempt to vindicate their personal
grievance. It was not disputed by the plaintiff that some of their own
sister-concerns had increased the capital issue. While so, there appeared to be
no bona fides in their objecting to the issue of the proposed number of shares
in favour of the promoters as per resolution No. 12. Further, subsequent to the
introduction of liberalisation policy, the promoters could have their share
capital up to 75% and the issue to the public was restricted to only 25%. This
percentage of shares which a promoter could have, subsequent to the
introduction of the liberalisation policy, was not challenged by the
plaintiffs. Therefore, the proposal to issue 1,01,04,000 equity shares in
favour of the promoters and 20% of shares to NRIs could not be considered as
steps taken against the interests of the minority shareholders. On that ground,
the resolution could not be declared as an improper or illegal one to deny the
permission sought for by them.
As regards the past record of
the promoters, there was no investigation pending before the CLB and what had
been suggested by the Regional Director to the Director was only to hold an
inspection and, therefore, the management could not be said to be having a past
record of a shady nature. As far as the productive purpose was concerned, the
introduction of total prohibition by the newly-formed State Government of
Andhra Pradesh was subsequent to the notice. That the previous Government had
approved the scheme and had offered its assistance could not be denied The
manufacture of beer was only productive in nature and it could not be stated
that the funds were not to be used for a productive purpose. Therefore, this
requirement was also satisfied.
As regards the source of
funding, the promoters had indicated issuing of shares and collection of share
capital through NRIs, and financial institutions including ICICI. Therefore,
this requirement was also satisfied As regards the point of family disputes, it
could not be stated on facts that there was any rift in the management of the
first defendant-company. The plaintiffs argument that it was only because of
the support of the financial institutions that this resolution had been passed
and that the stand taken by those institutions in modification of their earlier
stand was not correct, could not be accepted The Court could not sit in
judgment over the policy decision taken by the financial institutions to
support or not to support the resolution and decide the issue in favour of the
applicant. Resolution No. 12 could not be held as an invalid one by holding
that the financial institutions had not considered these aspects before
granting their support to the proposed issue of shares.
In the instant case, all the
three impugned resolutions had been passed by an overwhelming majority of
shareholders after due consideration of the stand taken by the plaintiffs. In
such a case, the majority alone would have their way and the minority could not
have their say alone. They could not be permitted to nullify the effect of the
resolutions passed by the shareholders of the company. In this connection, when
considering the balance of convenience, it would also show that if recognition
for these resolutions was not given, a vast majority of the shareholders of the
company would be prejudiced and hardship would be caused to them since it was
their desire to pass the resolutions, whereas no prejudice would be caused to
the plaintiffs if the resolutions were allowed to be implemented
For these reasons, all the three
resolutions passed by the majority of shareholders had to be approved and
permission had to be granted to implement them.
Narendra Kumar Maheshwari v.
Union of India AIR 1989 SC 2138, Madan Gopal Jajoo v. Union of India AIR 1992
Delhi 253, Needle Industries (India) Ltd v. Needle Industries Newey (India)
Holdings Ltd. AIR 1981 SC 1298.
The two Reliance Group Companies, Maxwell Dyes &
Chemicals and another had sought a stay of the judgment of the single judge
before the Vacation Bench of Madras High Court, Govardhan J, with the plea that
the promoters should be restrained from hiking their stake until the pending
disputes were resolved. The Vacation Bench on 3-6-1995 dismissed their appeal
for injunction and allowed implementation of all the three resolution as prayed
for. The appeal for direction to the respondents in the appeal case to keep the
money collected for beer project in a separate account was also dismissed. The
Court was inclined to the view point of KICL that the resolutions had been
passed by a majority of shareholders and a stay on the resolutions would cause
hardship to the company. The matter is now reported to be pending before a
Division Bench of Madras High Court.
1. A No. 7151 of
1994 - The deponent is the Company Secretary of the Applicant. On 7-9-1994,
this Court passed an order in O.A. Nos. 849 and 850 of 1994 in the suit C.S.
No. 1128/1994 and O.A. Nos. 855 and 856 of 1994 in C.S. No. 1132/1994 directing
the annual general meeting of the applicant-company as scheduled would go on
with all the resolutions listed for consideration excepting Resolution Nos. 10
to 12. A transfer petition was earlier filed by the applicant in the Supreme
Court seeking the transfer of certain suits including this suit to Delhi High
Court or any other High Court. When the above application came up for hearing
on 6-9-1994, the Hon'ble Chief Justice of India directed the petition be posted
for hearing on 9-9-1994. On 9-9-1994, the Supreme Court passed an order
permitting the first applicant-company to hold the annual general meeting on
12-9-1994 and permitted the respondents and their associates to vote on the
basis of their total shareholding submitted by them to the Hon'ble Supreme
Court. The Court further directed that the votes in respect of number of Partly
Convertible Debentures (PCDs) offered and applied for the number of Additional
partly convertible debentures, applied for under rights issue of the
applicant-company in respect of 11 Reliance companies be maintained separately.
The Supreme Court further directed that the results of voting on Resolution
Nos. 10 to 12 would not be declared nor would any decision about the passing of
the said resolutions be taken on the basis of the said voting until further
orders. The applicant-company was directed to keep the results of the voting on
the rights shares in a sealed envelope and intimate to the Supreme Court
promptly. On 12-9-1994, the AGM of the company was held. Poll was taken on
Resolution Nos. 10 and 11. Consideration of Resolution No. 12 was deferred till
27-9-1994. The results of the other resolutions were announced either unanimous
or by a overwhelming majority. On 25-10-1994, the sealed envelope was opened.
As per the results, 94 per cent of the shareholders present and voting approved
the Resolution Nos. 10 and 11 and 6 per cent were against the Resolutions. The
votes in respect of shares covered by Rights PCDs, (Partly Convertible
Debentures) claimed by the eleven Reliance companies were kept separately as
per the directions of the Supreme Court. If these votes are also taken into
account, about 87 per cent of the shareholders approved Resolution Nos. 10 and
11, and 13 per cent voted against the Resolution Nos. 10 and 11.
2. The
applicant-company received a Fax on 10-9-1994 addressed by the Life Insurance
Corpn. of India (LIC) to the applicant-company virtually withdrawing their
earlier approval given to Resolution No. 12 contained in the Notice of the AGM
dated 5-8-1994. The General Insurance Corporation of India (GIC) sent a similar
letter on 2-9-1994. The applicant-company wrote to LIC a letter seeking
clarifications on the change in their stand taken by them as compared to their
earlier stand taken in March 1994, giving approval to the proposal in
Resolution No. 12. Till date of AGM, viz., 12-9-1994, there was no reply. The
Board of Directors of the applicant-company resolved to defer the consideration
of Resolution No. 12 on 12-9-1994. The Chairman informed the decision of the
Board at the AGM to defer Resolution No. 12 to 29-7-1994 and sought the
concurrence of the shareholders. The shareholders were overwhelmingly in favour
of deferment of Resolution No. 12 and, therefore, it was deferred, on
27-9-1994, the Supreme Court directed the results of the voting on Resolution
Nos. 10 and 11 to this Court and the applicant-company would implement the
Resolutions after obtaining orders on the legality and validity of the said
Resolutions from this Court.
3. Resolution
No. 10 is as follows:
"RESOLVED THAT the consent
of the company be and is hereby accorded for change in the purpose of
utilisation of the proceeds from issue of 4,72,500 - 16 per cent Secured,
Redeemable Partly Convertible Debentures (PCDs) of Rs. 400 each and issue of
3,60,000 equity shares of Rs. 10 each at a premium of Rs. 15 per share to the
Overseas Corporate Body (OCB) for the following projects instead of as
originally proposed in the Letter of Offer dated 15-10-1992:
|
|
Rs. lakhs
|
|
Granite Tiles and Expansion of Granite
Monument Plants |
482 |
|
Brewery Project |
1216 |
|
Long Term sources for Working Capital |
150 |
|
Issue Expenses |
70 |
|
|
1918" |
Since a part of the total funds,
viz., Rs. 1,216 lakhs out of Rs. 2,250 lakhs raised, PCDs was to be utilised
for a new project, viz, Beer Project, instead for which they were originally
raised and since in order to comply with the conditions imposed by the
financial institutions and other authorities, the Beer Project could be
implemented from the funds raised by PCDs earlier, after obtaining the approval
of the shareholders of the company at the AGM. There is nothing illegal in such
a course of action and it is always left open to the shareholders to deny their
permission in which case funds cannot be diverted to new project not originally
envisaged. In the instant case, not less than 87 per cent of the votes polled
were cast in favour of Resolution No. 10 as proposed by the applicant-company.
The company should, therefore, be permitted to implement the Resolution. The
votes cast against Resolution Nos. 10 and 11 were votes cast by the Reliance
companies and their supporters. The Government of India, public financial
institutions, SEBI, the RBI and all other such authorities have permitted the company to
implement the beer project. They would not have done so if the Resolution No.
10 had been illegal or invalid. They have examined the company's proposal to
deploy the funds in a revised manner and only after convincing themselves, they
have approved the applicant-company taking up the new project. Public financial
institutions hold 34.65 per cent in the aggregate equity capital of the
applicant-company and they have voted in favour of Resolution Nos. 10 and 11 on
12-9-1994. The Andhra Pradesh Government has sanctioned land for the beer
project. It has been given incentives in the payment of land value, if the
commercial production could be established before August 1995. There is nothing
illegal in the commencement of the beer project or in implementing the same or
in utilising the funds raised for other purposes for the beer project. Any
delay in implementation of Resolution No. 10 will cause undue hardship and
damage to the applicant-company. The balance of convenience is in favour of the
applicant-company. This Court be pleased to dismiss the plaintiff's prayer for
permanent injunction regarding Resolution No. 10 and permit the
applicant-company to implement the Resolution.
4. Resolution
No. 11 of the notice dated 5-8-1994 is as follows:
"RESOLVED
THAT pursuant to the provision of section 81(1 A) and other applicable
provisions if any, of the Companies Act, 1956 (including any re-enactment
thereof) and subject to such further approvals as may be necessary from any
authority and subject to such terms and conditions and modifications as may be
prescribed in granting such approvals and agreed to by the Board of Directors
of the Company (hereinafter referred to as the 'Board' which term shall be deemed
to include any Committee of the Board as may be constituted) consent be
accorded to the Board to issue, offer and allot by private placement of not
exceeding 9,00,000 equity shares of Rs. 10 each at a premium to be calculated
in accordance with the guidelines of the Securities and Exchange Board of India
(SEBI) dated 4-8-1994 and such other amendments as may be made thereto in
respect of calculation of the premium on the shares and that the said shares
may be offered to the Indians [NRIs/Overseas Corporate Bodies (OCBs)] as the
Board in its absolute discretion and in such manner and within such period and
at such time or times as the Board may decide and in accordance with the
abovesaid guidelines of SEBI and that the said shares so offered and allotted
shall have a lock-in period of five years from the date of allotment. The
aforesaid number of shares have been calculated on the basis of an estimated
premium of Rs. 40 per share and that the same shall be varied depending upon
the calculation of the premium in accordance with the SEBI guidelines by the
statutory auditors of the Company and a modification in regard to the number of
shares, if necessary, will be placed at the general meeting.
'RESOLVED
FURTHER that such aforesaid shares shall rank paripassu in all respects with
the existing equity shares except as regards dividends. The said shares shall rank proportionate dividend from the date
of allotment. 'One of the conditions imposed by the Government of India on the
company for implementing the beer project that 20 per cent of the project cost
is to be financed out of equity to be raised in hard foreign currency from
Non-Resident Indians (NRIs) and foreign Bodies Corporate. To enable the company
to comply with this condition, it was proposed to seek the approval of the
shareholders by means of a Special Resolution to issue shares to NRIs/OCBs at a
premium to be calculated in accordance with the guidelines in force and after
obtaining the permission of the RBI under the Foreign Exchange Regulation Act, 1973
(FERA). The applicant-company has obtained overwhelming support and approval of
its shareholders at the AGM held on 12-9-1994 and has, therefore, complied with
the provisions of law and stipulations imposed by the Government of India while
granting Letters of Intent for manufacture of Beer. The applicant states that
there is nothing illegal in a company issuing shares to NRIs/OCBs on
preferential basis at a price calculated in accordance with the applicable
guidelines and subject to RBI approvals as required by law."
5. The
respondents who are minority shareholders have a mistaken impression that their
holdings in the company will get reduced if the shares are issued to NRIs/OCBs,
as per Resolution No. 11. Holdings of all the shareholders in the company will
correspondingly be reduced and, therefore, the respondents will not be
prejudiced in this regard. In the Company Petition No. 39 of 1994 filed by them
before the Company Law Board, the respondent has sought for injunction
suppressing this suit. They did not get interim relief from the Company Law
Board. They have not referred to it before the Supreme Court.
6. The
objections of the respondents are motivated and are not in the interests of the
applicant-company and not in the interests of majority of the shareholders. The
founders of the company Mr. D.C. Kothari father of the second applicant and
H.C. Kothari father of B.H. Kothari entered into a family arrangement under
which the applicant-company is man aged by the second applicant and four other companies
established by the same founders, are managed by the family members of B.H.
Kothari. The objection of the respondent is with the aim of putting into saddle
Mr. B.H. Kothari as their nominees. B.H. Kothari does not hold any shares in
the applicant-company. He has never been a member of the Board of the
applicant-company. The motive and intention of the respondent is only to take
over the management from U.D. Kothari.
7. Resolution
No. 12 reads as follows:
"RESOLVED THAT pursuant to
the provisions of section 81(1A) of the Companies Act, 1956 ('the Act') and
other applicable provisions, if any, of the Act (including any re-enactment
thereof) and subject to such further approvals as may be necessary from any
authority and subject to such terms and conditions and modifications as may be
prescribed in granting such approvals and agreed to by the Board of Directors
of the Company (hereinafter referred to as the 'Board' which term shall be
deemed to include any Committee of the Board as may be constituted) consent be
accorded to the Board to issue, offer and allot not exceeding 1,01,04,000
equity shares of Rs. 10 each at a premium to be calculated in accordance with
the guidelines of the Securities and Exchange Board of India (SEBI) dated
4-8-1994 and such other amendments as may be made thereto in respect of
calculation of the premium on the shares to Mr. Pradip D. Kothari and his
group, viz, his relatives, associates and associate companies ('Promoters
Group') as the Board in its absolute discretion and in such manner and within
such period and at such time or times as the Board may decide and in accordance
with the abovesaid guidelines of SEBI and that the said shares so offered and
allotted shall have a lock-in period of five years from the date of allotment.
The said number of shares have been calculated on the basis of an estimated
premium of Rs. 40 per share and the same shall be varied depending upon the
calculation of the premium in accordance with the SEBI guidelines by the
statutory auditors of the Company and a modification in regard to the number of
shares, if necessary, will be placed at the general meeting."
"RESOLVED FURTHER THAT such
aforesaid shares shall rank in all
respects with the existing equity shares except as regards dividends. The said
shares shall rank for proportionate dividend from the date of allotment."
"It is further resolved that the aforesaid investment of the promoters group shall not exceed a limit of 51 per cent of the equity capital of the company."
8. After the new
economic policy, the financial institutions have been permitting the existing
management of various companies in the domestic corporate sector, to increase
their stake in the companies managed or owned by them to 51 per cent with a
view to stall the unhealthy take over bids of companies with proven track
record. When various companies have availed this facility, there is no reason
why the applicant-company's present management should not avail this policy
relaxation. It was only on 2-9-1994 and thereafter when litigation was started
against the AGM of the company, the financial institutions have changed their
stand from what they had earlier agreed. B.H. Kothari and the eleven Reliance
companies want to take over the management of the company. It has, therefore,
become necessary for the existing management to increase its stake in the
company suitably in accordance with law and guidelines in force so that
destabilisation moves initiated by B.H. Kothari and associates are not allowed
to succeed. The applicant, therefore, prays to permit him to implement the
Resolution Nos. 10 and 11 and permit him to hold the adjourned AGM to consider
and put to vote Resolution No. 12.
9. A. No.
1628/1995 - The applicant is the Wholetime Director of the defendant company.
This Court, by its Order dated 15-2-1995 in Application No. 7152 of 1994 in
C.S. No. 1128/1994, permitted the applicant-company to hold the adjourned
annual general meeting of the company on 20-3-1995 to consider Resolution No.
12 of the notice dated 5-8-1994. One of the conditions in the aforesaid order
is that the results of the voting on Resolution No. 12 would not be declared
nor would any decision about the passing of the resolution be taken on the
basis of the said voting till further orders. The adjourned AGM was held on
20-3-1995 at 10 A.M. The applicant has filed an application seeking permission
of the Court to implement Resolution Nos. 10 and 11 of the notice dated
5-8-1994. He prays that the sealed envelope may be opened and the results of
Resolution No. 12 may be implemented.
10. In the counter,
the respondent-plaintiff contends briefly as follows: The legality of the
Resolution No. 12 is pending before this Court. The applicant-company cannot
seek for opening of the envelope before this Court. If the resolutions of
polling are made known to the parties, the results may become public which will
have a serious consequence. Even if the results as indicate that Resolution No.
12 has been passed by requisite majority, the request for implementing the said
Resolution is untenable in the light of the orders of the Supreme Court of
India to decide the validity of Resolution Nos. 10, 11 and 12. The request for
implementing the results may, therefore, be rejected.
11. O.A. No.
435/1995 - The applicant is the Director of the plaintiff company. In the
affidavit, he contends as follows:
The applicant has filed the suit
for declaring that the notice issued by the first respondent-company calling
for the 25th Annual General Meeting of the company on 12-9-1994 for passing of
items 10 to 12 is illegal and unenforceable and for a permanent injunction
restraining the respondents from considering and passing the said Resolutions.
The Supreme Court by its Order dated 9-9-1994, permitted the first
respondent-company to take for consideration Resolution Nos. 10 to 12, but
directed that the results would not be declared nor any decision would be taken
about the passing of the said Resolutions until further orders. At the meeting
held on 12-9-1994, the consideration of Resolution No. 12 was postponed
illegally. The matter was again taken up in the Supreme Court on 23-9-1994 and
the Supreme Court did not permit the respondent-company to take up for
consideration Resolution No. 12 until further orders. It was taken up on 25-10-1994
and the Supreme Court has held that the decision on the legality or otherwise
of Resolution Nos. 10 and 11 will have to be considered by this Court and until
then they cannot be implemented. So far as Resolution No. 12 was concerned, the
Supreme Court gave liberty to the first defendant to move their Court for
consideration of the said Resolution. The legality of the Resolutions is now
challenged by the applicant as per the directions of the Supreme Court.
12. Resolution No. 10 is
illegal and cannot be implemented for the following reasons: The monies which
were to be raised out of the rights issue were never intended to be utilised
for a beer project, a different purpose. The company is obliged to keep the
monies raised for specific purposes only for that purpose and so long as those
purposes are not sought to be implemented, the company is obliged to keep the
monies raised out of the rights issue, only in a separate bank account under
the provisions of the Act, which the first defendant failed to do so. Conse
quent upon the change in the Government in Andhra Pradesh, a total prohibition
was imposed in the State of Andhra Pradesh which bans the manufacture and
process of liquor and spirits in that State. The monies diverted and spent for
the beer project has, therefore, become a waste. The company would not have
landed into this piguant situation, had it waited for clearance from the
authorities for implementation of the beer project. The Regional Director,
Department of Company Affairs, Madras by his letter dated 5-1-1995 addressed to
the Director of Inspection and Investigation, Department of Company Affairs has
stated that even though the beer project has been conceived long time back even
prior to the issue of Partly Convertible Debenture issue, it was not disclosed
and that the company has suppressed material facts to its shareholders and had
never obtained Letter of Intent from the Government of India for establishing
the beer project. It appears that based on the abovesaid letter by the Regional
Director, that the Central Government has ordered limited inspection under
section 209A of the Act into the accounts of the company. When the matter is
the subject-matter of investigation in respect of the end-use of the funds, the
utilisation of the funds which were not to be utilised for purposes other than
envisaged, is not legal. Therefore, Resolution No. 10 cannot be implemented.
The beer project cannot be established in Andhra Pradesh where it can no longer
be established, and that on that ground also implementation of Resolution No.
10 which would divert the monies in beer project in Andhra Pradesh is not
legal. The diversion of funds for beer project is the subject-matter of pending
proceedings before the CLB under sections 397 and 398 of the Act and the CLB is
seized of the matter. The applicant herein has, therefore, a prima facie case
and balance of convenience is with him for restraining the company from
implementing the Resolution No. 10.
13. Resolution No. 11
pertains to allotment of shares on preferential basis to overseas body
corporates/NRIs to an extent of 9 lakh shares. Resolution No. 12 envisages
allotment of shares on preferential basis to persons in management, viz.,
Pradip D. Kothari and his group, and empowers the company to allot 51 per cent
of the shareholding on preferential basis. In terms of the guidelines issued by
the Central Government, the financial institutions which are the shareholders
of the company, viz., LIC, GIC, UTI, etc., own 34 per cent of the equity
capital. Therefore, they cannot obviously vote
in support of their resolutions for the following reasons: "The company
will have to establish that there is good management and track record; (2)
promoters should provide and disclose the source of funds; (3) the funds which
are to be raised by virtue of preferential allotment or any allotment should be
used for productive purposes; and (4) there should be no family dispute in the
management. None of the guidelines is satisfied in this case. There are serious
allegations against the company. The defendants have not disclosed the source
of funds. The beer project can no longer be construed as productive purpose as
the project was started in the State of Andhra Pradesh where it cannot now be
implemented. There is also serious family dispute which is conceded by the
defendants before the CLB. The financial institutions unmindful of the
guidelines of the Government of India, have voted in favour of Resolution No.
12 though its attention was expressly brought to these allegations in the form
of a writ petition filed by a shareholder. The question whether the financial
institutions have acted in accordance with the directions of the Government of
India is a serious matter for consideration, and that being the position, the
Special Resolution No. 12 cannot be implemented. Financial Institutions can
permit persons in management or promoters group to increase their stake up to
22 per cent only. But the Resolution to be passed is for the specific purpose
of enabling the preferential allotment of shares to promoters group to an
extent of 51 per cent. The number of shares that are to be allowed is also
expressly mentioned as 1,01,04,000 which constitutes 51 per cent. The
resolution would amount to complete violation of the guidelines of the Central
Government and the SEBI. The meeting held on 20-3-1995 is also liable to be
declared as illegal, since, it was not adjourned validly by obtaining the
approval of the members by show of hands or by poll. The very adjournment of
the meeting on 12-9-1994 and the deferment of consideration of the Special
Resolution No. 12 is totally bad and is liable to be declared as illegal.
Proxies which have been allowed in the meeting held on 12-9-1994 have been used
for the meeting held on 20-3-1994 and it is not correct. The company
deliberately did not send any fresh proxies, with ulterior motive of depriving
the legitimate shareholders of the company as on that date from participating
in the meeting. The allotment of shares to overseas body corporate/NRIs is an
indirect method of further consolidate the positions of P.D. Kothari. The
allotment of any shares to NRIs would merely enable Mr. P.D. Kothari to
increase his holding indirectly and, therefore, the Resolution No. 11 is liable
to be declared as illegal. For the above reasons, an injunction restraining the
defendants, and their men from in any manner giving effect to or implementing
the Special Resolution Nos. 10, 11 and 12 said to have been passed on 12-9-1994
and 20-3-1995 may be ordered.
14.
O.A.
No. 220/1995 - This application is filed by the plaintiff for injunction in
C.S. No. 1128 of 1994.
15. In this
application in the affidavit, the Director of the applicant- company contends
as follows: The first defendant company has come out with a sort of 'Rights
issue' of PCDs through letter of offer dated 15-10-1992. The company proposed
to raise Rs. 1,890 lakhs from existing shareholders and employees of the
company by allotment of PCDs. The purpose is to utilise Rs. 873 lakhs for
expanding the capacity of Spinning Mills at Singanallur, a sum of Rs. 520 lakhs
was for modernisation of the existing Mills at Singanallur and Vadamathurai by
installing imported autoconers; a sum of Rs. 637 lakhs was for the utilisation
for setting up of an 100 per cent Export Oriented Unit for quarrying Granite
Blocks and Processing into Granite Tiles with a capacity of 50,000 square
metres. The respondent with the intention of defeating the rights of the
applicant, deleted the names of the applicant and other 10 companies on the
ground that when the instruments relating to transfer of shares have been
presented, they have not been duly stamped. The matter is now pending in the
Supreme Court. The defendant company had proceeded to call for the annual
general meeting of the company by notice dated 5-8-1994. In item No. 10 of the
Agenda, the company made it known to the sharehold ers that the funds which
were collected in the year 1992 for the specific purpose, was to be diverted
for establishing a beer project, for which the company has got a letter of
intent in April 1993, subsequent to the closure of the issue and subsequent to
the collection of monies in April 1993. The validity of Resolution Nos. 10, 11
and 12 have been challenged and suits are filed within interim applications.
The Supreme Court, by order dated 9-9-1994, permitted the respondent to hold
the meeting on 12-9-1994, but, however held that the results of voting shall
not be declared nor could it be implemented until further orders. At the
meeting held on 12-9-1994, the respondent company deferred the consideration of
Resolution No. 12. The Supreme Court passed an order on 23-9-1994 pointing out
that inasmuch as Resolution No. 12 has not been put to vote, there will be
injunction until further orders as regards Resolution No. 12. The Supreme Court
has subsequently held that this Court should pass further orders. As regards
Resolution Nos. 10 and 11, the Supreme Court has held that the legality or
otherwise of the Resolution Nos. 10 and 11 have to be considered by this Court.
This Court, by its order dated 15-2- 1995, permitted the respondent-company to
hold a meeting for consideration of Resolution No. 12, but, however, has
reserved the right in favour of the applicant to even thereafter challenge the
validity and legality of the Resolution. The applicant is now moving this Court
for an order of injunction restraining the implementation of Resolution No. 10.
16.
The
respondent filed a common counter to this application as well as in Application
No. 1312 of 1995 contending the same averments which they have stated in the
affidavit of the applicant in A. No. 7151 of 1994 and A. No. 1628 of 1995.
17. The applicant
has filed a reply affidavit repudiating the averments in the counter and
contending that Rs. 13 lakhs have so far been spent for the beer project even
without getting the approval of the shareholders for diversion of funds and
that too in a State where prohibition has been imposed.
18. O.A. No. 436 of
1995, Application No. 7153 of 1994 in C.S. No. 1132 of 1994 are similar to O.A.
No. 435 of 1995 and Application Nos. 1628 of 1995 and 7151 of 1994 in C.S. No.
1128 of 1994.
19. A. No. 1312 of
1995 in C.S. No. 1128 of 1994 is an application filed by the
plaintiff-applicant with a prayer to direct the respondent to keep the monies
earmarked for the beer project in a separate bank account pending disposal of
the suit and decision by this Court on the legality and validity of Resolution
No. 10 of the Notice dated 5-8-1994 and its implementation.
20. All the above
applications are taken up for a common enquiry, since, all the above
applications are in respect of Resolution Nos. 10, 11 and 12 of the notice
dated 5-8-1994.
21. . The learned
counsel appearing for the plaintiff Mr. Mohan Parasaran has opened his
arguments by stating that the three Resolution Nos. 10, 11 and 12 for the
company Kothari Industrial Corporation Ltd. cannot be implemented even though
the voting pattern of the Resolutions are made known and it is just because
there have been serious allegations made against the company for diversion of
funds in an illegal manner detriment to the interest of the company as well as
the shareholders and the Supreme Court has left open the implementation of
these resolutions, only after establishing the legality of the same and has
left open for the plaintiff to contend that the Resolutions could not be
implemented even though the defendants claim that they have absolute and
overwhelming majority of the voting polled by the shareholders in the AGM held
on two different dates, viz., 12-9-1994 insofar as Resolution Nos. 10 and 11
and 20-3-1995 insofar as Resolution No. 12 are concerned. I have already
extracted Resolution Nos. 10,11 and 12 which are the subject-matter of the
entire discussion, in the earlier part of this order, while narrating the case
of parties.
22. The learned
counsel appearing for the defendants in his arguments has vehemently stated
that the objections that have been raised by the plaintiffs are motivated with
the intention of inducting Mr. B.H. Kothari in the Board of Directors of the
company and it is nothing but a proxy battle being fought by the said B.H.
Kothari and had drawn the attention of this Court to para 13 of the plaint. In
the said para, the plaintiff had stated that in the interest of the company and
the shareholders the company
should go in the hands of a professionally competent person and it would be
most appropriate that one of the original promoters of the company should be
given chance and at present, it would be none-else than B.H. Kothari son of
H.C. Kothari. The above statement according to the learned counsel appearing
for the defendants indicates the intention and the motive behind the objections
raised by the plaintiffs in this Court. The learned counsel appearing for the
plaintiffs would on the other hand argue that the applicant had collected money
from the shareholders for specific purpose and the particulars of the issue is
specific, the monies so collected is admitted to be utilised for other purposes
and it is only with the intention of strengthening the hands of the second
defendant who is in management of the first defendant and it is an attempt made
by the second defendant to defeat the rights of the others, in particular Mr.
B.H. Kothari. The question whether the objection with regard to the resolutions
were made with the oblique motive or in the interests of the shareholders of
their company have to be seen by us before coming to a conclusion whether the
first defendant could be permitted to implement the Resolutions or before
passing an order granting injunction restraining the first defendant from
implementing the Resolution. To reach this goal, I am of opinion that we have
to trace the history of this dispute a little in detail.
23. In C.S. No. 1128 of
1994 filed by Maxwell Dyes & Chemicals Ltd. and in C.S. No. 1132 of 1994
filed by Swadee Chemicals (P.) Ltd. against the first defendant Kothari
Industrial Corpn. Ltd. and another, the relief sought for is the same. That is
declaration of the notice issued by the first defendant calling for the public
to the annual general meeting of the company on 12-9-1994 for the purpose of
considering and passing Resolution Nos. 10,11 and 12 under the caption 'Special
Business' in the agenda, is illegally void and unenforceable and for a
permanent injunction restraining the defendants, their Officers and
Subordinates, etc., from passing the above Resolutions.
24. In the two suits,
applications for injunction were also filed in O.A. Nos. 220 of 1995 and 435 of
1995 in C.S. No. 1128 of 1994 and in O.A. No. 436 of 1995 in C.S. No. 1132 of
1994. The learned Judge (Hon'ble Mr. Justice A.R. Lakshmanan) has observed in
his order as follows: 'Even though a prima facie case has been made out, for
grant of interim injunction, the same is not granted in view of the
representation made by the advocates appearing for the respondents that the
consideration of Resolution Nos. 10, 11 and 12 will be deferred until further
orders'. There were certain transfer petitions pending on the file of the
Supreme Court. In transfer petition Nos. 363 of 1994 to 365 of 1994, the
Supreme Court of India in its order dated 9-9-1994 has passed an order as
follows:
"Taking
all the facts and circumstances into consideration and having regard to the fact
that the 25th Annual General Meeting is scheduled to meet on 12th September, 1994 and preparations for holding
that meeting are complete and its postponement would inconvenience many, we
think that the ends of justice would be met if we permit the appellants to hold
the meeting subject to the following conditions:
1. The appellants may hold the meeting on 12th
September, 1994 but the respondent shareholders will be permitted to vote on
the basis of their total shareholdings shown in the last column of the
statement at page 218; however the votes in respect of the number of PCDs
offered and applied for and the number of additional PCDs applied for in Rights
issue shall be maintained separately;
2. The result of the voting on Resolution Nos.
10 to 12 taken at the said meeting will not be declared nor will any decision
about the passing of the said Resolutions be taken on the basis of the said
voting till further orders. The question of the rights of the respondents in
the number of PCDs offered and applied for and the number of additional PCDs
applied for in the rights issue shall be determined hereafter and the Court's
decision will determine the outcome of the Resolution Nos. 10 to 12;
3. The result of the voting on the aforesaid
rights shares shall be kept in a sealed envelope and intimated to this Court
promptly; and
4. The above arrangement is purely interim and
will not prejudice the rights and contentions of the parties, including the
contention that the Resolutions are even otherwise illegal."
As per the above order, the
defendants company considered Resolution Nos. 10 and 11 at its AGM held on
12-9-1994, the result of the voting was forwarded to the Supreme Court as per
the directions of the Supreme Court in para 3 of the above order. Resolution
No. 12 was, however, deferred to be considered at the adjourned meeting fixed
for 27-9-1994, as per the order dated 23-9-1994 the Supreme Court has passed an
injunction in respect of Resolution No. 12, until further orders, on
25-10-1994, the sealed envelope was opened in the Apex Court and it showed that
both the Resolution Nos. 10 and 11 had been passed overwhelmingly with 94 per
cent voting without taking into account the disputed shares and 87 per cent of
the voting after taking into account the disputed shares. The Supreme Court has
passed an order on that date holding that the decision on the legality or
otherwise of the Resolution Nos. 10 and 11 will have to be decided before the
Resolution Nos. 10 and 11 can be implemented. As regards the Resolution No. 12,
the Supreme Court has observed that it will be open to the petitioners to
request the Madras High Court to permit them to put the said Resolution for
consideration at any subsequent adjourned meeting of the company, and that the
High Court will proceed to pass orders uninfluenced by their order dated
23-9-1994 insofar as Resolution No. 12 is concerned. It is only in pursuance of
the above order of the Supreme Court, the defendants company have filed the
Application Nos. 7151 and 7153 of 1994 seeking permission of this Court to hold
the adjourned AGM for considering Resolution No. 12.
25. On 15-2-1995,
this Court presided over by the Hon'ble Mr. Justice Jagadeesan, passed an order
similar to the order passed by the Supreme Court, permitting the applicants to
hold the meeting on 20-3-1995 for considering Resolution No. 12, and gave a
direction to keep the result of the voting in a sealed envelope and intimate to
this Court. The AGM was held on 20-3-1995 and the results were forwarded to
this Court in a sealed envelope. This Court has opened the envelope on
7-4-1995. It was seen that Resolution was passed with 94.44 per cent of voting
without taking into account the disputed shares and there were only 5.56 per
cent of voting against the Resolution. After taking into account the disputed
shares, the percentage of voting for the Resolution was 89.66 per cent and it
was 12.34 against the Resolution. Since the Supreme Court in its order dated
25-10-1994 and this Court in its order dated 15-2-1995 have held that the
legality or otherwise of the Resolution Nos. 10,11 and 12 will have to be
decided before the Resolutions could be implemented, it is for us now to
examine and consider the same in the ensuing discussion.
26. The learned
counsel appearing for the plaintiff has challenged the legality or otherwise of
Resolution No. 10 by contending that the applicants company collected money
from the shareholders, for specific purpose as detailed in the notice sent to
the shareholders and yet money so collected was not utilised for the above
purposes and it was diverted for the beer project in Andhra Pradesh without the
consent of the Andhra Pradesh Government and the shareholders and the money so
collected ought to have been kept in a separate account as required under
section 73(3) of the Act with details of statement and in the present case, no
statement of accounts was filed till date and the money has also not been kept
in a separate account. It is also argued by the learned counsel that the
Central Government, particularly the Department of Company Affairs, have
ordered investigation after coming to the conclusion that there has been an
irregular deployment of funds by a company and that it is illegal for the
company to deploy the funds for the purpose other than for which they have
raised the funds and inasmuch as the company has suppressed the facts of going
into the beer project with the letter of offer dated 15-10-1992, it amounts to
suppression of information under the prospectus and the resolution passed in
pursuance of such a letter is illegal and the Court cannot grant permission to
implement to the illegal resolution and be a party to the illegal activities of
the second respondent. The learned counsel appearing for the plaintiff has also
drawn the attention of this Court to the letter of offer dated 15-10-1992
issued by the applicant-company to its shareholders offering PCDs, in which,
the particulars of the issue are given at page 9 of the said Letter. As per the
above particulars, the proceeds of the issue will be utilised to put up
additional 10,080 spindles at the spinning mill at Singanallur, modernise
facilities at the spinning mills, set up a 100 per cent Export Oriented Unit
for the manufacture of 50,000 sq.mts. granite tiles, augment long-term sources
for the working capital and meeting the issue expenses. According to the
plaintiff it is only in pursuance of this letter of offer, the shareholders
have paid funds and this notice for the AGM is for conversion of these funds
into beer project regarding which there were no particulars given in the letter
of offer and, therefore, it is an invalid resolution even if it is passed with
a majority. The learned counsel appearing for the respondent would argue that
the letter of offer is one issued to the existing shareholders and the
requirement of section 81(1) and section 81(2) have been duly complied with and
there is no requirement under section 81(1) to disclose to the shareholders
anything else. According to the learned counsel appearing for the defendants,
this letter of offer has to be distinguished from the prospectus issued to the
public calling upon them to purchase shares and so long as the requirements of
section 81 are complied with, there is nothing improper or illegal in the
conversion of the funds. Section 61, permits the company to vary terms of the
contract referred in the prospectus by getting the approval of the shareholders
of the company in the AGM. When the letter of offer is accepted by the
shareholders, a contract comes into effect between the company and the
shareholders while the prospectus issued to the public itself is to be approved
by the shareholders of the company in the AGM to have a contract. Therefore,
there is no reason as to why the prospectus issued to the shareholders could
not be deployed for different purpose other than one, for which, the notice has
been issued. Further, the letters of intent for the manufacture of beer are
received by the Kothari Orient Industries Export Ltd. on 15-12-1992 from the
Government of India and the Government of India in their letter dated
15-12-1992, has observed that they are prepared to issue an Industrial Licence
under the Industries (Development and Regulation) Act, 1951 to Kothari Orient
Industries (Exports) Ltd. for the manufacture of beer in their existing
industrial undertaking at Singanamal District Anantapur in the State of Andhra
Pradesh up to the capacity on the basis of maximum utilisation of plant and
machinery. This letter has required the Kothari Orient Industries (Exports)
Ltd. to confirm their acceptance to the conditions imposed. Subsequently, in
pursuance of the letter by Kothari Industrial Corpn. Ltd., the Government of
India, in their letter dated 6-4-1993 have stated that the scheme covered by
the letter of intent issued in favour of Kothari Orient Industries (Exports)
Ltd., will now be submitted by Kothari Industrial Corpn. Ltd. and that the said
company will abide by the terms and conditions. From the above correspondence
between the Government of India and the sister concern of the
applicant-defendant and the defendant, it is seen that the letter of intent
itself is dated 15-12-1992 and the Central Government has approved the said
letter on 6-4-1993 and as such the question whether Kothari Industrial Corpn.
Ltd., is going to the beer project find a place in the letter of offer dated
15-12-1992 does not arise at all. Subsequent to the letter of intent in his
name, the defendant had approached the Industrial Credit Investment Corpn. of
India, the leading institution in respect of the term, loan lenders and also
the debenture trustee for debenture holders and they have responded to the
letter of offer seeking their consent for deployment of funds for beer project
instead of projects mentioned in the letter of offer, viz., modernisation
facilities, expansion of textile mills and they have sanctioned it is seen from
the correspondence filed by the defendant along with their typed set of papers.
The defendant addressed a letter on 19-8-1993 to the Industrial Credit &
Investment Corpn. of India Ltd., seeking the approval to revise the priority of
implementation of their project giving the particulars of the same. The ICICI,
in their letter dated 22-11-1993, has stated that based on discussions, they
had with the representatives of the defendant, they are agreeable to the
proposed changes as indicated in the annexure subject to certain conditions.
This approval has been issued by the ICICI not only in their capacity as
leading institution, but also as limitless for the PCDs as mentioned in the
above letter itself. In this letter, it is specifically stated that the company
shall raise Rs. 350 lakhs or 20 per cent of the cost of brewery project,
whichever is higher, by way of foreign/NRI equity at a premium which will have
to be approved specifically. The defendant has sent a revised proposal for
deployment of funds in the letter dated 24-11-1993 to the ICICI for according
approval for the proposed issue of equity NRI and foreign bodies corporate, a
total amount of Rs. 450 lakhs inclusive of a premium at Rs. 15 per share. The
ICICI in their letter dated 18-1-1994 have informed the defendant that they
have no objection to the proposed equity issue of Rs. 450 lakhs including
premium to the NRIs/foreign investors subject to their obtaining the necessary
statutory approvals and approval from shareholders for that purpose. The
defendant have addressed a letter on 18-1 -1994 to the financial institutions,
viz., UTI, LIC, GIC and its subsidiaries requesting the other factors in that
letter, to fix a suitable premium for the shares to be offered to the promoters
to keep their stake at the existing level of 16.91 per cent consequent on the
offer of Rs. 450 lakhs to the foreign/NRI investors. In the said letter, they
have informed the financial institutions that after receiving their approval,
they would get the approval of the shareholders at an extraordinary general
meeting. The defendant had also addressed a letter to ICICI to approve the
company making a preferential offer to the promoters of such number of shares
as would result in the promoters maintaining, their equity holding at the
present level of 16.91 per cent. The defendant had addressed to the Chairman,
SEBI, Bombay, in their letter dated 23-2-1994 seeking their guidance and suggestions
in the beer project. The SEBI had sent a reply stating that their guidelines
had been covering issues mentioned in the letter of the defendant like private
placements and by way of preferential allotments to identified NRIs and OCBs,
in favour of the defendant and that they are free to do so and determine the
terms thereof including pricing, after obtaining the consent of the
shareholders. The UTI, who was approached by the defendant company for
processing their application and for decision for fixing up premium for
preferential offer to the promoter Group and for issue of shares to NRIs has
sent a reply to the effect that the total holding of the promoters including
NRIs/OCBs after the proposed Preferential Offer shall not exceed 51 per cent of
the issued capital. This letter has been signed addressed not only by the
General Manager, UTI, but also by the General Manager, GIC of India and the
Executive Director of LIC of India showing that the financial institutions have
no objection for the deployment.
27. The defendant
has also filed the letter received from the Zonal Manager of the Industrial
Estate, Patancheru of Andhra Pradesh, which shows that they are allotting
71,970.428 sq.mtrs for setting up their industry for the manufacture of on OUT
RIGHT SALE basis at a tentative rate of Rs. 60 per sq.mt. The defendant has
also filed the letter addressed by them to the Government of India permitting
the applicant-company to implement the Letter of Intent for beer project in the
State of Andhra Pradesh. The defendant has also filed letter from the RBI dated
10-8-1994 in which, the RBI has stated that the defendant has their approval to
enter into technical collaboration with DAB BRAU - Consult Gmbh, Germany for
manufacture of beer subject to certain conditions. The RBI has reiterated their
approval remaining unchanged in their letter dated 12-8-1994 addressed to the
defendant. The RBI has also addressed a letter to the defendant stating that
they shall be glad to know the exact amount of premium for the proposed issue
to enable them to consider their request for issue of equity shares to NRIs
with repatriation benefits. It is, thus, seen that the defendant company has
addressed the authorities, viz, Central Government, State Government, financial
institutions like ICICI, UTI, GIC, LIC, and also the RBI for obtaining their
consent and approval of issue of debenture shares in favour of the NRIs towards
the beer project and the beer project has been approved by the Government of
India as well as the Government of Andhra Pradesh. The correspondence filed by
the applicant also shows that the Andhra Pradesh Government has even allotted
plots for the factory to enable the defendant to start the beer project in
Andhra Pradesh in pursuance of the sanction given by them subject to the
approval by the shareholders. Resolution No. 10 approved the deployment of the
funds to the beer project with certain percentage of shares to the NRIs, and
the objections raised by the plaintiff to hold that the deployment is not
proper and, therefore, the resolution is illegal cannot be given any credence
at all.
28. The learned counsel
appearing for the defendant has cited two authorities in Narendra Kumar
Maheswari v. Union of India AIR 1989 SC 2138 and Madan Gopal Jajoo v. Union of
India AIR 1992 Delhi 253 for the proposition that a company could utilise funds
raised for a particular project for which the funds raised to another project.
The Supreme Court has held in the former decision that the approval obtained
for the change in the scope of the project from the financial institution,
viz., ICICI being a Government organisation, it is acceptable. It has also held
that the deviation from the earlier proposal for the deployment of funds to a
project other than for which a proposal was made was neither illegal nor void.
In the latter case, the Supreme Court has held that where the Resolutions in
the shareholders and debenture holders meeting were passed with overwhelming
majority, any order by the Court that the debenture issue may be recalled would
result in unsettling effect on the capital market and it would affect the right
of the almost whole of the investing public. The Supreme Court has, therefore,
not encouraged any deviation from the Resolutions passed by majority of the
shareholders. In the above circumstances, the reasons given by the plaintiff to
declare the Resolution No. 10 as invalid on the ground that the promoter is
trying to increase his share-capital by issuing the debenture shares to NRIs
who are his own associates is a wrong approach which has not been notified in
the notice and the project itself cannot be implemented is not a tenable
contention. It is more so when the Ordinance introducing prohibition in Andhra
Pradesh which is taken as sheet-anchor by the plaintiff to contend that the
beer project could not be implemented in Andhra Pradesh on account of the
policy decision of the State Government itself is not challenged before the
Supreme Court as contended by the learned counsel appearing for the defendant.
The learned counsel appearing for the defendant would also argue that just
because prohibition has been introduced in Andhra Pradesh, it cannot be stated
that the manufacture of beer itself is prohibited. According to him manufacture
is to be distinguished from consumption is also a point in favour of the
defendant to come to the conclusion that the contention of the plaintiff that
the beer project cannot be implemented and any Resolution recognising it, is an
invalid one is not a tenable one.
29. The learned counsel appearing
for the plaintiff has also argued that there is an investigation pending
against the defendant company in respect of the mismanagement and misfeasance
of the affairs of the company and when an investigation is pending, resolution
diverting the funds of the company to another project is not proper, since, it
is not only the interest of the company but also interests of the public also
involved in this. The learned counsel appearing for the plaintiff bases his
argument on this aspect on account of the letter addressed by the Regional
Director of the company law affairs, Madras to
the Director of company law. The learned counsel appearing for the defendants 1
and 2 would argue that there is no such enquiry pending as alleged by the
learned counsel appearing for the plaintiff and the letter relied by the
plaintiff is an internal correspondence between the Regional Director and the
Director and it cannot be considered as evidence of investigation. The
plaintiff would also contend that copy of the letter has not been sent to them
and the letter surreptitiously obtained cannot be the basis to hold that there
is an investigation pending against the company. The learned counsel appearing
for the plaintiff would reply the same by contending that whether motivated or
not, the fact remains that an investigation is pending and till the
investigation is over, the beer project should not be permitted to be
implemented, since, it would encourage the diversion of the funds and wasteful
capital expenditure. The learned counsel would also request the defendants to
file an affidavit if necessary stating that there is no investigation pending
against them. This argument of the learned counsel appearing for the plaintiff
is not tenable since, it is not for the plaintiff to prove that there is an
investigation pending against the company. The letter relied by the plaintiff
ends with a note that it may, however, appear for the threshold that the
diversion of PCDs for modernisation of textile units to beer projects has been
requested by obtaining the approval from debenture-holders and members. This
observation by the Regional Director would drive us to the conclusion that the
Regional Director has been satisfied that the deployment of funds is quite
regular in view of the requisite approval of the debenture-holders and members
having been obtained. Therefore, the proposed inspection under section 209A
cannot be considered as an investigation pending against the company preventing
them from implementing the Resolutions passed on the beer project.
30. The learned
counsel appearing for the plaintiff would also argue that no accounts have been
furnished till date with regard to the collection of the funds and the amount
should have been kept in a separate account until the requisite permission is
given by a Stock Exchange and it has also not been done by the defendant
company and, therefore, there is a violation of section 73 and on account of
the same also, the Resolution cannot be permitted to be implemented. The
learned counsel appearing for the defendant would argue that Stock Exchange at
Madras has been informed of the transfer of the shares and they have also sent
letters informing that the stock in shares have been listed in the Madras Stock
Exchange and further the provisions of section 73 would be applicable only if
the prospectus had been issued calling for applications for shares and not in
cases where a notice of issue has been sent to the shareholders. Letters of the
Stock Exchange dated 12-3-1993 and 24-9-1993 reveal that the shares have been
listed in the Stock Exchange at Madras. Therefore, the contention of the
plaintiff that the amount raised has not been kept in a separate bank account
and, therefore, the Resolutions cannot be permitted to be implemented is not
convincing and acceptable.
31. The learned
counsel appearing for the defendant would also argue that even if it is assumed
that there is a misstatement in the Letter of Offer, the shareholder who has
subscribed on the basis of the misstatement, is entitled for compensation for
loss or damage if any, cause to him as per section 62 of the Act and the 1st
defendant had also expressed its opinion that the plaintiff is at liberty to
withdraw the application and the stock invested if they are not for the
deployment of the funds to the beer project and in spite of it, the plaintiffs
have been either withdrawn the application or asked for repayment of the
amount, but are simply objecting to the implementation of the Resolution only
to achieve their object of bringing B.H. Kothari into limelight. The plaintiffs
are described as Satellite Companies of Ambani. B.H. Kothari son of H.C.
Kothari is said to be the son-in-law of Mr. Ambani. He is not a Director in the
defendant company. In the above background, the argument of the learned counsel
appearing for the defendant that the objection with regard to the Resolution
No. 10 passed by the shareholders is only to enable Mr. B.H. Kothari to take
over the management cannot be said to be without any basis or weight. I am
therefore of opinion that Resolution No. 10 passed by an overwhelming majority
of the shareholders of the first defendant company is to be permitted to
implement the Resolution.
32. The next
Resolution which we have to consider is Resolution No. 11. This is attacked
questioning the validity of the same by stating that the offer has been made to
a Select Group, viz., NRIs to the detriment to the minority group. The
contention of the plaintiffs is that the NRIs to whom shares are offered will
be closed associates or the relations of the promoter and offering the shares
to them would only result in diluting the percentage of holding of the
plaintiffs and it cannot be approved. We have already seen that the offer to
NRIs has been made to comply with the conditions imposed in the Letter of
Intent given by the Government of India and it has been approved by the ICICI
who are the Trustees of the debenture shareholders. We have seen that the SEBI
guidelines do not prohibit transfer of debenture shares to NRIs Securities Contract
Regulation Act, RBI, Financial Institutions, etc., encourage the transfer of
shares up to 20 per cent of the purchase cost in favour of the NRIs. The offer
to NRI, therefore, does not appear to be an offer made to increase the
percentage of holding of the shares with the second defendant, diluting the
percentage holding of the plaintiffs. Resolution No. 11 being consequent upon
Resolution No. 10, the reason given by the plaintiffs to hold this resolution
is invalid and, therefore, it should not be permitted to be implemented, is,
therefore, not sustainable.
33. The learned
counsel appearing for the plaintiff would argue that the letters of intent and
financial institutions no doubt permit the promoter to issue debenture shares
in favour of NRIs but it should not be against law. When the learned counsel
contend that the issue of shares could not be against law and yet the first
defendant proposed to issue shares in favour of NRIs it is for the plaintiffs
to show how the issue of debentures in favour of NRIs is against law. There is
no such evidence placed before Court.
34. The learned
counsel appearing for the plaintiffs relies upon the Needle Industries Newey (India)
Holdings Ltd. (AIR 1981 SC 1298) for questioning
the validity of the Resolution contending that the offer is made to a Select
Group to the detriment of minority group. We have to refer to the decision in
O.S. Appeals 39 to 42 of 1995 in the matter of the Investment Trust of India
Ltd. wherein a Division Bench of this Court has held that the Needle Industries
India Ltd's case (supra) is not applicable to a listed public limited company.
The defendant company being public listed company, the law laid down in Needle
Industries India Ltd. 's case (supra) cannot be made applicable. Therefore, the
contention of the plaintiff that the Resolution No. 11 encourages allotment of
debentures in favour of particular section of people and, therefore, it cannot
be implemented is untenable. I am, therefore, of opinion that the Resolution
No. 11 is to be permitted to be implemented.
35. The plaintiffs
have questioned the legality of the Resolution No. 12 on several grounds. The
first ground of attack made by the learned counsel appearing for the plaintiffs
is that the passing of the resolution on 20-3-1995 when a notice has been
issued to hold the meeting on 12-9-1994 is improper and illegal. The defendants
have produced the original minutes of 12-9-1994. The plaintiffs have also
participated in the above meeting held on 12-9-1994. There are entries in the
minutes which would show that the plaintiffs have expressed their opinion when
the second defendant has sought for postponing the meeting to a future date.
After a discussion on the above subject, it has been decided by the
shareholders who were present on 12-9-1994 to have the meeting with regard to
the Resolution No. 12 postponed to a future date. The Supreme Court was also
aware of the adjournment of Resolution No. 12 to a future date and they have
also given directions. In our Court also, the adjournment of the meeting for
considering Resolution No. 12 has been considered and a direction has been
given by this Court to hold the meeting on 20-3-1995. When the plaintiffs were
parties to the proceedings dated 12-9-1994, and the meeting was adjourned to a
future date for considering Resolution No. 12, the present contention of the
plaintiffs that the adjournment was improper and illegal and, therefore,
Resolution passed on 20-3-1995 is an illegal resolution, cannot be given any
weight at all.
36. The learned
counsel appearing for the plaintiffs has also argued that two letters addressed
by the financial institutions which was the reason for the adjournment sought
by the second defendant have not been placed before the shareholders and,
therefore, there is a suppression of a material fact before passing the said
Resolution and on that ground also, the Resolution has to be held as an invalid
one. Here again, I wish to state that the two letters of the financial
institutions have been considered by those who have assembled in the meeting
and only after a detailed discussion with regard to the necessity for
postponing the meeting, the meeting has been adjourned is in the minutes.
Therefore, it cannot be stated that there is any suppression of material fact
before the shareholders who have assembled to pass Resolution No. 12. The
learned counsel appearing for the plaintiffs would argue that there is a no
proper notice for the meeting dated 20-3-1995. The meeting held on 20-3-1995 is
a meeting which has been adjourned from 12-9-1994. Since, it was held after 30
days, a notice has also been sent enclosing the proxy forms to enable such of
those shareholders who have purchased the shares subsequent to 12-9-1994 to
participate in the meeting. The meeting being a continuation of the original
meeting, the notice containing the same form of Resolution and explanatory
statement has been stated in the notice and there is nothing improper to hold
that there is no valid notice. By at one stretch, the learned counsel appearing
for the plaintiff would argue that there is no necessity for giving notice and
at another stretch, the learned counsel would argue that there is no proper
notice. The plaintiffs are blowing hot and cold at the same time with regard to
the notice sent for the meeting held on 20-3-1995. I am of opinion that it
cannot be appreciated at all. The resolution to be passed and the explanatory
statement of accounts were made known to the shareholders to form an opinion
whether they should or should not approve the proposal regarding the increase
of the percentage state of the promoters by preferential offer up to 51 per
cent. Therefore, the contention of the learned counsel appearing for the
plaintiff that there was no mention about 26 per cent as per the letter of the
financial institution is not relevant since it is less than 51 per cent. The
learned counsel appearing for the plaintiffs would also argue that proxies
provided for meeting 12-9-1994 itself have been utilised for the meeting held
on 20-3-1995 and that is also not proper. Since the meeting held on 20-3-1995
is only an adjourned meeting, there is nothing improper in housing the proxies
already furnished to the shareholders. At any rate, when the subsequent notice
has been issued, new blank proxy forms have been sent to the shareholders and
if anybody had desired to change the proxy, they could have done it. Even
though fresh proxy forms have been sent for the meeting on 20-3-1995 to enable
the purchasers of shares subsequent to 12-9-1994 to exercise their option, the
previous shareholders also could have utilised the same if they have an
intention to change the proxy. Therefore, it cannot be a ground to hold that
the meeting has not been properly held and old proxies have been used. At any
rate, none of the above reasons canvassed by the plaintiffs can be the valid
reasons for holding that the Resolution passed on 20-3-1995 is an improper and
illegal one. The main ground on which the Resolution No. 12 has been challenged
by the plaintiffs is that there are disputes between two groups and one cannot
defeat the other by increasing the shareholding against the guidelines issued
by the Government regarding the promoters' right to the detriment of the other.
According to the plaintiffs, the promoter's right to increase the shareholding
is only 26 per cent in the present case, as per the notice and Resolution, the
promoter's intention is to issue equity shares numbering 1,01,04,000 at Rs. 10
each and it is against the guidelines issued by the Government. The learned
counsel appearing for the defendants would argue that there is no such
guidelines issued by the Government as contended by the plaintiff. The
attention of this Court has been drawn to the wording in the notice as well as
in the Resolution which is to the effect that it is proposed to issue to Mr.
Pradip D. Kothari and his relative associates, and Associates Companies, viz.,
the promoters' group not exceeding 1,01,04,000 equity shares of Rs. 10 each in
accordance with the guidelines dated 4-8-1994 of the SEBI, details of which are
set out in the explanatory statement relating to this item. The wording used in
the notice as well as the Resolution is stated as not exceeding. It does not
necessarily mean that the minimum issue is 1,01,04,000; the maximum only is
mentioned and, therefore, it is always open to the shareholders to reduce the
same in the meeting after discussion. But the results of the meeting had
disclosed that except the plaintiffs, none other have opposed this proposal to
increase the shareholding. In the notice itself, it is mentioned that the
proposal is subject to the guidelines of SEBI. Lock-in-period as also stated as
five years. When the notice refers to the guidelines issued by the SEBI and the
lock-in-period is also mentioned, the shares even if issued cannot be utilised
by the person in whose name they have been issued to the detriment of other.
37. The learned
counsel appearing for the defendants would also argue that the only Act which
was restricting the capital issues is the Capital Issues Control Act, 1947 and
this Act has been repealed by the Capital Issues Confirmation Repeal Ordinance,
1972 promulgated on 29-5-1972 and published on the same date in the Gazette of
India (Extra-Ordinary) and, therefore, there is no restriction on the promoters
to increase the share capital. The learned counsel has also brought it to the
notice of this Court that a number of Companies of the Reliance Group of which,
the plaintiffs also form part, have also increased their share capital to the
maximum and the contention of the plaintiffs that the promoter cannot be issued
with 51 per cent of shares is only an attempt to vindicate their personal
grievance. It is not disputed by the plaintiff that some of their
sister-concerns have increased the capital issue. While so, there appears to be
no bona fides in their objecting to the issue of the proposed number of shares
in favour of Pradip D. Kothari and his associates as per Resolution No. 12. The
learned counsel appearing for the defendants would also argue that subsequent
to the introduction of liberalisation policy, the promoters can have their
share capital up to 75 per cent and the issue to the public is restricted to
only 25 per cent. This percentage of shares which a promoter can have,
subsequent to the introduction of the liberalisation policy, is not challenged
by the plaintiffs. Therefore, the proposal to issue 1,01,04,000 equity shares
in favour of Pradip D. Kothari and 20 per cent of shares to NRIs, cannot be
considered as steps taken against the interest of the minority shareholders. On
that ground, the Resolution cannot be declared as an improper or illegal one to
deny the permission sought for by them.
38. The learned
counsel appearing for the plaintiffs would argue that four things are to be
considered by the financial institutions supporting the preferential offer to
promoters and they are: (1) past record of the company; (2) funds to be used
for productive purposes; (3) source of the promoters for the funding; and (4)
there should not be any family dispute. The learned counsel appearing for the
plaintiffs would argue that the fact that an investigation is pending before
the Director of Company Affairs is evidenced and, therefore, the management
cannot be considered as having a good past record. We have already seen that
there is no investigation pending before the CLB and what has been suggested by
the Regional Director to the Director is only to hold an inspection and,
therefore, the management cannot be said to be having a past record of shady
nature. As far as the productive purpose is concerned, the learned counsel
would argue that the beer project cannot be considered as a productive purpose
and it is more so when the State in which it is to be implemented, has
introduced total prohibition. The introduction of total prohibition by the
newly formed State Government of Andhra Pradesh is subsequent to the notice.
The previous Government has approved the scheme and has offered its assistance
cannot be denied. The manufacture of beer in collaboration with the foreign
country, is only productive in nature and it cannot be stated that the funds
are not to be used for productive purpose. Therefore, the second requirement is
also satisfied. As regards the source of funding, the promoters have indicated
issuing of shares and collection of share capital through NRIs financial
institutions including ICICI. Therefore, the third requirement is also
satisfied. As regards the fourth requirement, the learned counsel appearing for
the defendants vehemently argued that it is a misnomer to say that there is a
family dispute between the two cousins which would stand in the way of
implementing the Resolution. According to the learned counsel, the fathers of
P.D. Kothari and B.H. Kothari, viz,, D.C. Kothari and H.C. Kothari, who were
brothers, have effected a mutual settlement between them in 1989 under which
four companies have been set apart to the share of Mr. H.C. Kothari and one,
viz., the defendant to Mr. D.C. Kothari and even the minimum shares owned by
one group in the companies of the other have been withdrawn and each one of
them is looking after the affairs of their companies for the past so many years
and it is not correct to say that there is a rift in the management of the
defendant company which would stand in the way of the Resolution being
recognised as a valid one. The Founders namely D.C. Kothari and H.C. Kothari
have divided among themselves and have come to an understanding in the year
1989 with regard to the management of the companies which have been allotted to
their respective shares and, therefore, it cannot be stated that there is any
rift in the management of the first defendant company which is under the
control of Mr. P.D. Kothari. The learned counsel for the plaintiffs would argue
that it is only because of the support of the financial institutions, this
Resolution has been passed and the stand taken by them in modification of their
earlier stand is not correct. This Court cannot sit in judgment over the policy
decision taken by the financial institutions either to support or not the
Resolution and decide the issue in favour of the applicant in the light of the
arguments of the learned advocate. The Resolution No. 12 cannot be held as an
invalid one holding that the financial institutions have not considered these
aspects before granting their support to the proposed issue of shares. The
learned counsel appearing for the defendants would cite the decision in Banford
v. Banford [1961] (I) All ER 971 and would argue that unless some provision to
the contrary is found in the Charter or other instrument by which the company
is encouraged, the Resolution of majority of shareholders in a duly convened
meeting upon any question, will be legally competent one. In the present case,
all the three Resolutions have been passed by an overwhelming majority of
shareholders after due consideration of the stand taken by the plaintiffs. In
such a case, the majority alone will have their way and the minority can have
their say alone. They cannot be permitted to nullify the effect of the
Resolutions passed by the shareholders of the company. In this connection, when
we consider the balance of convenience, it would also show that if recognition
for these Resolutions is not given, vast majority of the shareholders of the
company will be prejudiced and hardship will be caused to them since, it is
against their desire to pass the Resolutions whereas no prejudice will be
caused to the plaintiffs if the Resolutions are allowed to be implemented. It
is more so, when the plaintiffs are actually agitating not for upholding any of
their right but to bring the interest of Mr. B.H. Kothari to limelight as
contended by them in paragraph 13 of the plaint. The learned advocate for the
defendants would describe the dispute between the plaintiffs and defendants as
a proxy battle fought by Mr. B.H. Kothari. There is considerable weight for
this argument of the learned advocate. For these reasons, I am of opinion that
all the three Resolutions passed by the majority of shareholders have to be
approved and permission has to be granted to implement them. In that view, the
applications are ordered as follows:
39. O.A. No.
436/1995 in C.S. No. 1132/1994,0.A. No. 435/1995 in C.S. No. 1128/1994 and O.A.
No. 220/1995 in C.S. No. 1128/1994 filed by the respective plaintiffs for
injunction, are dismissed. A. Nos. 7151/1994 for direction to implement the
Resolution Nos. 10 and 11, A. No. 1628/1995 for direction to implement the
Resolution No. 12, in C.S. No. 1128/1994 are allowed. So also, A. No. 7153/1994
and A. No. 1631/1995 in C.S. No. 1132/1994 for direction to implement
Resolution Nos. 10,11 and 12, are allowed as prayed for. A. No. 1312/1995 in
C.S. No. 1128/1994 for a direction to the respondents to keep the money
collected for beer project in a separate account is also dismissed.
COMPANIES ACT
[1998] 15 SCL 185
(RAJ.)
v.
Lan Exda Ind. Ltd.
J.C. VERMA, J.
S.B. CIVIL WRIT PETITION NO. 5476 OF 1996
AUGUST 29, 1997
Section 73(2A) of the Companies Act, 1956 - Allotment of shares/debentures -Refund of excess money - Company had neither allotted shares to applicant nor returned application money - Later another company respondent's sister concern offered transfer of shares allotted to it in favour of applicant for which applicant was not agreeable - Whether applicant was entitled to refund of application money with interest at rate of 15 per cent from due date till actual payment - Held, yes
The petitioner
had applied for purchase of the certain public shares from respondent-company
and sent required amount. He was neither allotted shares nor amount was
refunded even after expiry of statutory period of 78 days. The Consumer Court
held that dispute raised by the petitioner were not maintainable before it. The
SEBI also had not taken any action in this regard. The petitioner filed writ
petition for a direction to initiate criminal proceedings under section 621
against the respondent. The company stated that shares which had been allotted
to its sister concern would be given to applicant and such shares would be
transferred to applicant. The applicant stated that he had not been issued any
share original or duplicate by the company for whose share the petitioner had
applied and he was not interested in any duplicate shares of any other company.
If the
petitioner had not been allotted the original shares, he was entitled to refund
of the amount within the stipulated period of 78 days. It shall be appropriate
in the instant case that direction be issued to the respondent-company to
refund the amount to the petitioner with interest at the rate of 15 per cent
from the due date till the payment.
Raymond
Synthetics Ltd. v. Union of India AIR 1992 SC 847.
Padam
Kumar Khetan for
the Petitioner. S.C. Bhandari for the Respondent.
1. The grievance of the petitioner is that he had applied for
purchase of the public shares from respondent No. ], Lan Exda Industry, 201, II
Floor, Babukhan Estate, Bashir Bag, Hyderabad. She alongwith Meena Devi had
sent an amount of Rs. 2,500 on 26-5-1993 for purchasing 200 shares each. The
petitioner and Meena had also approached the Consumer Courts but it was held by
the Consumer Court that disputes raised by the petitioner are not maintainable
before the Consumer Court. The petitioner has filed the present writ petition
for a direction to the respondent No. 2 to initiate criminal proceedings under
section 621 of the Companies Act, 1956, for proceeding against the respondent
No. 1 under section 173(2)(2) (sic) of the Act. It is stated that the
petitioner had approached the SEBI as well in this regard but no action had
been taken by the SEBI.
2. Written statement has been filed by the respondent No. 2. No body
appears on behalf of respondent No. 1 .A reply on behalf of respondent No. 1
has also been filed. The plea taken by the respondent No. 1 in the reply is
reproduced as under:
"(5).
Lan Inv. (P.) Ltd. had in turn sent letter reference No. 30105780/ 29466327 dated
10th August, 1993 to the complainant informing that she had been allotted 200
shares in LEIL upon payment of application money Rs. 2,500 and upon payment of
allotment money at Rs. 2,500 against application for 200 equity shares by the
complainant will be transferred in his/her name as the original allottee being
Lan Inv. (P.) Ltd. ("LIPL"). (Copy of letter enclosed as Exhibit
'B').
Despite
repeated requests by Lan Inv. (P.) Ltd. ('LIPL') the complainant did not
forward the allotment money and did not return signed transfer deed, as
required for effecting a transfer in his favour."
3. The counsel for the petitioner states that he had not been issued
any share original or duplicate by the company for whose share the petitioner
had applied and he is not interested in any duplicate shares of any other
company.
4. The contention of the petitioner
has force. If the petitioner had not been allotted the original shares, he was
entitled to refund of the amount within the stipulated period of 78 days as
held by Apex Court in Raymond Synthetics Ltd v. Union of India AIR 1992 SC 847.
It shall be appropriate in the present case that direction be issued to the
respondent No. 1 to refund the amount to the petitioner with interest at the
rate of 15 per cent from the due date till the payment.
5. The writ petition is disposed of
at the admission stage with no order as to costs.
[1962]
32 COMP. CAS. 604 (SC)
v.
Shree
Changdeo Sugar Mills Ltd.
P. B. GAJENDRAGADKAR, A. K. SARKAR AND K. N. WANCHOO, JJ.
MARCH 20, 1962
GAJENDRAGADKAR J.-The
principal question which arises in this appeal relates to the construction of
section 76(1) and (2) and (2) of the Companies Act, I956 (I of I956)
(hereinafter called the Act) before the amendment of sub-section (2) in I960.
That question arises in this way. The appellant, Madanlal FAKIRCHAND Dudhediya,
and respondents Nos. 2 and 3 and the father of respondents Nos. 7 to 10 were
the promoters of the first respondent company, Shree Changdeo Sugar Mills Ltd.
The said company was incorporated in I939 as a private limited company. It was,
however, converted into a public limited company in I944. At the time of the
original incorporation of the company agreed during its existence to pay a sum
equal to 3 1/8% every year of its net profits to each of the four promoters. As
result of this agreement, the aggregate consideration payable every year to the
promoters came to I2 1/2% of the net profits of the company. Article 3 of the
articles of association of the company came justified the making of this
agreement. In I94I, the company came into financial difficulties and in
consequence, on the 22nd April, I94I, a tripartite agreement was arrived at
between the company, M/s. Ardeshir Hormusji Bhiwandiwalla & Co., and the
promoters. Under this agreement, it was agreed, inter alia, to appoint the said
firm of Biwandiwallah & Co. or its nominee as the managing agents of the
company for 10 years with an option to the Company to extend the said period
upon certain terms. At this time, the earlier agreement said as to the payment
of the promoters was reduced to 6 1/4% and article 3 of the articles of
association was accordingly amended. Three years later, disputes arose between
the parties and they led to three suits filed on the original side of the
Bombay High Court. All the said suits were compromised and decrees by consent
were passed in them. One of the terms of the compromise was that the promoter’s
commission payable to the four promoters which was Rs. 1-9-0 to each of them of
and which came to 6 1/4% in the aggregate payable to them under the agreement
entered into between them and the managing agents shall remain in force as in
the agreement and the promoter’s right of commission shall continue
accordingly. Thus, as a result of the compromise, the promoters’ commission
which was payable to them under the earlier agreement was saved.
After
the Act came into force on the 1st of April, I956, the appellant received a
letter from respondent No. I informing him that respondent No. I had been
advised that as from the date of the commencement of the Act, the agreement
between the parties as to the payment of the promoter’s commission had become
illegal and void and that the 1st respondent would not, therefore, pay any more
commission after April, I956. In October, the appellant received a notice from
the 1st respondent that an extraordinary general meeting of the share holders
of the 1st respondent company was going to be held, inter alia, for the purpose
of amending certain articles of association of the company. One of the
amendments proposed to be put before the said meeting was to delete article 3
from the article of association of the company. On receipt of this notice, the
appellate filled the present suit on the I3th December, I956. By his plaint, he
claimed a declaration that the agreement between the parties was valid and
legal and he asked for an injunction restraining respondent No. I from passing
any resolution deleting article 3 of the article of association of the
respondent company or from taking any action o the basis that the said
agreement had became illegal and avoid. Respondent No. I resisted this suit. It
was urged on its behalf that as a result of the provisions of section 76(1) and
of the Act, the agreement and they supported the appellant. The learned judge
who tried the suit held that the defense raised by respondent No. I was well
found and that the agreement in question having become void and enforceable
under the relevant provisions of the Act, no declaration could be granted or no
injunction could be issued in favor of the appellant as claimed by him. In the
result, the appellant’s suit was dismissed with costs. The appellant then
preferred an appeal challenging the correctness of the decision of the trial
court. The court of appeal, however agreed with the view taken by the learned
trial judge ad dismissed the appeal preferred by the appellant. The appellant
then applied for and obtained a certificate from the High Court and it is with
the said certificate that he has come to this court by his present appeal. That
is how the principal point which has been raised for our decision in the
present appeal is about the construction of section 76(I) and (2).
Mr.
Sastri contends that in coming to the conclusion that the appellant’s claim to
enforce the agreement in question in respect of the profits made by respondent
No. I is affected by section 76, the courts below have misconstrued the
provisions of the said section. It is conceded by Mr. Sastri that the promoters
have so far received an aggregate amount of over Rs.5,80,000 which is fat in
excess of the maximum amount now [permissible under section 76(1). But his
argument is that the statutory provision imposing the limit in regard to the
payment f commission on which respondent No. I relies is inapplicable to a case
where the said commission is claimed not out of capital but out of the profits
of the company.
Before
dealing with this point, however, it would be convenient to dispose of another
objection raised by Mr.Sastri. He contends that the agreement in question is
really outside the purview of section 76. Section 76 refers, inter alia, to the
commissions payable to any person for his subscribing or agreeing to subscribe,
whether absolutely or conditionally for any shares of a company. That being so,
since the present agreement has been entered into for consideration other than
those specified inspection 76, its enforcement cannot be resisted on the ground
that it is hit by section 76. The decision of this question naturally depends
upon the construction of the two agreements. The first agreement of 1939
provides that for the help rendered and pains taken by the promoters ad because
each of them had agreed to purchase and had purchased shares worth Rs. 1 1/2
lakhs out of the company’s capital, the company was entering into an agreement
with them for the payment of commission. The agreement provided that the said
commission would be payable as long as the company was in existence. It is thus
clear that though the help rendered by the promotes and pains taken by them are
incidentally referred to, the agreement is substantially, if purchase and had
purchased shares worth Rs. 1 1/2 lakhs and so there can be no doubt that this agreement
clearly falls within the mischief of section 76. It is, however, urged that the
completion of the first agreement changed completely when the second agreement
was entered into promoters and the new managing agents, the former agreed to
receive 61/4% as promoter’s commission instead of I2 1/2% “as provided in our
respective agreements with the company .” That is the substance of the
agreement. Howevre, Mr. Sastri relies on the other recitals in the document in
support of his argument that latter agreement was not in consideration for the
purchase of shares by the promoters. These recitals refer to the fact that the
promoters had resigned their office and surrendered and renounced their rights
to act as the managing director or managing directors of respondent No. I and
it was in consideration of this fact that the agreement was made. We are not
impressed by this argument. It is true that before this agreement was made, the
new managing agents were appointed and that was no doubt the occasion for the making
of the agreement. But the essential part of the new agreement was the reduction
made in the commission payable to the promoters; for the rest, the earlier
agreement continued and so, in determining the scope and nature of this latter
agreement, we have inevitably to go back to the first agreement. As we have
pointed out, the operative clause in the agreement, in terms, refers to the
earlier agreements between the respective parties and avers that instead of 12
1/2% as provided by the said agreements, 61/4% would hereafter be paid.
Therefore, we are satisfied that the payment claimed by the appellant is
payment by way of commission to which section 76 would apply.
Then
it is argued that though the purchase of shares by the promoters may partly be
the consideration for the agreement, the service rendered by them and the pains
taken by them in promoting the company were also set out in the first agreement
as forming part of the consideration and even if the agreement as to the
payment of commission may fall within section 76, part of the agreement which
is based on other considerations would be outside section 76 and the two parts
being severable, it is necessary to determine how much the appellant would be
entitled to claim under the part which is valid. In our opinion, this argument
is not open to the appellant at this stage. It appears that, in the trial
court, an attempt was made on behalf of the appellant to lead oral evidence for
the purpose of saying that the two considerations could be severed and so the
amount payable to the appellant in respect of that part of the agreement which
was valid, should be determined. The learned trial judge did not allow oral
evidence to be led as suggested by the appellant because he found that the case
sought to be made by adducing the said oral evidence was not made out by any
averments in the plaint nor was any attempt made to raise any issue in that
behalf at the time when the issues were framed. Indeed, it appears from the
judgment of the learned trial judge that the attempt made by the appellant in
that was not allowed to make out this case and when he went before the court of
appeal, he apparently made no grievance about the decision of the trial court;
otherwise the appeal court would have dealt with this point. There fore, we do
not think that appellant can be permitted to raise this point before us in this
appeal.
That
takes us to the principal point of controversy between the parties in regard to
the construction of section 76(1) and (1) of the Act. Mr. Sastri contends that
in construction the relevant statutory provisions, it would be necessary it
bear in mind that the provisions of the Indian company law are substantially
based on the provisions of the English company law and so it would be necessary
to enquire what the corresponding provision of the English law has been
construed to mean. The pattern of the Indian company law is set by the English
company law and the principal enunciated by English decision in dealing with
the corresponding provision of the English company law should be followed when
we are interpreting the provisions of the Indian company law. This argument
proceeds on the assumption that the corresponding provision of the English
company law permits the payment of commission for subscribing for shares out of
the profits of the company without any limitation. It is, necessary to examine
briefly this argument. The provision in the company law in regard to the
payment of commission for subscribing for an shares was introduced another
English Companies Act in them form of an enabling provision in 1900 and it
became necessary to make the said enabling provision because of an earlier
decision of the House of Lords in Ooregum Gold Mining Co. of India Ltd., v.
George Roper and Charles Henry Wallroth. In that case thee House of Lords had
held that a company limited by sares foremed and registered under the at of
1862, had no power to issue shares as fully paid up for a more consideration
less than their nominal value. It appears that the memorandum of association of
a company registered under the act of 1862 stated that the capital of the
company was 125,000 dividend into 125,000 shares of 1 each and that the shares
of which the original or increased capital might consist might be divided into
different classes and issued with such preference privilege or guarantees as
the company might direct.. The company being in want of money and the original
shares being a t. a great discount the directors in accordance with resolutions
dud passed issued preference shares of 1 each with 15. credited as paid,
leaving liability of only 5s per share, A contract to this effect was
registered inure the companies Act of 1887, section 25, The transaction was
bona fide and for, the benefit of the company. In an action by an ordinary
shareholder t test the validity of the essay it w as held that r ending the
companies Acts of 1862 and 1867 together the issue was beyond the powers of the
company and that t he preference shares so far as the same were held by
original allots were held subjects to the liability of the holder to pay to the
company in flash the full amount unpaid on the shares. In his speech., Lord
Halsbury observed that: “Two things are manifest i section 25 of the Act 1887.
The shares to bee held subject to payment and the payment is to be in c ash .
to amount is to be paid and the whole amount to be paid in ca S. and to me it
appears looking at the latter part of the section whereby a contract made an d
filed may qualify and cut down the form of payment and that it may be a in
goods or in value received in some form instead of i cash it must nevertheless
be payment.” He also added that: “The capital is fixed certain a and every
creditor of the company is entitled to look to that capital as his security.”
Thus has a result of this decision it became obvious that no commission could
be paid to any person for his subscribing to the shares of thee company out of
the capital of the company.
It
was as result of this decision that section 8 was enacted in the Act which was
passed to amend here companies A in 1900 Section 8(1) provided that:
“Upon
any offer of shares to the public for subscription it shall b e lawful for a
company to pay a commission to any person in considerate of his subscribing or
agreeing to subscribe whether absolutely ear conditionally for any share in the
company or procuring or agreeing to procure subscription worthier absolute or
conditional for any shares in the company if the payment of the commission and
the amount or rate per cent. of the commission paid or agreed to be paid does
not exceed the amount or rate so authorized.”
Sub-section
(2) provided that:
“Save
as aforesaid no company shall apply for any of its shares or capital money
either directly or indirectly in payment of any commission discount or
allowance to any person in consideration of h is subscribing or agreeing to
subscribe whether absolutely or conditionally, for any shares of the company or
procuring or agreeing to procure subscripts whether absolute or conditional for
any share’s in the company whether the shares or money be so applied by being
added to the purchase money of any property occur by the company or to the
contract price of any work to be executed for the company for he money be paid
out of the nominal purchase many or contract price, otherwise.”
Sub
section (3) added that:
“But
nothing in this s section shall afore t the powers of any company to pay such
brokerage as it has heretofore been lawful for a company to pay.”
It
would thus be spend that the difficulty created by the decision of the House of
Lords in the case of the Ooregum Gold Mining Co. of India Ltd. was overcome by
this statutory provisions and in consequence it became lawful for the company
to pay commission subject to the conditioner specified in the section . It was
bookish to legal difficulty created b y the decision of thee Housed of Lords
was intended too be cured that the legislature enacted to section by providing
that it shall be lawful of the company to pay commission on the terms specified.
that is the gneisses of the expression “It shall be lawful for a company to
pay” with e which the section begins,
Then
followed the consolidating act of 1908, Section 89 of this Act dealt with the
power of the company to pay commissions and discounts. This section is more
elaborate than section 8 of the act of 1900, but in substance the patterns
remained the same.
Section
43 oil the Act of 1929 in produced an important change by making an additional
provisions by which the commission paid or a greed to be paid was not to exceed
10% of the price at which the shares are issued or the amount or rate
authorized by the articles whichever is the less. In other words. in 1929, a
ceiling was place on the payment of commission at 10% of the price. After this
act was passed commission paid could not exceeds 10% of the price at which the
shares were issued.
The
companies Act, 1948 by s action 53 has maintained in the same provision as
those contained in section 43 of the earlier act. That in brief is the position
of the corresponding provisions in the English companies Acts.
Mr.
Sastri contends that the relevant provisions of the English Companies Act have
been construed to mean that the ceiling on the payment of commission to which
they reefer is payment of commission out of capital and not out of profits. In
other words the arguments is that the payment if commission out of profits is
outside the mischief of the relevant English provisions. In support of this
argument reliance has been placed on the decision of the House of Lords in
Hilder v. dexter In that case to rise working capital a company offered shares
at par to the appellant and some other persons with an apportion to take
farther shares at par within a certain time. The appellant subscribed for
share’s, and the market price having risen to a premin desired to take up the
further shares, It was held: “that this was not an application of shares of
capital money directly or indirectly in payment of commission discount for
allowance within the meaning of he companies Act, 1900 section 8 sub-section 2,
and (the transaction b being otherwise unobjectionable) that the appellant was
entitled to exercise the option.” It would be notice that what the House of
Lords was called upon to consider was whether an application made by the
appellant for further shares offended against the provisions of section 8(2) of
the English Act and that the House of Lords held that it did not It is true
that the shareholder would have been b ale to sells his shares at a premium and
thereby obtain a benefits but the said benefit cannot be said to have been
obtained by him at the expenses of thee company’s capital. Thus the application
made by the appellant was outside the prohibition contained in section 8(2) In
other words, this decision is directly a decision non the construction of
section 8(2) It as, however been argued by Mr. Sastri that in dealing with he
construction of section 8(2) Lord Davey in his speech has considered section
8(1) and observed that: “This sub-section prime its a limited application of
the company’s capital in payment of a commission”. The whole of the appellants
argument is based on this sentence It is suggested that this sentence amounts
to a decision that the provisions of section 8(1) have reference to the payment
of commission out of capital and therefore have no re fairness to the payment
of commission out of profits We are not inclined to accept this contention It
is clear that in the case of Hilder the House of Lords had no occasion to
consider whether or not commission cold be paid out of profits. That point
simply did not arise in that litigation The question which arose was with that
was a case of payment out of capital which w as prohibited by s action 8(2) an
it in that context and while dealing with the narrow contrives between t he
parties that an observation has no due been made that s section 8(1) permits an
application of the company’s capital in payment of a commission in a limited
way. This statement can’t be taken to be an exhaustive interpretation of
section 8(1) so that it should be possibility to hold that by necessary
implication it was intended to lay down that payment of commission out of
profits w as not within the purview of this s section. Therefore, we are n o
prepared to accept the assumption made by the appellant that this decision is a
direct a authority on the point that payment of commission out of profits is
not covered by section 8(1) E.R by the relevant provisions in the subsequent
English Companies Act.
It
is then argued that authoritative text-books on company law support the view
that payment of commission out of profits is not prohibited by the English
companies law. In the Handbook on Joint Stock Co. by Gore-Browne, it is
observed: “that there is no. prohibition against paying commission
unconditionally out of profits” and this would seem to be lawful unless
contrary to any stipulation in he articles” (page 191). Booklet on the
companies Acts observes at page 132 that: “The prohibition is against
application of ‘shares or capital money and payment of commission out of a fund
of undistributed profits is at all event not expressly for biddent by the
section.” It is clear that this statement is somewhat cautions and not as
unqualified as the statement in Gore-Browne’s Handbook. In Polymer’s company
precedents it is observed the t the provisions of section 53(2) of the Act 19
1948 “ leave a company at liberty t apply any of its profits in paying
commission in accordance with the practice able referred t as existing before
the Act of 1900” (page 179) In Polymer’s Co. Law, however the position is
stated somewhat differently. Refereeing to section 53(2), it is observed that :
“if the words used are intended to restrict sub-section (I) so as to make it
only lawful to pay commission out of the newly issued shares or capital money
received for them , the payment f commission out of profits would appear to e
be prohibited by s section 54 which prohibits a company to give any fantail
assistant in connection with, inter alia. the subscription of its own shares.
If, on the other hand, sub- section (2) does not intend to restrict sub-section
(I) but contains a separate and independent provision the application of
profits of the company with in the limits of sub-section (2) of the section 53
are intended to make it clear that the former practice may be continued under
which a company could use its profits for the payment of commission within the
permitted limits” (page 200) It would thus appear that the last observation
seems to supper the view that the prohibition contained i section 53 (I)
applies as much to payments made out of capital as to payments made out of
profits.
It
is thus clear that the view expressed by the different writer on company law
disclose a difference of approach ad do not appear to be based on any judicial
decisions. In fact , though Mr. Sastri conceded that there was no direct
decision on this post, her contended that the absence of any judicial decision
shows tat the point was never disputed On the other hand, Mr. Aggarwala
contends that the absence of any juridical decision speaks for the fact that
nobody ever taught that payment of commission could be made out of profits
beyond the limits prescribed by the relevant statutory provision. However that
may be in view of the material placed before us we do not think it would be s
age for us to assume that the position under the English law is establishment
either one way or the other and for obvious reasons we would be reduction to
embark upon an inquiry on that point by seeking to interpret the relevant
English provisions ourselves.
Let
us, however assumed that the true legal position under the relevant provision
of the English statute is as the appellant contends Does it follow therefrom
that we should approach the problem of construing section 76 with the
preconceived notion that section 76 provides exactly for the same position? In
our opinion the answer to this question has to be against the appellant. Let us
first read section 105 of the Indian companies Act of 1913 and section 76 of
the act of 1956 side by side. Section 105 reads thus:
“Power
to pay certain commissions and prohibition of payment of all other commissions,
discounts, etc.-(I) It shall be lawful for a company to pay a commission to any
person in consideration of his subscribing ear agreeing to subscribe, weather
absolutely or conditionally for any shares in the company or procuring agreeing
to procure subscriptions whether absolute or conditional for any share in the
company if the payment of the commission is authorized by the articles and t he
commission paid for or agreed to bee paid does not exceed the amount air re ate
so authorized and if the amount or rate per cent of the commission paid or
agreed to be paid is-
(a) in
the case of shares offered to the public four subscription, disclosed in the
prospects ; or
(b) in
the case of shares not offered tot he public for subscription, disclosed in the
statement in lieu of prospectus or in a statement in the prescribed form singed
in like manner as a statement in lieu of prospectus and filed with t he
Registrar and where a circular or notice not being a prospects inviting
subscription for the shares is issued, also disclosed in that circular or
notice.
(2) Save
as aforesaid and save s provided ins action 105A, no company shall apply any of
its shares or capital money either directly or indirectly in payment of any
commission discount or allowance to any person in consideration of his
subscribing or agreeing to systems whether absolutely or conditionally for any
shares of the company or procuring or agreeing to procure sub subscription
whether absolute or conditional for any shares in. The Company where the shares
or money be so applied by being added to the purchase-money of any property
acquired by the company or to the contract price of any work to be excited for
the company or the money be paid out of the nominal purchase money or contract
or otherwise.
“Section
76(1) and (2) reads thus:
“(1)
A company may pay a commission to any person in consideration of
(a) his
subscribing or agreeing to subscribe whether absolutely or conditionally for
tank shares i , or d debentures of, the company or
(b) his
procuring or agreeing to procure subscriptions, whether absolute or conditional
for any s shares in, or debentures of, the company,
if the following conditions are fulfilled,
namely:-
(i) the
payment of the commission is authorized by the articles;
(ii) the
commission paid or agreed to be paid does not exceeds in the case of shares
five percent. of the price at which the shares are issued or the amount or rate
authorized by the articles whichever is less and in the case of debenture two
and a half per cent. of the price at which the debentures are issued for the
amount or rate authorized by the articles whichever is less;
(iii) the
amount or rate per cent. of the commission paid or agreed to be paid is-
In
the case of shares or debentures offered to the public for subscription
disclosed in the prospectus; and in the case of shares or debentures not
offered to the public for subscription disclosed in the statement in view of
prospectus or in t a statement in the prescribed form singed in like manner as
a statement in view f prospectus and filed before the payment of the commission
with the Register and where a circular or notice not being a prospects
inventing subscription for thee shares or debentures is issued all disclosed in
that circular or notice; and
(iv) the
number of shares or debentures which persons have agreed for a commission to subscribe
absolutely or conditionally is disclosed in the manner aforesaid.
(2) Save
as aforesaid and save as provide in section 79, no company shall allot any of
its shares or debentures or apply any of its capital moneys, either directly or
indirectly in payment of any commission, discount or allowance to any person in
consideration of-
(a)
his
subscribing or agreeing to subscribe, whether absolutely or conditionally for
any shares in , or debentures of, the company,.
or.
(b) his
procuring or agreeing to procure subscription, whether absolute or conditional,
for any shares in, or debenture of, the company.
Whether
the shares, debentures or money be so allotted or applied by being added tot he
purchase money of any property acquired by the company or to the contract price
of any work to be executed for the company, or the money be paid out of the
nominal purchase money or contract price for otherwise.”
A
comparison of thee two s sections will show that section 76 has made three
departure from section 105; first it begins by saying that “a company may pay a
commission “ and t h is expression has substituted the oilier expression “it
shall be lawful for a company to pay commission.” It is true that this change
is not very significant; but it cannot be treated as of no significance at all
and it may be that b y adopting the present expression the legislature wanted
to indicate that section 76, unlike its predecessor section 105, was not
intended to be merely an enabling provisions,. Then it would be noticed that the
substantial part of section 105(1) has no been put mare categorically and
definitely in thee form of conditions in section 76 and that may suggest that
what section 76(1) purports to do is to authorize the payment of commission but
subject only to the limitations prescribed by it, In other words it is a
section which enables payment to be made and prohibits payment being made
beyond the limit prescribed, the third change which is very material is that
debentures are included within its purview. It is common ground that so far as
commission payable on debentures is concerned, there never was any prohibition
in the English law or in the Indian law; and so if section 76(1) was intended
merely to be an enabling provision it was hardly necessary to include debentures
within its scope. The inclusion of debenture marks an important departure from
the position under section 105 of thee earlier Act as well as from the position
under the corresponding provisions of the English stature. Therefore having
regard to the s come off thee present section 76(1), it would we think, not be
legitimate to attempt thee take of constructing the said provision with a
preconceived notion as suggested by the appellant; for it may well be that the
object intended to be achieved by this sub-section is different from the object
intended to be achieved by the corresponding provision in the English law.
Besides
it would be relevant to recall that one of thee object of thee Act clearly was
to impose stringent restrictions upon payment soul of profits of the company to
the managing agents directors managing directors and other concerned with he
management of the affair of the company. This object has been expressly
achieved by several provision in the Act, such as sections 348, 352, and 38 7.
the anxiety of the legislature to save the profits made by the company and to
prevent extravagant payments being made out of them which is a distinguishing
feature o the act,. also shows that it would not be s are to assume that
section 76(1) must have intended to achieve exactly what the corresponding
provision in the English statute is intended to achieve. therefore we do not
think it would be right to assume at the very outset that the payment of
commission out of profits is outside the provision of section 76 because it is
not included in the corresponding provision in the English law. After all, the
question which has been raise before s in the present appeal must be determined
by us on a fair and reasonable construction of section 76(1) and (2) and it is
to that problem that we must now turn.
In
construing section 76(1) and (2), it would be necessary to bear in ming the
relevant rules of contractions. the first rule of construction, which is
elementary is that the words used in the s section must be given their plain
grammatical meaning. Since we are dealing with two sub-sections of section 76,
it is necessary that the said two sub-sections must be constrused as a whole
“each portion throwing light, if need be, on the rest.” The two sub-sections must
be read as parts of an integral whole and as being inter-dependent; an attempt
should be made in constrain them to reconcile them if it is reasonably possible
to do so, and to avoid repugnance. If repugnance cannot possibly be avoided,
then a question may arise as to which of the two should prevail . But that
question can arise only if repugnance cannot be avoided.
The
important part in section 78(1) with which we are directly concerned is the one
that provides that the commission paid or agreed to be paid does not exceed the
limit therein prescribed. One of the conditions which has to be satisfied in
the matter of that the said commission shall not exceed 5% of the price at
which the shares are issued or the amount or rate authorize by the articles,
whichever is less. It is significant that this provision seeks to place an
absolute ceiling on the payment of commission and, in doing so, it refers to
the commission generally as such and does not refer to the commission paid
either out of capital job out or profits; so that section 76(1) read by itself
unambiguously and clearly prescribes a ceiling on the payment of commission
whatever may be the source from which the said commission may be paid, We have
already seen that section 76(1) cannot be treated merely as an enabling section
. This portion has been coincide by the appellant before us and so commission
is intended to act as prohibition against the payment of any commission bidden
the said ceiling. therefore section 76(1)(i) leaves no doubt that it covers
commission paid either out of capital or out of profits.
Section
76(1)(i) prescribes another condition that the payment of commission is
authorized by the a articles. since the payment of commission which is referred
to in this clause is commission payable either for to shares or for the
debentures it may be relevant to consider whether the commission here referred
to can be commission only out of capital. Ordinarily, commission paid for
debentures would be commission out of debentures money or profits though of
course, it is conceivable that the commission on debentures may also be paid
out of capital But if commission on debentures can be paid out of profits then
it would not be unreasonable to assume that clause (i) refers to commission
payable not only out of capital be out of profits as well. The inclusion of
debentures within the scope of s action 76 suggest that the commission
mentioned by clause (i) would not on a reasonable construction be confined to a
commission payable out of capital alone.
Clause
(iii) of section 76(1) seems to suggest the same conclusion Under this clause
the condition imposed is that the amount or rate per cent, of the commission
paid or agreed to be paid is in the case of shares or debentures not offered to
the public for subscription disclosed in the statement in lieu of prospectors
for in a statement in the prescribed form singed in like manner as a statement
i lieu of prospectors and filed before the payment of the commission with the
Registrar. In construing this clause , it may be useful t refer to section 111
of the Act of 1913. Under that section, particulars in case of commission on
debentures had to be filed and it cannot be disputed that the said particular
would also refer to particulars of commission paid out of profits Now that
debentures have been brought under section 76 would it be unreasonable to
assume that under the particulars required to be fled under condition (iii)
particulars in regard to commission payable out of profits are also required to
be filed ? In other words the word “commission” used in clauses (i) and (iii)
seems to re few to commission paid not only out of capital but also out of
profits in relation to debentures That incidentally supports the constructions
that the word “commission” used in clause (ii) cannot be confined only to the
commission payable out of capital. Indeed if section 76(1) is read by itself
there can be not count of difficulty in coming to the conclusion that
commission there contemplated is commission payable both out of capital as well
as profits.
The
arguments however is that if this construction is accepted there would be
repugnance between the two sub-causes of section 76. It is therefore necessary to
examine section 76(2) because as we have already seen before determining the
true scope and effect if section 76(1) and (2) we must read them together as
parts of an integral whole.. Now what does section 76(2) provide? It provides
that no company shall allot any of its shares or debentures or apply any of its
capital moneys, either directly or indirectly, i payment of any commission
discount or allowance to any person in consideration of the objects therein
specified save as aforesaid and as provided in section 79 In other words, what
is prohibited by sub-section (2) is save as aforesaid in section 76(I) just as
it is save as provided in se action 79. That means that prohibition enacted by
section 76(2) has to be worked out in the high of section 76(1) and section 79.
The prohibition imposed by sections 76(1) is in general terms and it includes
payments from any source or fund. The l legislature knew that payment of
commission may be made by adopting several devices and what sub-section (2)
intends to achieve is to prohibits the adoption of such devices by making it
clear that whatever be the natures o the device adopted if the object of the
device is to pay commission the it must conform to the limit prescribe by
section 76(1) It is well known that sometimes shares or debentures are allied
her capital money is applied in payment of commission Similarly under the garb
of what may ostensible be lawful payments for instance, in respect of purchase
money of any property acquired by the combat or the contract price of any worm
to be executed for the Company commission may be paid; the purchase price of
any properly or the contact price of an y work may be fixed so as to include
something more than its real value the difference being intended to be paid as
commissions. It was in view of these d evils which the legislature knew were
being adopted for the payment of commission that s section 76(2) has been
inserted in the form which it has taken . As has been observed by Cries on
STatute Law, provisos are often inserted “to ally fears: or to remove
misapprehension. Just as section 76 (2) has to be read i them light of section
79 and subject to its provision so it has to be read in the light of section
76(1) ans subject to its provisions. In other words, in order to clarify the
position in regard t the devices which may be adopted to defeat the limit
imposed by section 76 (1) the legislature has provided by section 76(2) hat
these devise are as subject to section 76(1) and payments can be made under
those gars or devices provided they do not exceed the limit prescribed by
section 76(1) In out opinion therefore far from there being any conflict or
repugnance between section 76(1) and section 76(2) they constitute one
integrated provision one off the object of which is to impose a limit on the
payment of commission either in respondent of shares or in respect of
debentures. The anxiety to save the profits of the company is as much in
evidence in section 76(1) as it is i other section to which we have already
referred. Mr. Sastri, however contends that the proper way to r eat sections
76(1) and (2) would be to treat section 76(2) as the main provision ands
section 76(1) as a proviso to it. his arguments was that section 76(2) puts a
balance ban on the allotment of any shares or debentures or the application of
any capital money and section 76(I) relaxes the ban by allowing the payment to
be made within the limits prescribed and subject to the conditions therein
specified. The ban imposed by section 76(2) is in respect of capital and not in
respect of profits and so t he relaxation from the ban prescribed by section
76(1) must likewise be confined to capital and can’t be extended to profits. In
our opinion this is an arguments of desperation . What we are asked top do by
Mr. Sastri is, in substance, to rewrite the two sub- sections of section 76 and
that we can’t legitimately do, particularly when on the alternative
construction it is found that there is no repugnance between the two
sub-section. On the appellant’s view we have to ignore the opening words in
section 76(2) and substitute the said words in s section 76(I) That clearly is
the function of true legislature which en acts l;away nd not of the court which
interprets theme. Therefore in our opinion, the learned judges of the High
court were right when they held that a claim for commission out of the profits
of the company which the appellant seeks to make in the present suit is hit by
section 76(1) and cannot be entertained. In this connection there are tow other
points which have been urged before s by Mr. Aggarwala. He contends that if
section 76(1) and (2) are read as confined to the payment f commission from out
of the capital, there would be no provision for payment for commission out of
profits at all and so the plaintiff’s claim would have o be dismissed on that
ground. the argument is that the act is a consolidating Act sand as such it
wild be legitimate to assume that t he relevant provisions of section 76 deal
exhaustively with the topic of the payment of commission in respect of shares
and debentures, it that be so, whatever is not provided for by section 76 could
not be claimed after the passing of the consolidating Act. Similarly it is
urged that if commission payable our of profits in respect of dividends was intended
to be saved, a provision would have been made in section 76 corresponding to
the provision made by section 76(3) in regard to brokerage. Section 76(3)
provides that nothing in this section shall affect the power of any company to
pay such brokerage as it has hereto fore been lawful for a company to pay.
there is no such provision in respect of payment of commission out of profits
in relation to debentures. there may be some force in these contentions.
Before
we part with this subject it would be relevant to state that in 1960, section
76(2) has been amended by section 22 of thee Amending Act(No,65 of 1960) and as
result of this amendment the word “capital” has been deleted. It is common
ground that after this amendment was effected, section 76(1) and (2) both refer
to payment of commission out of profits as well as out of capital . As we have
already seen the whole of the argument urged b y the appellant on the
construction of s section 76(2) was substantially based on the use of the
expression “any of its capital money”. The world “capital” having been deleted
the provision of section 76(2) is wide enough t include profits. therefore
there can be no doubt that after 1960, the limit imposed on the payment of
commission in respect of shares and debentures applies has much to commission
out of capital as to those which are paid out of profits. It ma y be
permissible to assume that by the amendment made in 1960, the legislature has
attempted to remove doubt that may haven arisen owing to the use of the word”capital”
in section 76(2) and has now made its intentions clear beyond any doubt this
amendment made in 2960 the legislature has attempted to remove doubt that may
have arisen owing to the use of the word “capital” in section 76(2) and has no
made its intention clear beyond any doubt Their amendment along with severe;
other which were made in 1960 wash represumably the result of the
recommendation of the committee appointed inthat behalf. In its report, the
committee observed that “in order to remove any doubt we would recommend the
deletion of the word ‘capital’ from section 76(2).” Thus, it is clear that the
point raised in the present appeal cannot arise under the amended provision of
section 76.
That
leaves minor point still to be considered, It was urged in the courts below
that the provision of section 76 cannot be i invoked against t he appellant
because the agreement on which the appellant rests his claim was made prior to
the 1st april, 1956, when the Act came in. force, The contention appears to have
been that in invoking the provisions of section 76, respondent No. 1 was
seeking to make the said provision retrospective which it is not. In our
opinion there is no substance in this argument. Section 9 of the Act is a clear
answer to this contention . Under section 9(a) any agreement executed by the
Company cannot prevail if it is in consist with the provision of the Act and
under section 9(b) the a articles shall likewise not prevail if they area
inconsistent with the provisions of the Act. Section 645 leads to the same
conclusion.
The
result is, the appeal fails and is dismissed with costs.
SARKAR J.--The
respondent Sari Changdeo Sugar Mills Ltd. was incorporated as a private company
on September 1, 1939. the appellant , the respondents Nos. 2 and 3 and one
Kasturchand Srikrishan, since deceases had promoted its formation. On December
18, 1939, the respondent company entered into separate agreements with the
promoters providing that “ In consideration of the help given and trouble taken
by you promoters and i consideration of each of you having agreed to take
shares of the value of one hand a half lake of rupees in the capital of the
company and having taken the sin shares, the company enters into an agreement
with you as well as with other three promoters as follows:(I) Thee company
.........will.......pay a sum equal to 3 1/8 per cent. out of the net profits
of th e company to each of you promoters or his heirs and representatives,
executors, administration or assigns.” The promoters duly took the shares
mentioned in the agreement and became entitled to receive, taken all together,
12 1/2 per cent. of the profits of the respondent company. Articles 3 of thee
articles of association of th respondent company provided that it would enter
into the aforesaid agreement with the promoters.
In
1941, the respondent company was involved in financial difficulties and on
April 22, 1941,a tripartite agreement was made between it and a firm called
Ardeshir Hormusji Bhiwandiwalla and Co. and the promoter under which it was
proved that the firm or its nominee would become the managing one t of th
respond company and the promoters all together would receive “6 1/4 per cent.
as promoters” commission instead of 12 1/2 per cent. as in our respective
agreement with t he company”, that is to say the agreement of December 18,
1939. In terms of this agreement articles 3 of the articles of association of
the company was duly amended. An agreement was also specifically entered into
by the respondent company with each of the promoters.
In
1944, the respondent company was converted its a public. limited company. On
June 10, 1944, Kasturchand d Srikrishan died and his interest under the
agreements is now represented by respondents Nos.7 to 10. Presumably,
respondent No.3 had taken the shares and entered into the agreement as
representing a joint family, for it is not in dispute that on a portion between
respondent No.3 and his co-shares, respondent No.3 under the agreements and in
the shares.
In
September 1944, three suits were pending in the High court at Bombay between
respondent company,m the beneficiaries under the agreement and the is
Bhiwandiwalla and Co. to the details of which it is unnecessary to refer fort
the said suits were however compromised The terms of settlement provided that
(a) all the suits would be mutually withdrawn; and (b)”The promoters”
commission payable t us four which is Rs. 1-9-0 to each of us and which comes
to 6 1/4 peer cent. in the aggregate payable to us fours under the agreement
shall remain i force as in the agreement and our right of commission shall
continue accordingly”. the word “us” in thee terms of settlement means the
beneficiaries under the agreements.
The
respondent company aid the commission act the said rate of 6 1/4 per cent. to
the beneficiaries under the agreement up to September 30, 1955. On October 1,
1956, the respondent company informed the appellant and the other beneficiaries
that as from April 1, 1956 when the companies Act, 1956 had come into force the
agreement had become illegal and vid. It was said that section 76 of the
companies Act, 1956 prohibited all payment of commission for subscribing for
shares in excess of 5 per cent. of the price at which the share’s were issued.
It is not in dispute that what the appellant and the other beneficiaries had
been paid as commission exceeded five per cent of the price at which the shares
had been issued. The respondent company therefore, contended that the appellant
and the other beneficiaries were not entitled to any further commission.
The
appellant disputed the contention of the respondent companioned filed a suit in
the High Court at Bombay against it in which the other beneficiaries were also
made defendants for a declaration that the agreement of December 12, 1939, as
modified on april 22, 1941, was valid and for an injunction roistering the
respondent company from passing a resolution deleting article 3 of thee its
articles of association as it proposed to do and from acting on the footing as
if thee is agreement was illegal. The appellant contended that section 76 of
the companies Act of 1956 prohibited payment of commission of subscribing for
shares beyond the limit specified out of capital only and as the agreements
provided for payment of the commission out of profits they where not affected
by that section at all.
The
suit was contested by the respondent company but the o them defendants
supported the appellant’s case, The respondent company contend de that the
section applied to payment f commission both out of capital as well as out of
profits. the suit was heard tin th e first i instance by S.T. Desai J. and was
dismissed. An appeal to an appellant bench of the High Court was also
dismissed. The present appeal is against the judgment of the appellate bench by
special leave granted by this court.
I
shall have presently to refer to the provision of section 76 but before doings
I think necessary to refer to the previous state of the law. In England, prior
to the companies Act of 190, there was no statutory provision concerning
payment of commission for subscribing for shares and such a provision was first
enacted by section 8 of that companies Act. Even before the Act of 1900.
however the law was that anybody subscribing for shares in a company had to pay
the amount of the shares in full. That was considered to be one of the
fundamental principals of company law. Ooregum Gold Mining Co. of India Ltd. v.
George Roper was a case which turned on the law as it stood before 1900. There
a company had issues shares of I each with 15s. credited as paid up leaving a
liability of only 5s. per share. A shareholder brought an action to test the
validity of t he issue, It was held that the issue was invalid. Lord Halsbury
observed: “It seems to me that the system thus created by which the shareholder’s
liability its to be limited bat he amount unpaid upon his shares render its
impossible for the company to depart from that requirement, and by any
expedient to arrange with their shareholder that they shall not be liable of
the amount unpaid on the shares although the amount of those shares has been in
accordance with the act of Parliament, fixed at a c certain sum of Mount is
manifest that if the company could do so the provision in question would
operate nothing.” The provision referred to by Lord Halsbury was the section
which required the memorandum of association to state the amount of the
company’s capital as divided into shares of a c certain fixed amount. Such a
provision of course occurs in our companies Acts too.
This
decision made it impossible for a company to pays out of is capital any
commission t o any person for subscribing for its shares, It was f felt that
this created some inconvenience to a company in the management of its affair’s
and therefore section 8 was incorporated in the companies Act, 1900. win the
intention of grant some relief against that in convenience . Sub section (I) of
this section provided that i would be lawful for a company to pay commission to
a person in consideration of his sub rabbinate for any shares the company if
the amount or r ate of it were respectively authorized by the articles of
association and disclosed in the prospectus and the commission paid did not
exceed the amount or rate so authorized. Sub- section (2) provided that save as
aforesaid no company could apply any of its capital money, either directly or
in directly in payment of any commission to any person in consideration of his
subscribing for any shares in the company. This provision came up for
consideration before the House of Lords in Hilder v. Dexter . There a company
had in consideration of a person taking up some of its shares entered into an
agreement with him that he would have an petition to take further shares at par
within a certain time. A little later the price of the shares went up and the
person then exercised his option . An action was thereupon brought by a
shareholder to test the validity of this agreement,and it was held by the House
of Lords that the agreement was valid. Lords Davey observed:” In this case the
question is as to the powers of the company itself and not as to the due
exercise of the directors powers. I have come to the conclusion from a
consideration of the language of section 8 sub section 2, that the prohibition
there in contained extends only to the application direct or indirect of the
company’s capital in payment of a commission by the company. and the
transaction impeached in this case is not within it. It is satisfactory to find
that the conclusion to which I have come will not have the effect of extending
the prohibition to transactions which were legitimate befores the Act, and not
so far as I am aware,open to objection on any other ground.” He also said
refereeing to subsection (I) of section “this sub- section therefore permits a
limited application of the company’s capital in payment of a commission. Now
there is no doubt that prior to the Act of 1900 there was nothing to prevent
the payment of commission for subscribing for shares out of a company’s
profits. The decision in the Ooregum Gold Mining Company case only laid down
that the amount of the shares must be paid in full It would not be so paid if
the capital was utilized for payment of commission for subscribing for shares.
It was therefore the legitimacy of transactions providing for payment of the
commission out of profits that Lord Davey was happy to feel that his decision
would not affect It is hence plain that the House o Lords was of the opinion in
Hilder v. Dexter that section 8, sub-section I of the act of 1900 was not
concerned with payment of commission out of profits. That is how that case has
been understood in England: see Palmer’s company Precedents, 17 th edition Vol.
1, page 179, Palmer’s company law, 20th edition Vol.1 page 200. See also Sarkar
and Sen’s Indian companies Act, 1913, page 302.
It
seems to me that no other view is possible. There is nothing in any companies
Act, except where it expressly does so to restrict in any way the power of a
company to deal with its profits. A company is therefore free to enter into any
agreement entitling and person to a part of its profits in consideration of his
subscribing for shares in it, That was the law as it existed before the Act of
1900. The view taken in Hilder v. Dexter was that the was nothing in section 8
of that Act which effected a change in the pre-existing law. In spite therefore
of the Act, a company retained fully its powers to pay out of its profits
commission of subscribing for shares in it. I think it right to remind here
that we are dealing with the powers of a company and not of its directors.
Section
8 of the Act of 1900 was replaced by section 89 of the English Companies Act of
1908 and this in its turn was substituted by section 43 of the English
Companies Act of 1929 and the corresponding provision is now contained in
section 53 of the english companies Act of 1948. substantially the provision in
this regard has remained the same in England throughout from 1900 except that
in 1929 a further restriction end pay on to pay the commission for subscribing
for shares by providing that the commission p[aid shall nor exceed 10 per cent
of the price for which the shares were issued or the amount or rate authorized
buy the articles whichever was less. That restriction could not have effected a
change in the law as it previously existed in England in regard to payment of
commission out of profits.
Now
in our country section 105 of the companies Act of 1913 for the first time
introduced the provision corresponding to that contained in section 8 of the
English Act of 1900. Both therefore On the general principles underlying
company law under which a company except in cases where in express provision to
the contrary is made, is free to deal with its profits in such manner as it
likes and on the authority of Hilder v. Dexter which in my view would be fully
applicable to our companies Act of 1913, a company in out country cult enter
into a valid agreements to pay any commission it liked out of its profits to
any persons for subscribing for shares in it I may here add that section 105 of
the Indian Companies Act, 1913 was in terms substantially the same as section 8
of the English Companies Act 1913, was in terms substantially the same as
section 8 of the English Companies Act of 1900. It contained no provision
restricting the amount of the commission to be paid.
I
now turn to section 76 of out companies Act of 1956. It provides by subsection
(I) that a company may pay a commission to any person in consideration of his
subscribing........ for any shares in, or debentures of, the company,........
if the following conditions are fulfilled.” These condition are:
“(i) the
payment of the commission is authorized by the articles;(ii) the commission
paid.. does not exceed i the case of share 5 per cent of the price at which the
shares are issued or the amount or rate authorized by the articles whichever is
less and in the case of debentures 2 1/2 per cent of the price at which the
debentures are issued or the amount or rate authorized buy the articles,
whichever is less;
(iii) the
amount or rate.. of the commission paid .. is in the case of shares or
debentures offered to he public or subscription, disclosed i th prospectus and
in the case of shares or debentures not offered the public for subscription
disclosed in the statement in the lieu of prospectus or in a statement in the
prescribed from and duly signed and filed before the payment of the commission
with the Registrar and where a circular or notice not being a prospectus
inviting subscribing for the shares or debenture is issued also disclosed in
that circular or notice.
Now
the question that arise s is whether this sub-section has made any alteration
in the law which previously existed and which for the reasons earlier stated,
In thing permitted commission to be paid freely out of profits. In other were
does this subsection as it stands prevent a company from paying any commission
it likes out of its profits to any person for subscribing for shares in it ? I
find nothing in it to indicate that a change in the law was intended. It is said
that the permission granted by sub-section (I) is not expressly confined to
payment of commissions out of capital only. Neither, however does it say that
the enabling provision contained in it is to be applied to payment of
commission out of profits also. How then is this sub-section to be construed?
Now one of the established rules of construction of statutes is that it is to
be presumed “that the legislature does not intend to make any substantial
alteration in the law beyond what it explicitly declares, either in express
terms or by clear implications, or in other words, beyond the immediate scope
and object of the statue. In all general outside these limits the law remains
undisturbed. It is the last degree improbable that the legislature would overthrow
fundamental principles, infringe rights, or depart from the general system of
law, without expressing its intention either irresistible clearness, and to
give any such effect to general words, sample because they have a meaning that
would lead thereto when used in either their widest, their usual, or their
natural seasons, would be to give them a meaning other than that which was
actually intended. General words and phrased, therefore, however wide and
comprehensive they may be in their literal sense must usually, be construed as
being limited to the actual objects of the Act.”
(Maxwell
on Interpretation of Statutes, 10th edition, pages 81- 82)
I
have earlier state that under the Act of 1913f a company was free to pay any
commission out of its profits it liked to persons subscribing for shares in it.
I find nothing in sub-section 76 to indicate that that rule of law which is
based o the fundamental principals of company law, was intended to be affected
by it. The only substantial departure made in section 76(1) of the Act of 1956
from the provisions in section 105 of the Act of 1913, except another to which
I will later refer, is the imposition of a restriction on the amount of
commission that can be paid. That cannot, to my mind, furnish any reason for
holding that the pre-existing law giving full liberty to a company t pay
commission out of profits was intended to be changed. That restriction will
have full scope if applied payment out of capital and does not itself indicate
any source out of which the restricted commission is to be paid. Therefore, it
seems to me that the proper way of reading sub-section (1) of section 76 is to
restrict its general words so as not to affect the pre-existing law. So read
the terms contained in it has to be confined to payment of commission out of
the capital moneys of companies.
Again,
in section 105(1) of our Companies Act of 1913 it was said, “It shall be lawful
for a company to pay a commission to any person in consideration of his
subscribing” for shares in it. The words “it shall be lawful”are establishing
words. They are used in a statute when it is intended to permit something to be
done which previously could not legally be done which previously could not
legally be done. In Craies on Statute Law, 5th edition ap page 263, it has been
said,”Statutes passed for the purpose of enabling something to be done are
usually expressed in permissive language, that is to say, it is enacted that
‘it shall be lawful’,etc., or that ‘such and such a thing may be done.’” In Julius
v. Bishop of Oxford 1 it was said:”the words ‘it shall be lawful’ are not
equivocal. They are plain and unambiguous. They are words merely making that
legal and possible which there would otherwise be right or authority to to do.
They confer faculty or power, and they do not of themselves do more than cover
a faculty or power.’ It would follow from the use of the words “it shall be
lawful” i section 105 (1) of the Act of 1913that the legislature intended t
make that payment of commission for subscribing for shares legal, which was not
so before . The legislature, therefore, intended to permit and make legal the
payment of commission out of profits had always been legal and there was no
necessity for any statutory provision to make such payment legal or pass an
enabling enactment in regard to it. It would follows that section 105was not
concerned with putting any restriction on a company’s power to pay commission
out of profits.
Now
sub-section (1) of section 76 of our Companies Act of 1956 uses instead of the
words “it shall be lawful” the word ‘may”. That however makes no difference. As
has been stated in the passage in Craies which I have earlier read, both mean
the same thing. They are both used in a statute to indicator that something may
be done which prior to it could not be done. It would follow that section 76(1)
of the Act of 1913, namely , the legalizing of a payment of commission out of
capital which before the Act of 1913 was illegal and which became illegal on
the repeal of that Act by the Act of 1956. That would be another reason for
saying that section 76(1) of the Act of 1956 was nor concerned with any payment
of commission out of profits.
I
pass on now to sub-section (2) of section 76 of the Act of 1956.That
sub-section says;
“Save
as aforesaid and save as provided in section 79, no company shall allot any of
its shares or debentures or apply any of its capital moneys, either directly or
indirectly, in payment of any commission, discount or allowance, to any person
in consideration of-
(a)
his subscribing or agreeing to subscribe, whether absolutely or conditionally,
for any shares in, or debentures of, the company, or (b) his procuring or
agreeing to subscriptions, whether absolute or conditional , for any shares in,
or debentures of, the company
whether
the shares debentures or money be so allotted or applied by being added to the
purchase money of any property acquired by the company or to the purchase money
of any property acquired by the company, or the money be paid out of any work
to be executed for the company, or the money be paid out of the nominal
purchase money or contract price, or otherwise.”
This
sub-section strongly suggests that sub-section (1) is to be read as confined
only to payment of commission out of capital, for it says that save to the
extent provided by sub-section(1) no commission shall be paid out of the
capital moneys of the company . If sub-section (1) were exhaustive of the
powers of a company to pay commission both out of its capital and its profits so
that nothing could be paid as commission either out of capital, or out of
profits or out of any other moneys of the company except as therein provided,
as the respondent company’s contention is, then sub-section (2) would be wholly
redundant; the prohibition contained in it , that case be totally unnecessary.
it was said that sub-section (2) is used only to make sure that the limits
prescribed by sub-section(1) would not be departed from by indirect method. But
surely it was not necessary to make any provision of that purpose only. What
could not be done directly could also to be done indirectly. Furthermore, if it
was necessary to provide as sub-section (2) is said to do ,that the capital
moneys of the company should not be used indirectly for payment of commission
why was it not provided that the profits should not also be used for the same
purpose indirectly? This clearly, for the same reason, should have been done if
sub-section(1) dealt with payment of commission out of profits also. The reason
suggested on behalf of the respondent company for the enactment of sub-section
(2) does not therefore seem to me to be well founded.
Furthermore
, the two sub-sections must be read together. Subsection (2) contains a general
prohibition of payment of commission out of capital and an exception to it is
provided in sub-section (10). That seems to be the inevitable result of the
words “save as aforesaid”, that is, save as provided in sub- section (1), with
which sub-sections (2) opens. It necessarily follows that sub-section (1)
contains an exception to the general prohibition of payment of commission out
of the capital. It , therefore, has nothing to do with payment of commission
out of profits.
They
other substantial feature in which section section 76 of the Act of 1956 has
departed from the provisions of section of section 105 of the Act of 1913, is
by inclusion in the former of a provision for the payment of commission for
subscribing for debentures. While section 105 dealt only with payment of
commission for subscribing for shares, section76 deals with payment of
commission both for subscribing for shares as well as debenture. An argument
was based on this innovation made in section 76. It was pointed out that in
regard to debentures accompany was before the Act of 1956 free to pay any
commission it liked for subscribing for them, either out of its capital or out
of its profits and certain particulars had to be filed as required by section
111 of the Act of 1913. It has, therefore been contended that the illusion of
debentures in section 76 of the Act of 1956 would show that the power to pay
commission whether out of capital or profits for subscribing for shares as well
as debentures was exhaustively contained in sub-section (1) of that section. I
am unable to accept this argument.
If
I am right in my view that sub-section (1) of section of the Act of 1956 is
only an exception to the general prohibition contained in sub-section(2), it
would follow that the restriction imposed by subsection(1) is confined to
payment of commission for subscribing for debentures out of capital only. It is
true that or read there would after the Act of 1956 be no power in a company to
pay out of its capital any commission for subscribing for its debentures,
except as provided in section 76(1) of that Act. The law would doubt thereby
have been charged but it would have been so changed because the Act of 1956
made that change in express words by the probation contained in sub-section (2)
of section 76. But suppose sub-section (1) is exhaustive as regards a company’s
power to pay commission for subscribing for debentures whether out of capital
or profits, then also the sub- section debentures whether out of capital or
profits, then also the sub-sec-section would clearly be altering the pre-existing
lad; it would then be putting a restriction on the power ton pay commission for
subscribing for debentures out of profits which power was previously free of
all restrictions. If it were not so, then sub-section (1) in so far as it
relates to payment of commission for subscribing for debentures out of profits
would become infructuous. Therefore, it would have if that case to be read as
altering the pre-existing law by a necessary implication. It is of some
interest to point out here that section 111 of the Act of 1913 provided that an
omission to file the particulars as required by would not affect the validity
of the debentures issued and, therefore ,perhaps, the validity of the agreement
to pay commission on them.
Coming
back now to the point under consideration, I find it impossible to say that a
necessary implication of sub-section (1) of section 76 of the Act of 1956 is to
alter the previous law which permitted payment of commission for subscribing
for shares freely out of profits. In regard to payment of commission out of
capital for subscribing for shares, it was only an enabling section and not a
restrict for shares, it was only an enabling section and not a restrictive one,
though in regard was only an enabling section and not restrictive one, though
in regard to payment of commission for subscribing for debentures whether out
of capital or out of profits, on the assumption that we have made, it would be
a restrictive and exhaustively provision with no power to pay such commission
except in accordance with its terms. In regard to payment of commission out of
capital for subscribing for shares, the section being only an enabling
provision, it cannot affect the pre-existing power to pay out of profits a
commission for subscribing for shares. The fact that in regard to payment of
commission for subscribing for debentures the section many have to be read as
restrictive, that is , as containing exhaustively the power in regard thereto ,
is no reason for saying that it has the same effect in regard to payment of
commission for subscribing for shares. The considerations applicable to the two
cases are entirely different and the effect, therefore, of the section on them
has to be different.
For
these reasons , my opinion, section 76 of the Act of 1956 does not affect a
company’s right to pay out of its profits any commissions it likes for
subscribing for shares in it. I therefore think that the agreements for
payments of commission for shares in the respondent company out of its profits
with which this appeal is concerned were not affected by section 76(1) of the
Act of 1956. They remained perfectly valid after the coming in to force of the
Act of 1956.
I
would , therefore ,allow the appeal.
ORDER.-In
accordance with the opinion of the majority, the appeal fails and is dismissed
with costs.
Appeal dismissed.
[1947] 17 COMP.
CAS. 17 (PAT.)
Chotanagpur
Banking Association Ltd.
v.
Rajib
Nath Mukherji
SHEARER, J.
APPEAL FROM APPELLATE DECREE NO.
1383 OF 1944.
APRIL. 15, 1946
P.R. Das and C.J. Sinha, for the Appellants.
G.C. Mukherji and A.K. Chatterji, for the Respondents.
Shearer, J.—The respondent Rajib Nath Mukherji, who was the plaintiff in the
trial Court, is the son of one Parendra Nath Mukherji and the nephew of one
Digendra Nath Mukherji. In 1915, Digendra Nath Mukherji borrowed a sum of money
from the appellant, who is the Chotanagpur Banking Association and was the
contesting defendant in the trial Court, and by way of security for its
repayment, executed a premissory note. Digendra Nath Mukherji died in 1921, and
two years later, the bank obtained a decree against his widow Jyoti Bala Devi
and his two brothers. Successive attempts were made to realise the amount due
under the decree, but these attempts proved infructuous. Eventually, the bank
attached 48 fully paid-up shares which Digendra Nath Mukherji had held in it,
and, at the ensuing sale, purchased them itself. This was on August 3, 1935.
The name of Digendra Nath Mukherji continued, however, to be shown in the
register of shareholders, the bank apparently realising soon after the sale
that it had not been open to it to purchase them. On December 31, 1935, the
secretary of the bank caused 43 out of the 48 shares to be sold and entered the
names of the purchasers in the registers. Jyoti Bala Devi died on February 23,
1936, and Parendra Nath Mukherji, who survived his two brothers, died on
September 4, 1940. On January 2, 1942, the plaintiff instituted the suit out of
which this appeal arises. In it he asked for a declaration that the sale in
execution of the decree was a nullity as also was the subsequent sale by the
secretary of the bank. He asked that the names of the purchasers of the shares
should be deleted from the register and his own name should be substituted, and
he asked also for a decree for any dividends which had accrued on the shares.
The suit was decreed by both the Courts below and the bank has appealed.
Mr. P.R. Das, for the appellant, referred to Section 54A of
the existing Indian Companies Act and contended that, as the lending of money
was part of the ordinary business of the appellant company, it was permissible
for it to purchase its own shares. The proviso to sub-section (2) of Section
54A of the Indian Companies Act has been taken bodily from Section 45(1) of the
British Companies Act, 1929. I am inclined myself to think that draftsman has
fallen into an error and that the words "provided that nothing in this
section" should have been "provided that nothing in this sub-section."
It is, however, unnecessary for me to consider this point more fully as the
existing Companies Act had not yet come into operation when the sales with
which we are concerned took place. The provisions of law which are applicable
are Section 55(1) of the Indian Companies Act, 1913 (Act VII of 1913), and
regulation 8 of Table A in the first schedule to that Act. It is important to
notice that article 1 of the articles of association of the bank states that:—
"The regulations in Table A, in the first schedule of
Act VII of 1913, in so far as they are not excluded or modified by these
articles, shall also apply to the company in the same manner and to the same
extent as if they were contained in these presents."
Now, regulation 8 states:—
"No part of the funds of the company shall be employed
in the purchase of or in loans upon the security of the company's shares."
It is thus quite clear that if the amount which was bid at
the sale in execution of the decree exceeded the amount due under the decree,
the sale was a nullity. If the amount bid was the amount due under the decree
and no more, the matter is perhaps not so free from doubt. I am, however,
inclined to think that the judgment-debt must be regarded as part of the assets
or of the funds of the company and that the position is exactly the same as if
money belonging to the company had been actually paid into Court. Moreover, on
general principle, a company cannot become a member of itself. I, therefore,
agree with the Courts below that the sale was a nullity and that the bank was
correct in treating it as such and in allowing the name of Digendra Nath
Mukherji to remain on its register. In selling the shares or the majority of
them on December 31, 1935, the bank purported to be exercising a right
conferred on it by article 30 of its articles of association. This article has
to be read along with regulations 9 to 11 in Table A of the first schedule to
Act VII of 1913. These regulations do not give the company a lien on shares
which are fully paid shares. It is, however, open to a company to provide by
its articles of association that it shall have a lien upon such shares as well
as on other shares: see Bradford Banking Co. v. Briggs and Bank of
Africa, Ltd. v. Salisbury Gold Mining Co. Ltd. The lower
Appellate Court was of opinion that the bank could not be said to have been
acting in exercise of its right under article 30, as it omitted to issue notice
on the legal representatives of Digendra Nath Mukherji and also as no
resolution on the matter had been adopted at a meeting of the directors. It was
not, however, essential that this matter should have been considered by the
directors at a meeting. As to notice, it was, I think, obligatory on the
company to give notice in writing to the legal representatives of Digendra Nath
Mukherji in the manner required by regulation 10. Assuming, however, that this
was not done, the sale would nevertheless be a valid sale. The concluding words
in regulation 11 are:—
"The purchaser shall be registered as the holder of the
shares, and he shall not be bound to see to the application of the purchase
money, nor shall his title to the shares be affected by any irregularity or
invalidity in the proceedings in reference to the sale."
Mr. R.S. Chatterji, for the respondents, pointed out that
the decree was passed on May 15, 1923, and that the sale by the secretary of
the bank took place on December 31, 1935. Mr. Chatterji contends that, as a
period of more than twelve years had elapsed since the passing of the decree,
the bank had lost any lien on the shares which it may have ever had. There is,
in my opinion, no substance in this argument. It is true that the liability of
Digendra Nath Mukherji or his legal representatives under the hand-note had
been converted into a liability under a decree. It is true that it was no
longer possible for the bank to realise the amount due under the decree by
putting it into execution. Nevertheless the debt itself, I think remained,
although, owing to lapse of time, no steps could be taken to recover it by
process of the Courts. As the debt remained, the lien also continued. If it had
been necessary for the bank to have recourse to the Courts in order to enforce
its lien, then it would have been unable to obtain relief. But when Digendra
Nath Mukherji purchased the shares he entered into a contract with the company,
and it was a term of that contract that if he was indebted to the company it
should be open to the company, of its own motion and without instituting a suit
and obtaining a decree, to sell his shares. For these reasons I would allow the
appeal and dismiss the suit with costs throughout. I am reluctant to grant leave
to appeal as it appears to me that this is a purely speculative suit. The
plaintiff, in effect, seeks to recover shares which were the security or part
of the security for money borrowed by his uncle without having repaid or even
offering to repay any part of the money. The shares, moreover, have passed into
the hands of other persons, and these persons may quite possibly have
themselves borrowed money on the security of them. As, however, the regulations
in Table A, on which I have largely based my decision, were for some reason or
other not referred to by either of the learned Advocates for the parties at the
hearing, and as possibly the view I have taken of them may be erroneous, leave
will be granted.
Companies act
[2003] 45 scl 475 (bom.)
High Court of
Securities and Exchange Board of
v.
Sterlite Industries (India) Ltd.
A.P. Shah and Smt. Nishita Mhatre, JJ.
Appeal Lodging Nos. 520 and 526 of 2002
in Company Petition No. 203 of 2002
in Company Application No. 18 of 2002
July 15, 2002
Section 391, read with sections 77A and 394A,
of the Companies Act, 1956 - Compromise and arrangement - Company presented
scheme of arrangement in respect of purchase and buy-back of shares of not more
than 50 per cent of its paid-up capital - Meeting of equity shareholders,
secured creditors and unsecured creditors was convened wherein scheme was
approved - Central Government approved said scheme under section 394A - Company
Court sanctioned scheme and substantial portion of scheme was complied with -
However, SEBI and Central Government challenged scheme on ground that such a
scheme of purchase and buy-back of shares could not be sanctioned by Court
under section 391 and procedure prescribed under section 77A was to be followed
- Whether since section 394A provides for notice being issued to Central
Government prior to any order being passed under sections 391 and 394, Central
Government has right of statutory appeal under section 391(7), if in its
opinion, said scheme is contrary to law as such scheme, if sanctioned, would
adversely affect interest of investing public whereas SEBI not being conferred
with such right under section 394A or under any provisions of SEBI Act, 1992,
has no locus in petition under section 391 or 394 - Held, yes - Whether since
Central Government had already given consent to scheme and scheme had been
substantially implemented and vast majority of shareholders had exercised their
option in accordance with scheme, it would be highly unjust to allow Central
Government to raise objection at appellate stage that scheme was contrary to
any provisions of law or was unconscionable and unfair and against interests of
shareholders - Held, yes
Section 77A of the Companies Act, 1956 -
Shares - Power of company to purchase its own securities - Whether legislative
intention behind introduction of section 77A is to provide an alternative
method by which a company can buy-back up to 25 per cent of its total paid-up
equity capital in any financial year and it does not supplant or take away any
part of pre-existing jurisdiction of Company Court to sanction a scheme under
sections 100 to 104 and under section 391 - Held, yes
Facts
The respondent, a public limited company, presented
a scheme of arrangement in respect of purchase of not more than 50 per cent of
issued, subscribed and paid-up equity share capital. The requisite meeting of
equity shareholders, secured creditors and unsecured creditors of the company
was convened wherein the scheme was approved by overwhelming majority. The
Company Court sanctioned the scheme after Central Government did not object to
the same under section 394A. After the scheme was sanctioned, the company
issued option forms to the shareholders along with the cheque for Rs. 100. It
seemed that a total number of 94,474 shareholders had deposited the cheques or
the option forms representing 91.8 per cent equity share capital of the
company. The value of the cheques deposited and realised by the shareholders in
response to the option was approximately Rs. 158 crores. Under the scheme
option was to be exercised by 21-6-2002. The SEBI filed an appeal on 19-6-2002
and the Central Government’s appeal was lodged on 24-6-2002.
Both the SEBI and the Central Government
challenged the scheme on the ground that the Court had no power to sanction the
scheme of buy-back of shares under section 391 and that the company was
required to follow the procedure prescribed under section 77A and the SEBI
(Buy-Back of Securities) Regulations. The scheme was also challenged on the
ground that it was unconscionable and unfair to the shareholders and violated
the provisions of various laws including the Companies Act.
Held
(i)
Whether the appeals filed by the Central Government and the SEBI were
maintainable in law?
Insofar as the issue of maintainability of the
appeal by the SEBI was concerned, the Companies Act does not provide for any
notice being issued to the SEBI prior to any order being passed under section
391 or section 394. Even the SEBI Act, 1992 does not contemplate any notice to
the SEBI or any right of appearance by the SEBI in proceedings before the Court
in its company jurisdiction including proceedings under section 391. Section
394A provides for notice to the Central Government and further provides that
the Court shall take into consideration the representation, if any, made to it
by the Central Government before passing any order under any of these sections.
On a plain reading of the provisions of the Act, it was to be held that the
SEBI would not get right of statutory appeal under section 391(7). [Para 8]
Under section 55A, the SEBI has been empowered
to administer the provisions of sections specified in section 55A insofar as
they relate to issue of securities, transfer of securities and non-payment of
dividend. Merely because the SEBI has been empowered to administer the
provisions of sections 77 and 77A, it does not give the SEBI any locus in a
petition under section 391 or section 394. The right to notice in section 391
proceedings remains with the Central Government under section 394A. The SEBI
has no right of notice nor does it have any right to appear in the proceedings
under sections 391 and 394A. [Para 9]
Insofar as the appeal filed by the Central Government
was concerned, the case of the Central Government stood on a different footing.
Section 394A was inserted in the Act with the
object to enable the Central Government to study the proposal and raise such
objections as it thinks fit in the light of the facts and information available
with it and also place the Court in possession of certain facts which might not
have been disclosed by those who appeared before it so that the interests of
the investing public at large may be fully taken into account by the Court
before passing its order. A more liberal approach is required to be adopted in
the background of objective of the Legislature in enacting section 394A. The
Central Government has the statutory duty and interest to see that the interest
of the investing public should be protected and that the laws are not violated.
Section 394A enjoins the Court to take into consideration the representation,
if any, made to it by the Central Government before passing any orders under
section 391 or 394. If the decision of the Company Court, according to the
Central Government, is contrary to the law or it is of the opinion that
sanctioning of the scheme of arrangement would adversely affect the interest of
the investing public at large, the Central Government can be said to be
aggrieved person to safeguard the interest of the investing public and can
maintain an appeal under section 391(7). [Para 11]
In the light of the decision in Bar Council of
Maharashtra v. M.V. Dabholkar AIR 1975 SC 2092, and in the background in which
section 394A was introduced, it is clear that the Central Government has right
to appeal under section 391.
Thus, the appeal filed by the Central
Government was clearly maintainable in law. [Para 15]
(ii) Whether the Company Court has power to grant
reorganisation scheme under section 391 read with sections 100 to 104
empowering the company to buy-back the shares from the shareholders or whether
section 77A is the only mode to buy-back the shares?
Section 77 puts restriction on purchase of its
own shares by a company. [Para 16]
The reason for the restriction on purchase of
its own shares by a company is that such purchase either amounts to
‘trafficking’ its own shares, thereby enabling the company, in an unhealthy
manner to influence the price of its own shares on the market or it operates as
a reduction of capital which can be effected with the sanction of the Court,
and in the manner laid down by sections 100 to 104. Prior to introduction of
section 77A the only exceptions to the general principle that the company
cannot buy its own shares were (i) purchase resulting in reduction of capital
with the sanction of the Court under sections 100 to 104; (ii) redemption of
redeemable preference shares under section 80; (iii) purchase under an order of
Court in a scheme of arrangement or amalgamation under sections 391 to 394,
subject to compliance with sections 100 to 104 and (iv) purchase under an order
of CLB to purchase shares of minority shareholders under section 402(b). [Para
17]
Thus, the company could purchase its shares
prior to introduction of section 77A provided the scheme or arrangement,
therebefore, had been sanctioned under sections 100 to 104. Section 100 does
not prescribe the manner in which the reduction of capital is to be effected.
Nor is there any limitation on the power of the Court to confirm the reduction
except that it must be first satisfied that all the creditors entitled to
object to the reduction have consented or have been paid or secured. [Para 18]
It is well-settled that under section 391 the
Court is invested with very wide powers to approve or sanction any scheme of
amalgamation, arrangement, compromise or reconstruction. The Court has power to
sanction all matters which for their effectuation require a special procedure to
be followed under the Act. The only exception to this is the special procedure
to be followed under section 101 for reduction of capital since rule 85 of the
Court Rules specifically enjoins the following of a special procedure
prescribed for reduction of share capital. [Para 19]
The opening words of section 77A, viz.,
“notwithstanding anything, contained in this Act, but subject to the provisions
of sub-section (2) of this section and section 77B, a company may purchase its
own shares or other specified securities....” show that section 77A is a
facilitating provision which enables the companies to buy-back their shares
without having to approach the Court under section 391 and sections 100 to 104
subject to compliance with the provisions of sub-sections (2), (3) and (4).
Prior to the introduction of section 77A, the only manner in which a company
could buy-back its shares was by following the procedure set out under sections
100 to 104 and section 391 which required the calling of separate meetings of
each class of shareholders and creditors as well as (if required by the Court)
the drawing up of a list of creditors of the company and obtaining of their
consent to the scheme for reduction. The legislative intention behind the
introduction of section 77A is to provide an alternative method by which a
company may buy-back up to 25 per cent of its total paid-up equity capital in
any financial year subject to compliance with sub-sections (2), (3) and (4). It
does not supplant or take away any part of the pre-existing jurisdiction of the
Company Court to sanction a scheme for such reduction under sections 100 to 104
and section 391. [Para 22]
The non obstante clause in section 77A, namely
‘notwithstanding anything contained in this Act....’ only means that notwithstanding
the provisions of section 77 and sections 100 to 104, the company can buy-back
its shares subject to compliance with the conditions mentioned in that section
without approaching the Court under sections 100 to 104 or section 391. There
is nothing in the provision of section 77A to indicate that the jurisdiction of
the Court under section 391 or 394 has been taken away or substituted. It is
well-settled that the exclusion of the jurisdiction of the Court should not
readily be inferred; such exclusion should be explicitly or clearly implied.
There is nothing in the language of section 77 that gives rise to such an
inference. Therefore, section 77A is merely an enabling provision and the
Court’s powers under sections 100 to 104 and section 391 are not in any way
affected. The conditions provided in section 77A are applicable only to
buy-back of shares under section 77A. The conditions applicable to sections 100
to 104 and section 391 cannot be imported into or made applicable to a buy-back
under section 77A. Similarly the conditions for a buy-back under section 77A
cannot be applied to a scheme under sections 100 to 104 and section 391. The
two operate in independent fields. [Para 23]
It is not disputed that reduction in the
capital can be effected under section 77 read with sections 100 to 104 and 391
even in the case of buy-back of shares. Even in cases where capital is reduced
by optional sale reduction results after the option is exercised to the extent
of the shares cancelled. This is as equally a reduction of capital as in the
case of compulsory cancellation of shares. There is no distinction between the
two on the aspect of the reduction. The word ‘arrangement’ is of wide import
and is not restricted to a compulsory purchase or acquisition of shares there
is no reason as to why a cancellation of shares and the consequent reduction of
capital cannot be covered by section 391 read with section 100 merely because a
shareholder is given an option to cancel or to retain his shares. In view of
the foregoing discussion, the objection of the appellants based on section 77A
must be rejected. [Para 24]
(iii) Whether the scheme sanctioned by the
Company Court was contrary to any provisions of law or was unconscionable and
unfair and against the interest of the shareholders?
The principal attack against the scheme
sanctioned by the Company Judge was that the scheme treated the silence of
shareholders as an offer. It was contended that that was contrary to the
well-established principles of transfer of shares and that it violated various
provisions of various laws such as Companies Act, Depositories Act, and the
SEBI and NSDL Regulations. It would be highly unjust to allow the Central
Government to raise an objection of such nature at the appellate stage. The
draft order of the Company Judge recorded that the Central Government had
submitted to the order of the Court. The Judge specifically recorded in the
minutes of the order that the Central Government had no objection to the
scheme. As indicated earlier, a vast majority of shareholders had exercised
their option in accordance with the scheme. In these circumstances, it would be
wholly inequitable to entertain such objections at such belated stage. [Para
25]
Resultantly, the appeals were to be dismissed.
Cases referred to
Ucal Fuel Systems Ltd., In re [1992] 73 Comp.
Cas. 63 (Mad.) (para 10), Adi Pherozshah Gandhi v. H.M. Seervai,
Advocate-General of Maharashtra AIR 1971 SC 385 (para 12), Motilal Kanji &
Co. v. Natvarlal M. Jhaveri [1932] 2 Comp. Cas. 64 (Bom.) (para 12), M.G.
Investment & Industrial Co. Ltd. v. New Shorrock Spg. & Mfg. Co. Ltd.
[1972] 42 Comp. Cas. 145 (Bom.) (para 12), Bar Council of Maharashtra v. M.V.
Dabholkar AIR 1975 SC 2092 (para 14), Punjab Distilling Industries Ltd. v. CIT
[1965] 35 Comp. Cas. 541 (SC) (para 18), Hindusthan Commercial Bank Ltd. v.
Hindusthan General Electrical Corpn. [1960] 30 Comp. Cas. 367 (Cal.) (para 18),
Maneckchowk & Ahmedabad Mfg. Co. Ltd., In re [1970] 40 Comp. Cas. 819
(Guj.) (para 19), Vasant Investment Corpn. Ltd. v. Official Liquidator, Colaba
Land & Mill Co. Ltd. [1981] 51 Comp. Cas. 20 (Bom.) (para 19) and PMP Auto
Industries Ltd., In re [1994] 80 Comp. Cas. 289 (Bom.) (para 19).
R.A. Dada, R.V. Desai, Kumar Desai and G. Hariharan N. Raja for the
Appellant. I.M. Chagla, Dr. Virendra, Virag Tulzapurkar and D.J.
Khambata for the Respondent.
Judgment
1. These
appeals arise out of an order passed in Company Petition No. 202 of 2002
sanctioning a scheme of arrangement between the respondent-Sterlite Industries
(India) Ltd. (for short ‘the company’) and its shareholders under section 391
of the Companies Act, 1956. The scheme was presented to the company judge on
18th February, 2002, after meetings of the equity shareholders, secured
creditors and unsecured creditors of the company had approved of the scheme at
their separate meetings called for that purpose pursuant to order dated 9th
January, 2002, on summons for directions issued by the company. The scheme was
sanctioned by the company judge after notice to the Central Government under
section 394A of the Companies Act. The drawn up order of the learned Judge
shows that the Central Government through the Regional Director, Department of
Company Affairs, Maharashtra, submitted to the order of the court. It is
recorded in the minutes of the impugned order that the Central Government had
no objection to the scheme.
2. Appeal
Lodging No. 520 of 2002 is filed by the Securities and Exchange Board of India (for
short the ‘SEBI’). Appeal Lodging No. 526 of 2002 is filed by the Central
Government. Along with the appeals notice of motions have been filed for
condonation of delay. The SEBI has filed a separate notice of motion seeking
leave to file an appeal against the impugned order of the company judge. The
principal challenge in these appeals is based on section 77A of the Companies
Act introduced by the Companies (Amendment) Act, 1999 with effect from 31st
October, 1998. The scheme is challenged on the ground that the court has no
power to sanction the scheme of this nature under section 391 of the Companies
Act and the company is required to follow the procedure prescribed by section
77A and the SEBI (Buy-back of Securities) Regulations, 1998. The scheme is also
challenged on the ground that it is unconscionable and unfair to the
shareholders and violates the provisions of various laws including the
Companies Act.
3. The
respondent-company is a public company limited by shares. It was incorporated
in 1975 under the Companies Act. The company is engaged inter alia in the
business of non-ferrous metals and mining business notably copper. The scheme
of arrangement submitted by the company envisages a purchase by the company of
not more than 2,79,96,278 equity shares (representing approximately 50 per cent
of its issued, subscribed and paid-up equity share capital) of the company. The
relevant provisions of the scheme in so far as they are material for the
purpose of these appeals are reproduced below :
“4.1
The company shall, on a date fixed by the Board following the record date,
purchase not more than 2,79,96,278 equity shares (representing approximately 50
per cent (fifty per cent) of its issued, subscribed and paid-up equity share
capital) from the shareholders excluding the equity shares of those
shareholders from whom the company receives a written intimation (in the
relevant form provided for the purpose) within the stipulated period of their
intention to continue holding the equity shares.
4.3
In case the equity shares required to be purchased by the company as above
exceed 2,79,96,278 equity shares representing 50 per cent (fifty per cent) of
the issued, subscribed and paid-up equity share capital), the company shall
purchase the equity shares on a pro rata basis.
4.6
Subject to clause 4.7 in consideration for every 1 (one) equity share purchased
by the company in pursuance of clause 4.1 the company shall within 7 (seven)
days from the date of purchase of the equity shares, without any further
application, act or deed by the shareholders.
4.8
Upon discharge of the consideration as provided in clause 4.6 the equity shares
purchased in pursuance of clause 14.1 shall be deemed to be transferred in the
company’s name, without any act or deed by the shareholders, including but not
limited to surrendering of share certificates with transfer forms and/or
sending appropriate instructions to the depository participants. On the date of
purchase fixed under clause 5.1 below, the share certificates relating to the
equity shares purchased by the company shall be rendered invalid.
4.9
For the purpose of the scheme, the equity shares shall not be traded on the
stock exchange for a period commencing from the record date and until the date
of discharge of the consideration as provided in clause 4.6.”
4. The
scheme was approved by the shareholders in the shareholders meeting by an
overwhelming majority of 95.69 per cent in number and 91.26 per cent in value
and unanimously in the meeting of the secured and unsecured creditors. After
the scheme was sanctioned the company issued option forms to the shareholders
along with the cheque for Rs. 100. It seems that a total number of 94,474
shareholders have deposited the cheques or the option forms representing 91.8
per cent equity share capital of the company. The value of the cheques
deposited and realised by the shareholders in response to the option is
approximately Rs. 158 crores. Under the scheme option was to be exercised by
21st June, 2002. The SEBI’s appeal was lodged on 19th June, 2002. The Central
Government’s appeal was lodged on 24th June, 2002.
5. Mr.
Dada and Mr. Desai learned counsel appearing for the SEBI and the Central
Government respectively submitted that neither the provisions relating to
reduction of capital under sections 100 to 104 nor the provision of section 391
could be invoked if the market price was to be paid to the shareholders who may
opt to sell their shares to the company. The company can buy-back its equity
shares only in accordance with section 77A of the Companies Act. The non
obstante clause in section 77A gives overriding effect to the said provision
and is a complete code for buy-back of shares. Therefore, the company desiring
to buy-back its equity shares must follow the procedure under section 77A and
SEBI (Buy-back of Securities) Regulations, 1998. In any event in judicial
determination which a company court is required to make under the provisions of
sections 100 to 104 read with section 391 must take into account the norms and
safeguards provided by section 77A and the SEBI Regulations. Learned counsel
further submitted that the scheme and in particular clauses 4.1 to 4.8 treat
the silence of the shareholder as an offer. Unless there is a positive assent
of a shareholder to transfer his shares, no transfer can be treated as valid.
The scheme, thus, violates section 108 of the Companies Act, Depositories Act,
1996, SEBI (Depositories and Participants) Regulations, 1996, and bye-laws
framed by the NSDL under the Depositories Act. The scheme would also violate
the SEBI (Disclosure and Investor Protection) Guidelines, 2000. It was also
submitted that there was no adequate disclosure of material facts. A contention
was also raised that the provision in the scheme that the shares will not be
dealt with on the stock exchange between 20th May, 2002, and 20th June, 2002,
is violative of the SEBI’s circular dated 19th January, 1996, and clause 16 of
the listing agreement executed between the company and the stock exchange.
Further as a result of the scheme offered to the public there is likelihood of
reduction in the public shareholding less than 25 per cent amounting to
violation of regulations 20(3) and 21(3) of the SEBI (Substantial Acquisition
of Shares and Takeovers) Regulations, 1997. The submissions of Mr. Dada and Mr.
Desai were adopted by Mr. Diwan, Mr. Rajiv Kumar and Mr. Khera appearing for
the interveners.
6. In
reply Mr. Chagla appearing for the company raised a preliminary objection to
the maintainability of the present appeals. Mr. Chagla submitted that neither
the SEBI nor the Central Government could be regarded as a person aggrieved or
a person adversely affected by the order under appeal. The Companies Act does
not contemplate any notice to the SEBI nor is any right of appeal conferred on
the SEBI in proceedings under section 391. Merely because section 394A
contemplates prior notice to the Central Government, the section would not in
law render such noticee a person aggrieved or a person adversely affected by
the impugned order. Therefore even the Central Government has no right of
appeal. Mr. Chagla submitted that even assuming the locus of either the SEBI or
the Central Government to maintain any appeal, no cause, much less sufficient
cause, is made out for condoning the delay in filing the appeal. Mr. Chagla
refuted the argument of the appellants that section 77A lays down the only mode
for buying-back the shares. He submitted that buy-back by a company of its
shares was permissible even before section 77A was inserted in the statute book
and a scheme of arrangement for buying-back shares was permitted provided the
provisions of sections 100 to 104 for reduction of capital under the Companies
Act had been followed. Introduction of section 77A does not in any manner alter
this position. Section 77A is only an enabling provision which grants companies
an easier route for buy-back of their shares without having to approach this
court under section 391 and sections 100 to 104 and without undergoing the
rigours of those provisions. In regard to the allegation that the scheme
provides for a negative or deemed consent counsel submitted that an arrangement
under section 391 is essentially contractual in nature and unless there is
illegality or fraud involved in the scheme the court cannot decline to sanction
the scheme. He submitted that there is nothing unfair or unjust in the scheme.
He emphatically denied that there was any violation of any statutory provisions
or regulations or bye-laws. He submitted that the SEBI and the Central
Government consciously stood by and acquiesced in and allowed the scheme to go
forward and if the appeals are entertained at this belated stage that would
result in grave and irreparable prejudice to the company. According to Mr.
Chagla, the appeals are completely devoid of any substance.
7. In
view of the aforesaid rival contentions, the following points arise for our
consideration :
(i) Whether the appeals filed by the
Central Government and the SEBI are maintainable in law ?
(ii) Whether the company court has power to
grant reorganisation scheme under section 391 read with sections 100 to 104
empowering the company to buy-back the shares from the shareholders or whether
section 77A is the only mode to buy-back the shares ?
(iii) Whether the scheme sanctioned by the
company court is contrary to any provisions of law or is unconscionable and
unfair and against the interest of the shareholders ?
Regarding question (i) :
8. First,
we will take up the issue of maintainability of the appeal by the SEBI. The
Companies Act does not provide for any notice being issued to the SEBI prior to
any order being passed under section 391 or section 394 of the Companies Act.
Even the Securities and Exchange Board of India Act, 1992 does not contemplate
any notice to the SEBI or any right of appearance by the SEBI in proceedings
before this court in its company jurisdiction including proceedings under
section 391. Section 394A provides for notice to the Central Government and
further provides that the court shall take into consideration the representation,
if any, made to it by the Central Government before passing any order under any
of these sections. On a plain reading of the provisions of the Companies Act,
we are unable to appreciate how the SEBI would get right of statutory appeal
under section 391(7) of the Companies Act. Mr. Dada, however, submitted that by
virtue of the provisions contained in section 55A of the Companies Act, the
SEBI has been empowered to administer the provisions of the sections specified
in section 55A including sections 77 and 77A. Under section 621 of the
Companies Act the SEBI is the appropriate authority to take steps for
prosecution of any offence in regard to matters in respect of which it is the
authority for administration. The SEBI was, therefore, a necessary party to the
proceedings and ought to have been heard before any order was passed. Mr. Dada
also submitted that under sections 11A and 11B of the SEBI Act, the SEBI is the
guardian to protect the interest of investors and it is the statutory duty of
the SEBI to take up any cause where investors’ interest has been adversely
affected and when the SEBI has come to court with the specific grievance that
the scheme has affected the interest of the investors/shareholders the court
has the discretion to grant leave to the SEBI to file the appeal.
9. We
are afraid we cannot accede to the submission of Mr. Dada. Under section 55A,
the SEBI has been empowered to administer the provisions of sections specified
in section 55A insofar as they relate to issue of securities, transfer of
securities and non-payment of dividend. Merely because the SEBI has been
empowered to administer the provisions of sections 77 and 77A, it does not give
the SEBI any locus in a petition under section 391 or section 394. The right to
notice in section 391 proceedings remains with the Central Government under
section 394A. The SEBI has no right of notice nor does it have any right to
appear in the proceedings under sections 391 and 394A of the Act.
10. In
Ucal Fuel Systems Ltd., In re [1992] 73 Comp. Cas. 63, the Madras High Court
has held that the fact that the Ministry of Industry had to approve the
transfer of the letter of intent did not mean that the Ministry of Industry had
to be impleaded or issued notice. The provisions of section 394A of the
Companies Act did not require any such notice to be served. While considering
an application under section 394A of the Act, the court has to give notice to
the Central Government and shall take into consideration the representation
having been made by it and there is no need to implead the Industries
Department. This decision lends support to our view that SEBI has no right of
notice of proceedings under section 391 or section 394 of the Companies Act.
11. Insofar
as the appeal filed by the Central Government is concerned, we feel that the
case of the Central Government stands on a different footing. Section 394A was
inserted in the Companies Act with the object to enable the Central Government
to study the proposal and raise such objections as it thinks fit in the light
of the facts and information available with it and also place the court in
possession of certain facts which might not have been disclosed by those who
appear before it so that the interests of the investing public at large may be
fully taken into account by the court before passing its order. A more liberal
approach is required to be adopted in the background of objective of the
Legislature in enacting section 394A. The Central Government has the statutory
duty and interest to see that the interest of the investing public should be
protected and that the laws are not violated. Section 394A enjoins the court to
take into consideration the representation, if any, made to it by the Central
Government before passing any orders under section 391 or 394. If the decision
of the company court, according to the Central Government, is contrary to the
law or it is of the opinion that sanctioning of the scheme of arrangement would
adversely affect the interest of the investing public at large, the Central
Government can be said to be aggrieved person to safeguard the interest of the
investing public and can maintain an appeal under section 391(7).
12. Mr.
Chagla, urged that merely because the Central Government is entitled to
statutory notice does not clothe it with a right of appeal. He submitted that
the Central Government merely discharges its duty of appearing before the
company court to assist it at the stage of grant or refusal of sanction under
section 391. The Central Government cannot be said to have been aggrieved by
the order ultimately passed by the company court and would have no right of
appeal therefrom and the Central Government could not be said to be interested
in the impugned order after it is passed. He referred to the decision of the
Supreme Court in Adi Pherozshah Gandhi v. H.M. Seervai, Advocate-General of
Maharashtra AIR 1971 SC 385. He also referred to the decision of the Division
Bench in Motilal Kanji & Co. v. Natvarlal M. Jhaveri [1932] 2 Comp. Cas. 64
(Bom.) and the decision of the learned Single Judge of this court (Nain, J.) in
M.G. Investment & Industrial Co. Ltd. v. New Shorrock Spg. & Mfg. Co.
Ltd. [1972] 42 Comp. Cas. 145.
13. In
Adi Pherozshah Gandhi’s case (supra) question which fell for consideration was
whether the appeal filed by the Advocate-General of Maharashtra before the Bar
Council of India was competent. The majority view was that the Advocate-General
of Maharashtra was not competent to file appeal to the Bar Council of India. In
that case the disciplinary committee of the State Bar Council was satisfied
that there was no reason to hold Adi Pherozshah Gandhi guilty of professional
misconduct or other misconduct. The Advocate-General of Maharashtra filed an
appeal before the Bar Council of India. The appellant objected to the locus
standi of the Advocate-General before the Bar Council of India. That objection
was overruled and the appeal filed by the Advocate-General was accepted by the
disciplinary committee of the Bar Council of India. The disciplinary committee
of the Bar Council of India held the advocate Adi Pherozshah Gandhi guilty of
misconduct and suspended him from practice for one year. The advocate preferred
an appeal under section 38 of the Act to the Supreme Court. In view of the
majority decision, the appeal filed by Adi Pherozshah Gandhi was accepted by
the Supreme Court on the ground that the Advocate-General of Maharashtra was
incompetent to file an appeal.
14. In
Bar Council of Maharashtra v. M.V. Dabholkar AIR 1975 SC 2092, the Supreme Court
considered its earlier decision in Adi Pherozshah Gandhi’s case (supra). The
question before the Supreme Court was whether the State Bar Council is a person
aggrieved to maintain an appeal against the decision of its disciplinary
committee. The court after referring to its earlier decision in Adi Pherozshah
Gandhi’s case (supra) held that the appeal was competent. The observations made
by the court in paras 24 and 30 are pertinent :
“24.
In finding out the meaning of the words ‘person aggrieved by an order made by
the disciplinary committee of the Bar Council of India’, two features are to be
kept in the fore front. First, there is no lis in proceedings before the
disciplinary committee. When the disciplinary committee exercises the power to
reprimand the advocates, or suspend the advocate from practice or remove the
name of the advocate, the committee does not dedde a suit between the parties.
The Bar Council in placing a matter before the disciplinary committee does not
act as prosecutor in a criminal case. A complainant who prefers a complaint
against an advocate is not like a plaintiff in a civil suit. The complaint is
examined by the Bar Council in order to find out whether there is any reason to
believe that any advocate has been guilty of misconduct. The Bar Council may
act on its own initiative on information which has come to its notice in the
course of its duties. Second, there is no party to the disciplinary
proceedings. It is because the Bar Council, the Attorney-General, the
Advocate-General, as the case may be, all act in protecting the interests of
advocates, the interests of the public. In so acting there is no conflict
between the advocate and any other person. The reason is that it is
professional conduct, professional etiquette, professional ethics, professional
morality, which are to be upheld, transgression of which results in
reprimanding the advocate or suspending him from practice or removing his name
from the roll.
** ** **
30.
The Bar council is ‘a person aggrieved’ for these reasons. First, the words
‘person aggrieved’ in the Act are of wide import in the context of the purpose
and provisions of the statute. In disciplinary proceedings before the
disciplinary committee there is no lis and there are no parties. Therefore, the
word ‘person’ will embrace the Bar Council which represents the Bar of the
State. Second, the Bar Council is ‘a person aggrieved’ because it represents
the collective conscience of the standards of professional conduct and
etiquette. The Bar Council acts as the protector of the purity and dignity of
the profession. Third, the function of the Bar Council in entertaining
complaints against advocates is when the Bar Council has reasonable belief that
there is a prima facie case of misconduct that a disciplinary committee is
entrusted with such inquiry. Once an inquiry starts the Bar Council has no
control over its decision. The Bar Council may entrust it to another
disciplinary committee or the Bar Council may make a report to the Bar Council
of India. This indicates that the Bar Council is all the time interested in the
proceedings for the vindication of discipline, dignity and decorum of the
profession. Fourth, a decision of a disciplinary committee can only be
corrected by appeals as provided under the Act. When the Bar Council initiates
proceedings by referring cases of misconduct to disciplinary committee the Bar
Council in the performance of its functions under the Act is interested in the
task of seeing that the advocates maintain the proper standards and etiquette
of the profession. Fifth, the Bar Council is vitally concerned with the
decision in the context of the functions of the Bar Council. The Bar Council
will have a grievance if the decision prejudices the maintenance of standards
of professional conduct and ethics.” (p. 2097)
15. In
the light of the decision in M.V. Dabholkar’s case (supra) and in the
background in which section 394A was introduced in the Companies Act we are
unable to accept the submission of Shri Chagla that the Central Government has
no right of appeal under section 391 of the Act. Two other decisions relied
upon by Mr. Chagla have no bearing on the issue of maintainability of appeal by
the Central Government. In Motilal Kanji Co.’s case (supra), the Division Bench
held that an appeal would not lie under section 202 of the Indian Companies
Act, 1913 at the instance of the appellants who are neither creditors nor
contributors and who have no present interest in the company but only a
prospective interest to be appointed secretaries and agents if the company is
made to stand on its legs as a result of the modified scheme. The Bench held
that unless a person shows that he has got an interest which is adversely
affected by the decree of the lower court, or has an interest in the
subject-matter which is under litigation, he has no right to appeal. In M.G.
Investment & Industrial Co. Ltd.’s case (supra) the question was whether
the Central Government could be joined as party to the proceedings under
section 391. Learned counsel appearing for the Central Government argued before
the company judge that the Central Government should be joined as party to the
company petition. The ground stated for that application was that important
issues were involved and if the Central Government were made party to the
petition they would have a right of appeal against the orders on this petition
which, according to learned counsel they would not have if they appear merely
pursuant to notice under section 394A of the Companies Act. The learned judge
held that there is no jurisdiction to add the Central Government as a party to
the proceedings. The decision of the Single Judge has no applicability to the
issue involved before us. Thus the appeal filed by the Central Government is
clearly maintainable in law.
Regarding question No. (ii) :
16. Before
we take up this question we would briefly refer to the relevant provisions of
the Companies Act. Section 77 puts restrictions on purchase of its own shares
by a company. The section reads as follows :
“Restrictions
on purchase by company, or loans by company for purchase, of its own or its
holding company’s shares.—(1) No company limited by shares, and no company
limited by guarantee and having a share capital, shall have power to buy its
own shares, unless the consequent reduction of capital is effected and
sanctioned in pursuance of sections 100 to 104 or of section 402.
** ** **
(5)
Nothing in this section shall affect the right of a company to redeem any
shares issued under section 80 or under any corresponding provision in any
previous companies law.”
17. The
reason for the restriction on purchase of its own shares by a company is that
such purchase either amounts to ‘trafficking’ in its own shares, thereby
enabling the company, in an unhealthy manner to influence the price of its own
shares on the market or it operates as a reduction of capital which can only be
effected with the sanction of the court, and in the manner laid down by
sections 100 to 104. Prior to introduction of section 77A the only exceptions
to the general principle that the company cannot buy its own shares were (i)
purchase resulting in reduction of capital with the sanction of the court under
sections 100 to 104; (ii) redemption of redeemable preference shares under
section 80; (iii) purchase under an order of court in a scheme of arrangement
or amalgamation under sections 391 to 394, subject to compliance with sections
100 to 104 and (iv) purchase under an order of CLB to purchase shares of
minority shareholders under section 402(b) (see Guide to the Companies Act by
A. Ramaiya, (15th edn.) at pp. 962 and 963).
18. Thus,
the company could purchase its shares prior to introduction of section 77A
provided the scheme or arrangement, therebefore, had been sanctioned under
sections 100 to 104. Section 100 does not prescribe the manner in which the
reduction of capital is to be effected. Nor is there any limitation on the
power of court to confirm the reduction except that it must be first satisfied
that all the creditors entitled to object to the reduction have consented or
have been paid or secured. Reference in that behalf may be made to Punjab
Distilling Industries Ltd. v. CIT [1965] 35 Comp. Cas. 541 (SC) and Hindusthan
Commercial Bank Ltd. v. Hindusthan General Electrical Corpn. [1960] 30 Comp.
Cas. 367 (Cal.).
19. It is well settled that under section 391 of the Companies Act the
court is invested with very wide powers to approve or sanction any scheme of
amalgamation, arrangement, compromise or reconstruction. The court has power to
sanction all matters which for their effectuation require a special procedure
to be followed under the Companies Act. The only exception to this is the
special procedure to be followed under section 101 for reduction of capital
since rule 85 of the Companies (Court) Rules, 1959, specifically enjoins the
following of a special procedure prescribed for reduction of share capital. In
Maneckchowk & Ahmedabad Mfg. Co. Ltd., In re [1970] 40 Comp. Cas. 819
(Guj.), D.A. Desai, J. as he then was, has held that section 391 of the Companies
Act is a complete code. However, in view of rule 85 of the Companies (Court)
Rules, 1959, whenever a scheme of arrangement proposed under section 391
involves a reduction in the share capital of the company, the procedure
prescribed under sections 100 to 102 of the Companies Act and the Rules
relating to the reduction of the capital shall have to be complied with. He
went on to hold that reduction of capital can be sanctioned as part of a scheme
of compromise and arrangement by a common order under section 391 subject to
the requirements of sections 100 to 102 being complied with. The decision in
Maneckchowk & Ahmedabad Mfg. Co. Ltd.’s case (supra) was followed by this
court in Vasant Investment Corpn. Ltd. v. Official Liquidator, Colaba Land &
Mill Co. Ltd. [1981] 51 Comp. Cas. 20 and PMP Auto Industries Ltd., In re.
[1994] 80 Comp. Cas. 289.
20. The
impact of section 77A which was introduced by the Companies (Amendment) Act,
1999, will have to be considered in the light of the afore-stated provisions as
interpreted by the courts. Section 77A was introduced pursuant to the report of
the working group which was set up to suggest reforms to the Companies Act. It
would be useful to refer to paras 3.9 and 3.10 of the report which read as
under :
“3.9
There is an erroneous belief that the sole reason for buy-back is to block
hostile takeovers. In this connection it is pertinent to list the five reasons
why the Bank of England favoured the making of law to allow companies to
repurchase their shares, of which blocking takeovers was only one :
(a) to return surplus cash to shareholders;
(b) to increase the underlying share value;
(c) to support share price during periods of
temporary weakness;
(d) to achieve or maintain a target capital
structure;
(e) to prevent or inhibit unwelcome takeover
bids.
3.10
Almost all OECD countries allow companies to buy-back shares subject to certain
regulations. Unfortunately, section 77 (read with section 100) of the Act
prevents buy-back. In today’s context, the group strongly believes that this
section is antiquated, and goes against the long-term interests of corporate
sector growth and shareholder value. Hence, the group recommends that :
The
new Act should provide for buy-back of shares subject to certain provisions....”
21. Section 77A along with section 77AA and section 77B have been
introduced pursuant to the Working Committee’s Report to provide for buy-back
of its own shares by the company subject to safeguards specified therein.
Section 77A insofar as it is material for our purpose reads as follows :
“Power
of company to purchase its own securities.—(1) Notwithstanding anything
contained in this Act, but subject to the provisions of sub-section (2) of this
section and section 77B, a company may purchase its own shares or other
specified securities (hereinafter referred to as ‘buy-back’) out of—
(i) its free reserve; or
(ii) the securities premium account; or
(iii) the proceeds of any shares or other
specified securities :
Provided
that no buy-back of any kind of shares or other specified securities shall be
made out of the proceeds of an earlier issue of the same kind of shares or same
kind of other specified securities.
(2) No
company shall purchase its own shares or other specified securities under
sub-section (1), unless—
(a) the buy-back is authorised by its
articles;
(b) a
special resolution has been passed in general meeting of the company
authorising the buy-back :
Provided
that nothing contained in this clause shall apply in any case where—
(a) the
buy-back is or less than ten per cent of the total paid-up equity capital and
free reserves of the company; and
(b) such
buy-back has been authorised by the Board by means of a resolution passed at
its meeting :
Provided
further that no offer of buy-back shall be made within a period of three
hundred and sixty-five days reckoned from the date of the preceding offer of
buy-back, if any;
Explanation
: For the purposes of this clause, the expression ‘offer of buy-back’ means the
offer of such buy-back made in pursuance of the resolution of the Board
referred to in the first proviso;
(c) the
buy-back is or less than twenty-five per cent of the total paid-up capital and
free reserves of the company :
Provided
that the buy-back of equity shares in any financial year shall not exceed
twenty-five per cent of its total paid-up equity capital in that financial
year;
(d) the
ratio of the debt owed by the company is not more than twice the capital and
its free reserves after such buy-back :
Provided
that the Central Government may prescribe a higher ratio of the debt than that
specified under this clause for a class or classes of companies;
Explanation
: For the purposes of this clause, the expression ‘debt’ includes all amounts
of unsecured and secured debts;
(e) all
the shares or other specified securities for buy-back are fully paid-up;
(f) the
buy-back of the shares or other specified securities listed on any recognised
stock exchange is in accordance with the regulations made by the Securities and
Exchange Board of India in this behalf;
(g) the
buy-back in respect of shares or other specified securities other than those
specified in clause (f) is in accordance with the guidelines as may be
prescribed.
(3) The
notice of the meeting at which special resolution is proposed to be passed
shall be accompanied by an explanatory statement stating—
(a) a full and complete disclosure of all
material facts;
(b) the necessity for the buy-back;
(c) the class of security intended to be purchased
under the buy-back;
(d) the amount to be invested under the
buy-back; and
(e) the time-limit for completion of buy-back.
(4) Every
buy-back shall be completed within twelve months from the date of passing the
special resolution (or a resolution passed by the board) under clause (b) of
sub-section (2).”
22. The
opening words of section 77A, viz., “notwithstanding anything contained in this
Act, but subject to the provisions of sub-section (2) of this section and section
77B, a company may purchase its own shares or other specified securities....”
shows that section 77A is a facilitating provision which enables companies to
buy-back their shares without having to approach the court under section 391
and sections 100 to 104 subject to compliance with the provisions of
sub-sections (2), (3) and (4). Prior to the introduction of section 77A, the
only manner in which a company could buy-back its shares was by following the
procedure set out under sections 100 to 104 and section 391 which required the
calling of separate meetings of each class of shareholders and creditors as
well as (if required by the court) the drawing up of a list of creditors of the
company and obtaining of their consent to the scheme for reduction. The
legislative intention behind the introduction of section 77A is to provide an
alternative method by which a company may buy-back upto 25 per cent of its
total paid-up equity capital in any financial year subject to compliance with
sub-sections (2), (3) and (4). It does not supplant or take away any part of
the pre-existing jurisdiction of the company court to sanction a scheme for
such reduction under sections 100 to 104 and section 391.
23. The
submission of the appellants that the non obstante clause in section 77A gives
precedence to that section over the provisions of sections 100 to 104, section
391 is misconceived. The non obstante clause in section 77A namely
“notwithstanding anything contained in this Act....” only means that
notwithstanding the provisions of section 77 and sections 100 to 104, the
company can buy-back its shares subject to compliance with the conditions
mentioned in that section without approaching the court under sections 100 to
104 or section 391. There is nothing in the provision of section 77A to
indicate that the jurisdiction of the court under section 391 or 394 has been
taken away or substituted. It is well settled that the exclusion of the
jurisdiction of the court should not readily be inferred, such exclusion should
be explicitly or clearly implied. There is nothing in the language of section
77 that gives rise to such an inference. We are, therefore, inclined to hold
that section 77A is merely an enabling provision and the court’s powers under
sections 100 to 104 and section 391 are not in any way affected. The conditions
provided in section 77A are applicable only to buy-back of shares under section
77A. The conditions applicable to sections 100 to 104 and section 391 cannot be
imported into or made applicable to a buy-back under section 77A. Similarly the
conditions for a buy-back under section 77A cannot be applied to a scheme under
sections 100 to 104 and section 391. The two operate in independent fields.
24. It
is not disputed before us that reduction in the capital can be effected under
section 77 read with sections 100 to 104 and 391 even in the case of buy-back
of shares. However, it is contended that the optional sale by the shareholders
would not amount to arrangement or reorganisation of the capital and would not,
therefore, cover section 391 read with section 100 of the Companies Act. We are
unable to accede to this contention as even in cases where capital is reduced
by optional sale reduction results after the option is exercised to the extent
of the shares cancelled. This is as equally a reduction of capital as in the
case of compulsory cancellation of shares. We do not see any distinction
between the two on the aspect of the reduction. The word ‘arrangement’ is of
wide import and is not restricted to a compulsory purchase or acquisition of
shares. There is no reason as to why a cancellation of shares and the
consequent reduction of capital cannot be covered by section 391 read with
section 100 merely because a shareholder is given an option to cancel or to retain
his shares. In view of the foregoing discussion, the objection of the
appellants based on section 77A must be rejected.
Regarding question (iii) :
25. The
principal attack against the scheme sanctioned by the company judge is that the
scheme treats the silence of shareholders as an offer. It is contended that
this is contrary to the well established principles of transfer of shares. It
is also contended that this violates various provisions of various laws such as
Companies Act, Depositories Act, and the SEBI and NSDL Regulations. On behalf
of the company, it was vehemently contended that the Central Government should
not be allowed to raise this contention for the first time in appeal, when the
scheme has been substantially implemented and no objection was raised to the
scheme before the learned company judge. It is submitted that when the
shareholders have approved of the terms of offer and of the acceptance by
passing the required resolution, it does not fall within the province of the
company court to sit in judgment over that commercial wisdom and to interfere
with that decision. An order of a court requiring transfer or cancellation has
never been subject to the procedural requirement of even the Companies Act, let
alone bye-laws made by the NSDL. In fact, the NSDL bye-laws themselves provide
a transaction or to take any other action in order to give effect to the order
or judgment of a court. A number of decisions have been cited by both sides in
support of their respective contentions. We feel that it would be highly unjust
to allow the Central Government to raise an objection of this nature at the
appellate stage. The draft order of the learned company judge records that the
Central Government has submitted to the order of the court. The learned Judge
specifically recorded in the minutes of the order that the Central Government
has no objection to the scheme. As indicated earlier a vast majority of
shareholders have exercised their option in accordance with the scheme. The
value of the cheques deposited and realised by the shareholders in response to
the B option is more than Rs. 158 crores. In these circumstances, in our
opinion it would be wholly inequitable to entertain this objection at such
belated stage. Although we are not inclined to accept the submission that a
deemed or negative consent should not be permitted, we wish to make it clear
that our order should not be understood to mean that we have approved such a
provision. We have been told that several such schemes containing a provision of
deemed or negative consent have been filed before the company judge. It will be
open for the Central Government to raise objection to such schemes and if such
objection is raised we are sure that the learned company judge will deal with
the same in accordance with law.
26. It
appears that 2,584 option forms out of 1,44,252 have been received undelivered.
Mr. Chagla has made a statement that in respect of these undelivered option
forms, shareholders would be allowed to retain their shares. Mr. Chagla further
stated that the company has received around 143 complaints alleging that the
shareholders have encashed the cheques through inadvertence or error and even
those shareholders will be allowed to retain their shares provided they return
the money within two months. Further, in respect of shares held by the
shareholders who have neither returned the option forms nor encashed the
cheques forwarded by the company, Mr. Chagla made the following offer :
“In
respect of shares held by the shareholders who have returned the option form
and not encashed the cheques forwarded to them by respondent No. 1, the shares
shall be purchased by the respondent and cancelled as per the order of the
company judge dated 10th April, 2002. The respondent-company shall keep in trust
for such shareholders a sum of Rs. 100 per share plus five debentures of Rs. 10
each to be dealt with in the following manner :
(a) If
the shareholder is desirous of obtaining the shares, the sum of money and
debentures so retained shall be paid over as price of the shares to a seller
identified by the respondent who shall transfer to such shareholder an
equivalent number of shares as the number held by him on the record date. The
option shall be available for a period of four months from 21st June, 2002.
(b) If
the shareholder elects to receive the consideration and in any case after the
expiry of three months from 21st June, 2002, if the shareholder has not elected
to receive the shares till that period, the sum of money and debentures will
together with the net income if any accrued thereon be handed over to the
shareholder as and when required by him.
The
respondent shall within four weeks publish public advertisement of the
aforesaid offer in Indian Express in English and Maharashtra Times in Marathi in
Bombay and Lokmat Times in English and Lokmat in Marathi at Aurangabad.”
27. In
view of the fact that the scheme has been substantially implemented and the
fact that the Union of India/Regional Director has not raised any objection
before the learned company judge, we are inclined to accept the statement made
by Mr. Chagla as indicated above.
28. Certain
other objections were raised on behalf of the appellants. It was stated that
the information which was material to the scheme was not disclosed to the court
at the time of passing of the impugned order. According to the appellants, the
company should have disclosed earlier resolution of the shareholders for
buy-back under section 77A of the Act. Similarly disclosure in respect of the
offer made by the company for takeover of Indian Aluminium Co. Ltd. (‘INDAL’)
and the pendency of the writ petition filed by the company in the Delhi High
Court ought to have been disclosed. It is pointed out by Mr. Chagla that the
contention is incorrect on facts because the annual report of the company for
the year 2000-01 had detailed information and the report was annexed to the
company petition of the company. It forms part of the material of these
proceedings, therefore, there is no substance in the allegation that there was
suppression of facts.
29. The
SEBI has also submitted that the provision for stoppage of transaction in the
stock exchange amounts to violation of the SEBI circular dated 19th January,
1996, and clause 16 of the listing agreement executed between the company and
the stock exchange. It appears that the suspension of trading in Sterlite
shares from 13th May, 2002, rather than from the record date of 20th May, 2002,
was fixed by the Mumbai Stock Exchange itself. It is pointed out that the
subsequent circular dated January 18, 2000, removes even the requirement for
SEBI approval for the suspending scrip’s for more than three days. Be that as
it may, when the scheme has already been effected and substantially implemented
it would not be proper to interefere with the order of the learned company
judge on the alleged ground of violation of listing agreement. It was also
argued that the SEBI (Disclosure and Investors Protection) Guidelines, 2000, in
respect of issue of debentures were violated. We have gone through the record
and we are satisfied that these guidelines have been substantially complied
with by the company. The debentures are rated as AA and the rating was
disclosed in its letters sent to the shareholders. The Western India Trustee
& Executor Co. Ltd. have been appointed as trustees. This fact was also
disclosed in the option letter sent to the shareholders. Thus, there is no
merit in the contention that there is non-compliance with the guidelines.
Lastly, it was contended that cheques have been issued along with option forms,
though it was provided in the scheme that payment would be made after the
option forms are received from the shareholders. Even assuming that there was
irregularity in sending the cheques along with option forms, in our opinion,
this would hardly constitute a ground for setting aside the scheme.
30. In
the result, appeals as well as notice of motions are dismissed. No order as to
costs.
[2004] 50 SCL
450 (AP)
High Court of Andhra Pradesh
N.V. Ramana, J.
Company Petition No. 87 of 2002
September 4, 2003
Section 391 of the Companies Act, 1956 -
Compromise and arrangement - Whether if proposed scheme as approved by
shareholders or secured creditors or unsecured creditors is in their best
interest and it is appropriate that scheme of arrangement should be sanctioned,
it is not for High Court to delve deep into commercial wisdom exercised by
shareholders or secured creditors or unsecured creditors for High Court lacks
such an expertise - Held, yes
Section 77A of the Companies Act, 1956 -
Power of Company to purchase its own securities - Whether section 77A which is
merely an enabling provision, providing for alternative mode by which a company
can buy back its shares up to a certain percentage, is not given any overriding
effect over provision of sections 391 and 394 - Held, yes
Facts
The
petitioner-company proposed a scheme of arrangement for demerger of two
companies. In consideration of the demerger of the said companies, the
shareholders who were holding 100 shares each in the petitioner-company were
allotted five shares each of the company and said scheme was approved by 100
per cent vote of the shareholders in a meeting conducted by the Chairman.
Pursuant thereto, the petitioner-company filed the instant company petition to
sanction the scheme of arrangement with their shareholders. The High Court
while admitting the company petition, issued notice to the Central Government
and directed the petitioner to publish the notice of hearing of the company
petition in two newspapers. The Registrar of Companies, however, contended that
the scheme of arrangement proposed by the petitioner which sought cancellation
of shares held as small-lot in consideration of payment for such cancellation,
in accordance with the provision of the scheme, was nothing but a scheme of
buyback of its own shares and, therefore, the petitioner, instead of invoking
the jurisdiction of the High Court under sections 391 and 394 ought to have
followed the procedure prescribed under section 77A read with section 192A and
provisions of the SEBI (Buy Back of Securities) Regulations, 1998.
Held
The
proposed scheme of arrangement, admittedly, was approved by 100 per cent vote
of the shareholders and that was evident from the report filed by the Chairman,
who presided over the meeting of the shareholders under the directions of the
High Court. There was no objection to the scheme of arrangement from any of the
shareholder, who was present at the meeting and voted in favour of the motion.
[Para 12]
The
contention of the Registrar that the scheme of arrangement proposed by the
petitioner which sought cancellation of shares held as small-lot in
consideration of payment for such cancellation in accordance with the
provisions of the scheme was nothing but a scheme of buyback of its own shares
by the petitioner and, therefore, the petitioner ought to have followed the
procedure prescribed under section 77A read with section 192A and the provisions
of the SEBI (Buy Back of Securities) Regulations, 1998, instead of invoking the
jurisdiction of the Court under sections 391 and 394 read with section 100 of
the Act, could not be accepted. [Para 13]
Sections
391 and 77A are independent of each other. Section 77A which was incorporated
by reason of the Companies (Amendment) Act, 1999, and which came into effect
from 31-1-1999, is not given any overriding effect over the provisions of
sections 391 and 394. The said provision is merely an enabling provision
providing for alternative mode by which the company can buyback its shares up
to a certain percentage. [Para 14]
The
principle is well-established that the High Court while exercising its powers
under sections 391 and 394 does not sit in appeal over the decision arrived at
by the shareholders or the secured creditors or the unsecured creditors and
minutely examine whether the proposed scheme of arrangement, as approved by the
shareholders or the secured creditors or the unsecured creditors, as the case
may be, should be sanctioned or not. Suffice it to say, if the proposed scheme
as approved by the shareholders or the secured creditors or the unsecured
creditors, as the case may be, is in their best interest and it is appropriate
that the scheme of arrangement should be sanctioned, it is not for the High
Court to delve deep into the commercial wisdom exercised by the shareholders or
the secured creditors or the unsecured creditors for the High Court lacks such
an expertise. [Para 15]
In
the instant case, the proposed scheme of arrangement was unanimously approved
by 100 per cent vote and there was not even a single vote, which was polled
against the proposed scheme of arrangement. That apart, the petitioner had made
provision for depositing a sum of Rs. 45 lakhs and earmarked a sum of Rs. 6.50
crores for meeting the payment needs of the shares, which might be cancelled.
When the shareholders, in their wisdom, thought that the proposed scheme of
arrangement was fair and reasonable for them and that it had safeguarded their
interest, it was not for the High Court to go into the pros and cons thereof
and balance them. Suffice it to say that the proposed scheme of arrangement,
having been approved by 100 per cent vote, and there being no resistance from any
of the shareholders or persons interested in the affairs of the company, the
High Court had no other alternative except to approve the proposed scheme of
arrangement, as approved by the shareholders of the company. [Para 19]
In
the above view of the matter, the company petition was liable to be allowed for
none of the objections raised by the Registrar against the scheme of
arrangement could be upheld. Hence, the objections raised by the Registrar were
rejected. The company petition was allowed. As a corollary, the scheme of
arrangement as approved by the shareholders of the company was required to be
sanctioned and it was, accordingly, sanctioned. [Para 20]
Cases referred to
SEBI
v. Sterlite Industries (India) Ltd. [2003] 113 Comp. Cas. 273 (Bom.) (para 9),
Falcon Tyres Ltd., In re [C.P.No. 14 of 2002 dated 19-11-2002] (para 9),
Gujarat Ambuja Exports Ltd., In re [C.P.No. 232 of 2002 dated 19-2-2003] (para
9) and Miheer H. Mafatlal v. Mafatlal Industries Ltd. [1996] 10 SCC 70 (SC)
(para 16).
V.S
Raju for the Petitioner.
Order
1. This
company petition filed by M/s. TCI Industries Limited, under sections 391 and
394 of the Companies Act, 1956 seeks sanction of the Court to the scheme of
arrangement proposed by the petitioner with their shareholders.
2. In
the year 1965, the petitioner was incorporated as a Private Limited Company
under the provisions of the Companies Act, 1956 (for short ‘the Act’), in the
State of Assam. Thereafter, in the year 1974, the petitioner converted itself
into a Public Limited Company and changed its registered office to the State of
Andhra Pradesh after complying with the provisions of the Act. As on 31-3-2002,
the authorized share capital of the petitioner is at Rs. 15,00,00,000 divided
into 1,50,00,000 equity shares of Rs. 10 each and 1,00,000 preference shares of
Rs. 100 each, and the issued, subscribed and paid-up capital of the petitioner
is at Rs. 95,00,000 divided into 9,50,000 equity shares of Rs. 10 each fully
paid. Apart from the above capital, there is forfeited amount of Rs. 99,450.
3. The
petitioner was incorporated for carrying on the business of public carriers,
transporters and carriers, goods, passengers, merchandise, corn-commodities and
other products and goods and luggage of all kinds and description in any part
of India and elsewhere, on land, water and air by any conveyance whatsoever.
4. The
petitioner proposed a scheme of arrangement between Transport Corporation of
India Limited, M/s. Gati Corporation Limited, TCI Industries Limited and
Transcorp. International Limited for demerger in the year 1999. In
consideration of the demerger of the above companies, the shareholders who were
holding 100 shares each in the petitioner-company were allotted five shares
each of the company.
5. The
Board of Directors of the petitioner-company in their meeting held on 27-4-2002
have approved the scheme of arrangement between the petitioner and their
shareholders. In pursuance thereof, the petitioner filed an application in
C.A.No. 613 of 2002, wherein this Court by order dated 23-7-2002 directed the
meeting of the equity shareholders of the petitioner-company be held on
7-9-2002 at 12.00 A.M. at Lions Bhavan, Lakhpat Building, behind Usha Kiron
Complex, S.D. Road, Secunderabad - 500 003 for the purpose of considering the
scheme of arrangement and appointed Sri P. Subba Rao, an Advocate practising in
this Court as Chairman to preside over the meeting.
6. The
Chairman having conducted the meeting, filed his report before the Court
stating that the meeting was attended by 20 members in person holding shares
valued at Rs. 400 divided into 40 shares of Rs. 10 each and nine members by
proxy holding shares valued at Rs. 2,06,03,250 divided into 20,60,325 equity
shares of Rs. 10 each out of the issued, subscribed and paid up capital of Rs.
2,31,54,260 divided into 23,15,426 shares of Rs. 10 each and that all the
members present at the meeting, have unanimously resolved to approve the scheme
of arrangement proposed by the company.
7. Pursuant
thereto, the Secretary of the petitioner-company filed the present company
petition praying this Court to sanction the scheme of arrangement with their
shareholders. This Court, on 1-10-2002 while admitting the company petition
issued notice to the Central Government, and directed the petitioner to publish
the notice of hearing of the company petition in two news papers, namely
“Andhra Prabha” and “New Indian Express”, as required under rule 80 of the
Companies (Court) Rules, 1959.
8. On
behalf of the Central Government, the Registrar of Companies filed affidavit on
21-8-2002 stating that the scheme of arrangement mooted by the petitioner for
cancellation of its equity shares, held small lot, as indicated in the scheme,
and payment in consideration thereof to such equity shareholders of the petitioner
in accordance with the scheme is nothing but a scheme for buyback of its own
shares, and as such, section 77A of the Act, would be attracted. According to
him, section 77 of the Act, imposes complete prohibition of purchasing of own
shares, but section 77A thereof permits the companies buyback its own shares on
certain terms and conditions, and the petitioner instead of approaching this
Court under sections 391 and 394 of the Act, ought to have followed the
procedure prescribed in section 77A read with section 192A of the Act, 1956 for
buying back its own shares. The scheme is silent about the source from which
the company proposes to pay consideration of the shares, which are to be
reduced, cancelled and extinguished. He, therefore, prayed that the scheme
spelt out in para 4(a) be modified that instead of automatic cancellation,
cancellation can be done in respect of those shareholders who desire to cancel
their shares against payment.
9. Purporting
to submit reply to the above, the petitioner filed memo stating that sections
391 and 77A of the Act are independent of each other, and in any manner,
section 77A of the Act does not have any overriding effect on section 391
thereof. That, in fact, section 77A is merely an enabling provision, providing for
an alternative method by which a company can buy-back its shares upto a certain
percentage of its total paid-up capital in any financial year, and therefore,
the procedure prescribed under section 77A of the Act, cannot be made
applicable to the scheme under section 391 read with section 100 of the Act,
which is much wider in its perspective, and permits the scheme of arrangement
between the company on the one hand and its shareholders on the other.
According to the petitioner, the language used in section 77A of the Act is not
suggestive of the fact that the jurisdiction of this Court under sections 391
and 394 of the Act has been taken away or substituted. The petitioner in order
to negative the contention of the Registrar of Companies that the provisions of
section 77A of the Act, cannot be by-passed while proceeding under section 391,
placed reliance on the judgment of the Bombay High Court in SEBI v. Sterlite
Industries (India) Ltd. [2003] 113 Comp. Cas. 273. In support of his contention
that this Court cannot sit in appeal over the decision arrived at by the
shareholders in their meeting to consider the scheme of arrangement, he placed
reliance on the judgment of the Karnataka High Court rendered in Falcon Tyres
Ltd., In re [C.P.No. 14 of 2002 dated 19-11-2002] and the judgment of the
Gujarat High Court rendered in the matter of Gujarat Ambuja Exports Ltd., In re
[C.P.No. 232 of 2002 dated 19-2-2003].
10. Contending
that the scheme need not be modified to ready that the cancellation may be done
in respect of those shareholders who desire to cancel their shares against
payment, the petitioner states that out of 18,934 small share holdings, 17,767
holdings are still in physical form, though the trading in shares is in
compulsory demat since last two years. That para 4(a) of the scheme of
arrangement envisages automatic cancellation without surrender of share
certificate only in case of physical holdings, but still the holder has the
option to continue as a member and opt for non-cancellation of his holding by
sending an intimation in Form-A to the company, and if this is done, the scheme
of arrangement, will not permit the petitioner to cancel the said shares. That
the said para is an investor friendly measure in the interest of the
shareholder, and that the scheme of arrangement is offering small shareholder
folios a hassle-free, cost-free exit from their small shareholding in physical
certificate form at a price more attractive than the one that may become
available to them in the stock market. That to safeguard the interests of the
shareholders, para 15(e) provides depositing an amount of Rs. 45.00 lakhs. That
apart, the company is having share premium account of Rs. 6.50 crores, which
can be utilized for the purpose of cancellation of shares, and the amount
required for cancellation of equity shares will be made available from expected
fund flow from future business plans. In view of circular G.S.R. No. 773(E),
dated 11-10-2001, there is no need for compulsory voting by postal ballot.
11. As
a rejoinder to the above reply, the Registrar of Companies, in his affidavit
filed on 27-1-2003 states that the aforesaid contention of the petitioner is
not tenable having regard to the fact that section 77A of the Act, came to be
incorporated vide Companies (Amendment) Act, 1999, which came into effect from
31-10-1999, giving power to a company to purchase its own shares, which was
prohibited earlier. The contention of the petitioner that section 77A of the
Act is merely an enabling provision is disputed. Reiterating the very stand
taken in his earlier affidavit, the Registrar of Companies states that the
proposed scheme of arrangement contemplates for reduction/cancellation and
extinguishments of small lots of shareholdings and payment of consideration in
respect thereon in the form of cash, envisaged in the scheme which will provide
an exit route to small holders is nothing but a scheme of buy-back of its own
shares attracting the provisions of section 77A of the Act and SEBI (Buy Back
of Securities) Regulations, 1998. Further according to him para 4 of the scheme
which provides for automatic cancellation of shareholding in physical form upto
10 equity shares, and in case of shareholding in physical form of more than 10
equity shares, cancellation of upto 10 equity shares upon the company receiving
a written intimation in Form-B, and in case of shareholding in demat form of
less or equal to or more than 10 equity shares held, upon the company,
receiving a written intimation, which means it is a clear buy-back of shares within
the meaning of section 77A of the Act, and the petitioner ought to have
complied with the requirements prescribed thereunder as also under section 192A
of the Act. He further states that if the petitioner intends to give option to
the shareholders holding upto 10 equity shares, the petitioner should have
obtained the approval of the shareholders on the terms and conditions of the
offer so that it does not contain any negative option and the draft letter
should have been made a part of the scheme.
12. The
proposed scheme of arrangement admittedly is approved by 100 per cent vote of
the shareholders, and this is evident from the report filed by the Chairman,
who presided over the meeting of the shareholders under the directions of this
Court. There was no objection to the scheme of arrangement from any of the
shareholder, who was present at the meeting and voted in favour of the motion.
13. The
contention of the Registrar of Companies that the scheme of arrangement
proposed by the petitioner which seeks cancellation of shares held as small-lot
in consideration of payment for such cancellation, in accordance with the
provisions of the scheme, is nothing but a scheme of buy-back of its own shares
by the petitioner, and therefore, the petitioner ought to have followed the
procedure prescribed under section 77A read with section 192A of the Act and
the provisions of SEBI (Buy Back of Securities) Regulations, 1998, instead of
invoking the jurisdiction of this Court under sections 391 and 394 read with
section 100 of the Act, cannot be accepted.
14. Be
it noted that sections 391 and 77A of the Act are independent of each other.
Section 77A of the Act, which was incorporated by reason of Companies
(Amendment) Act, 1999 and which came into effect from 31-1-1999, was not given
any overriding effect over the provisions of sections 391 and 394 of the Act.
The said provision is merely an enabling provision, providing for alternative
mode by which the company can buy-back its shares upto a certain percentage.
The High Court of Bombay, in the case of Sterlite Industries (India) Ltd.
(supra), upon which the learned counsel for the petitioner placed reliance,
considered similar objection as was raised by the Registrar of Companies, in
this company petition. The Bombay High Court having framed the point namely -
Whether the company court has power to grant reorganization scheme under
section 391 read with sections 100 and 104 empowering the company to buy-back
the shares from the shareholders or whether section 77A is the only mode to
buy-back the shares, for its consideration, analyzed the provisions of sections
77 and 77A of the Act, and held thus :
“The opening words of section 77A viz.,
‘notwithstanding anything contained in this Act, but subject to the provisions
of sub-section (2) of this section and section 77B, a company may purchase its
own shares or other specified securities. . .’ shows that section 77A is a
facilitating provision which enables the provisions of sub-sections (2), (3)
and (4). Prior to the introduction of section 77A, the only manner in which a
company could buy-back its shares was by following the procedure set out under
sections 100 to 104 and section 391 which required the calling of separate
meetings of each class of shareholders and creditors as well as (if required by
the court) the drawing up of a list of creditors of the company and obtaining
of their consent to the scheme for reduction. The legislative intention behind
the introduction of section 77A is to provide an alternative method by which a
company may buy-back upto 25 per cent of its total paid up equity capital in
any financial year subject to compliance with sub-sections (2), (3) and (4). It
does not supplant or take away any part of the pre-existing jurisdiction of the
company court to sanction a scheme for such reduction under sections 100 to 104
and section 391.
The submission of the appellants that the non
obstante clause in section 77A gives precedence to that section over the
provisions of sections 100 to 104, section 391 is misconceived. The non
obstante clause in section 77A namely “notwithstanding anything contained in
this Act. . .” only means that notwithstanding the provisions of section 77 and
sections 100 to 104, the company can buy-back its shares subject to compliance with
the conditions mentioned in that section without approaching the court under
sections 100 to 104 or section 391. There is nothing in the provision of
section 77A to indicate that the jurisdiction of the court under section 391 or
394 has been taken away or substituted. It is well-settled that the exclusion
of jurisdiction of the court should not readily be inferred, such exclusion
should be explicitly or clearly implied. There is nothing in the language of
section 77 that gives rise to such an inference.We are, therefore, inclined to
hold that section 77A is merely an enabling provision and the court’s powers
under sections 100 to 104 and section 391 are not in any way affected. The
conditions provided in section 77A are applicable only to buy back of shares
under section 77A. The conditions applicable to sections 100 to 104 and section
391 cannot be imported into or made applicable to a buy-back under section 77A.
Similarly, the conditions for a buy-back under section 77A cannot be applied to
a scheme under sections 100 to 104 and section 391. The two operate in
independent fields.”
15. The
principle is well-established that this Court while exercising its powers under
sections 391 and 394 of the Act, does not sit in appeal over the decision
arrived at by the shareholders or the secured creditors or the unsecured
creditors, and minutely examine whether the proposed scheme of arrangement, as
approved by the shareholders or the secured creditors or the unsecured
creditors, as the case may be, should be sanctioned or not. Suffice it to say,
if the proposed scheme as approved by the shareholders or the secured creditors
or the unsecured creditors, as the case may be is in their best interests and
it is appropriate that the scheme of arrangement should be sanctioned, and it
is not for this Court to delve deep into the commercial wisdom exercised by the
shareholders or the secured creditors or the unsecured creditors, for this
Court lacks such an expertise.
16. In
Falcon Tyres Ltd.’s case (supra), a similar question came up for consideration
before the Karnataka High Court in C.P. No. 14 of 2002. The Karnataka High
Court by its judgment dated 19-11-2002, quoted the ratio laid down by the Apex
Court in Miheer H. Mafatlal v. Mafatlal Industries Ltd. [1996] 10 SCL 70, which
is to the following effect :
“The Company Court which is called upon to
sanction a scheme of compromise and arrangement has not merely to go by the
ipse dixit of the majority of the shareholders or creditors or their respective
classes, who might have voted in favour of the scheme by requisite majority but
the Court has to consider the pros and cons of the scheme with a view to find
out whether the scheme is fair, just and reasonable and is not contrary to any
provisions of law and it does not violate any public policy. This is implicit
in the very concept of compromise or arrangement which is required to receive
the imprimatur of a Court of law. No Court of law would ever countenance any
scheme of compromise or arrangement arrived at between the parties and which
might be supported by the requisite majority if the Court finds that it is an
unconscionable or an illegal scheme or is otherwise unfair or unjust to the
class of shareholders or creditors for whom it is meant. Consequently, it
cannot be said that a company court before whom an application is moved for
sanctioning such a scheme which might have got the requisite majority support
of the creditors or members of any class of them for whom the scheme is mooted
by the concerned company has to act merely as a rubber stamp and must almost
automatically put its seal of approval on such a scheme. It is trite to say
that once the scheme gets sanctioned by the Court it would bind even the
dissenting minority shareholders or creditors. Therefore, the fairness of the
scheme qua them also has to be kept in view while putting its seal of approval
on the concerned scheme placed for its sanction.
However, Court cannot have jurisdiction like
an appellate authority to minutely scrutinize the scheme and to arrive at an
independent conclusion whether the scheme should be permitted to go through or
not when the majority of the creditors or members or their respective classes
have approved the scheme as required by section 391 sub-section (2). The Court
certainly would not act as a Court of appeal and sit in judgment over the
informed view of the concerned parties to the compromise as the same would be
in the realm of corporate and commercial wisdom of the concerned parties. The
Court has neither the expertise nor the jurisdiction to delve deep into the
commercial wisdom exercised by the creditors and members of the company who
have ratified the scheme by the requisite majority. Consequently, the company
court’s jurisdiction to that extent is peripheral and supervisory and not
appellate. The Court acts like an umpire in a game of cricket who has to see
that both the teams play their game according to the rules and do not overstep
the limits. But subject to that how best the game is to be played is left to
the players and not to the umpire. The propriety and the merits of the
compromise or arrangement have to be judged by the parties who as sui juris
with their open eyes and fully informed about the pros and cons of the scheme
arrive at their own reasoned judgment and agree to be bound by such compromise
or arrangement. The Court cannot, undertake the exercise of scrutinizing the
scheme placed for its sanction with a view to finding out whether a better
scheme could have been adopted by the parties.”
17. So
quoting, the Karnataka High Court, approved the scheme before it, and while
approving the scheme, it held thus :
“Therefore, it becomes clear that this Court
cannot have jurisdiction like an appellate authority to minutely scrutinize the
arrangement and to arrive at an independent conclusion whether the arrangement
should be permitted to go through or not when the majority of the creditors or
members or their respective classes have approved the scheme as required by
section 391, sub-section (2). All that the Court has to consider is that the
scheme is fair, just and reasonable and it is not contrary to any provisions of
law and it does not violate any public policy.”
18. Similar
objections, as are raised in this company petition by the Registrar of
Companies, came up for consideration before the Gujarat High Court in Gujarat
Ambuja Exports Ltd.’s case (supra). The Gujarat High Court while negativing the
objections taken to by the Registrar of Companies, quoted the following broad
principles as laid down by the Supreme Court in Miheer H. Mafatlal’s case
(supra) :
1. The
sanctioning court has to see to it that all the requisite statutory procedure
for supporting such a scheme has been complied with and that the requisite
meetings as contemplated by section 391(1)(a) have been held.
2. That the scheme put up for sanction of the
court is backed up by t he
requisite majority vote as required by section 391(2).
3. That the
concerned meetings of the creditors or members or any class of them had the relevant
material to enable the voters to arrive at an informed decision for approving
the scheme in question. That the majority decision of the concerned class of
voters is just and fair to the class as a whole so as to legitimately bind even
the dissenting members of that class.
4. That all
necessary material indicated by section 391(1)(a) is placed before the voters
of the concerned meetings as contemplated by section 391(1).
5. That all
the requisite material contemplated by the proviso to sub-section (2) of
section 391 of the Act is placed before the court by the concerned applicant
seeking sanction for such a scheme and the court gets satisfied about the same.
6. That the
proposed scheme of compromise and arrangement is not found to be violative of
any provision of law and is not contrary to public policy. For ascertaining the
real purpose underlying the scheme with a view to be satisfied on this aspect.
The Court, if necessary, can pierce the view of apparent corporate purpose
underlying the scheme and can judiciously x-ray the same.
7. That the
company court has also to satisfy itself that members or class of members or
creditors or class of creditors, as the case may be, were acting bona fide and
in good faith and were not coercing the minority in order to promise any
interest adverse to that of the latter comprising the same class whom they
purported to represent.
8. That the
scheme as a whole is also found to be just, fair and reasonable from the point
of view of prudent men of business taking a commercial decision beneficial of
the class represented by them for whom the scheme is meant.
9. Once the
aforesaid broad parameters about the requirements of a scheme for getting
sanction of the court are found to have been met, the court will have no
further jurisdiction to sit in appeal over the commercial wisdom of the
majority of the class or person who with their open eyes have given their
approval to the scheme even in the view of the court there could be a better
scheme for the company and its members or creditors for whom the scheme on that
grounds it would otherwise amount to the court exercising appellate
jurisdiction over the scheme rather than its supervisory jurisdiction.
19. In
the instant case, as already noted supra, the proposed scheme of arrangement,
was unanimously approved by 100 per cent vote, and there was not even a single
vote, which was polled against the proposed scheme of arrangement. This apart,
the petitioner had made provision for deposing a sum of Rs. 45.00 lakhs and
earmarked a sum of Rs. 6.50 crores, for meeting the payment needs of the
shares, which may be cancelled. When the shareholders, in their wisdom, thought
that the proposed scheme of arrangement, is fair and reasonable for them and
that it had safeguarded their interest, it is not for this Court to go into the
pros and cons thereof balance them. Suffice it to say that the proposed scheme
of arrangement, having been approved by 100 per cent vote, and there being no
resistance from any of the shareholders or persons interested in the affairs of
the company, this Court has no other alternative except to approve the proposed
scheme of arrangement, as approved by the shareholders of the company.
20. In
the above view of the matter, the company petition is liable to be allowed for
none of the objections raised by the Registrar of Companies against the scheme
of arrangement, which is filed as Annexure-3 to the company petition, can be
upheld. Hence the objections raised by the Registrar of Companies are rejected.
The Company Petition is allowed. As a corollary, the scheme of arrangement, as
approved by the shareholders of the company, is required to be sanctioned, and
it is accordingly sanctioned. The petitioner shall cause a copy of this order
on the Registrar of Companies, Andhra Pradesh, Hyderabad, within a period of 30
days from the date of its receipt. No costs.
[2004] 53 scl
376 (ap)
Hyderabad
Industries Ltd., In re
V.V.S. Rao, J.
Company Petition No. 169 of 2003
April 27, 2004
Unless
articles of association of company permit utilisation
of share premium account for purposes other than men-
tioned in section 78(2) of Companies Act, company court
cannot approve resolution to that effect
Section 78, read with section 100 of the
Companies Act, 1956 - Shares - Application of premium received on issue of -
Whether in terms of section 78 and section 100 unless and until there is
diminution of shares capital and corresponding reduction of share premium
account, no company can be allowed to write off or adjust loss against share
premium account - Held, yes - Whether unless articles of association of company
permit utilization of share premium account for purposes other than section
78(2), company cannot pass resolution to that effect, nor company court can
approve such a resolution - Held, yes - Whether if subscribed shares capital in
another company is lost or not properly represented by assets, same would fall
under section 78, read with section 100 - Held, no - Whether in view of
aforesaid legal position, where articles of association of petitioner-company
did not specifically permit utilization of share premium account for purposes
other than those mentioned in section 78, share premium account could not be
utilised for setting off of loss incurred due to investment in another company
and, therefore, petition seeking approval of resolution to that effect was to
be dismissed - Held, yes
Facts
The petitioner-company made an investment of a certain
amount out of its reserve capital in ‘NMCL’, a company promoted by the
petitioner-company. ‘NMCL’, however, could not make much headway due to various
reasons, as a result of which allegedly the value of investment made by the
petitioner-company in ‘NMCL’ was reduced to nil. The petitioner-company
proposed to set off the loss incurred by investment made in NMCL against the
share premium account. The AGM of the shareholders unanimously passed a
resolution to utilize share premium for the adjustment against permanent loss
in value of investment in shares of NMCL. Therefore, contending that the
aforesaid set off would not cause prejudice to the creditors of the company and
the reduction of capital did not involve either diminution of the liability in
respect of unpaid capital or payment to any shareholder of paid-up capital, the
instant application was filed seeking approval of the aforesaid adjustment.
Held
A bare reading of sections 78(1) and (2) together with
sections 100, 101 and 102, makes it clear that when the share premium account
is to be applied either for the purpose of writing off the loss (in case such a
course is permissible) or otherwise, the procedure under sections 100(2) and
105 has to be followed. [Para 10]
When
sections 78 and 100 speak of share capital whether unpaid, fully paid or
excessively issued share capital, the provisions refer to share capital of the
company and not the investment made by the company by subscribing to the share
capital of another company. Obviously, therefore, if the subscribed shares
capital in another company is lost or not properly represented by assets, the
same cannot and should not fall under section 78 read with section 100. When
the company writes off its loss, or resorts to adjusting loss from the reserve
fund, there is no reduction of share capital as contemplated under sub-section
(2) of section 100. The share premium account can only be utilized for any of
the purposes mentioned under section 78(2) or at the time of winding of or for
the purpose of issuing bonus shares or dividend, whereas the reserve of the
company or the reserve fund, represented by assets, cannot be used for the
purpose of issuing dividend or bonus shares. However, in the event of
capitalization of reserve, it can always be used for issue of bonus shares. Be
that as it is, unless and until there is diminution of the shares capital and
corresponding reduction of the share premium account, no company can be allowed
to write off or adjust the loss against share premium account. [Para 12]
The
share premium account can be applied (i) for paying of bonus shares issued to
members as fully paid shares; or (ii) writing off preliminary expenses or
expenses of or the commission paid or discount allowed on, any issue of shares
or debentures of the company; or (iii) providing for premium payable by the
company on redumption of redeemable preference shares or of debentures.
Therefore, when a share premium account is distributed among the shareholders,
it is to be regarded as if the company is reducing its share capital by paying
off paid-up share capital. Therefore, though share premium account is
considered as one of the types of capital or quasi-capital of the company, the
share premium account cannot be equated as a reserve fund. Reverting back to
section 78, a conspectus of its three sub-section would reveal that if the
share premium account is to be applied to any of the purposes mentioned in
sub-section (2), the company need not seek approval/confirmation of the company
court. If the company desires to apply share premium account for any other
purposes, it has to approach the company court for confirmation. [Paras 19
& 20]
There
could be myriad situation, when company may have to use share premium account
or reserve or reserve fund. But such use must be authorised by articles of
association and must be within four corners of law. Unless the reduction of the
share capital is specifically authorized by the articles of association, a
company cannot do so, nor the court can approve or sanction such resolution.
Likewise, unless the articles of association of company permit utilization of
shares premium account for purposes other than section 78(2), the court cannot
approve or sanction such resolution. Indeed, any adjustment out of the share
premium account must be authorized by law and subject to law. In the instant
case article 15(2) of the articles of association of the petitioner-company
clearly showed that the company by special resolution and subject to law might reduce
the capital reduction reserve fund or share premium account. This only meant it
was for the purposes authorized under sections 78 and 100. [Para 21]
The
balance sheet of the petitioner-company revealed that the company was not in a
position where it could not write off its loss as against general reserve. The
submission that a prudent business decision which does not effect or prejudice
the interest of the creditors or shareholder must receive the
approval/confirmation of the court could not be accepted in the facts of the
instant case. The company court is essentially a court exercising jurisdiction
in equity and such exercise cannot ignore the law or give relief de hors the
principles of law. Further, in the background of the case, it did not fall within
the purview of section 78 read with section 100 and the instant petition was
misconceived. [Para 22]
For
the above reasons, the company petition was devoid of merits and the
petitioner-company was not entitled for order confirming the minute of the company.
The company petition was, accordingly, rejected. [Para 23]
Cases referred to
Bharat Fire & General Insurance Ltd. v. CIT
[1964] 34 Comp. Cas. 683 (SC) (para 8), CIT v. Allahabad Bank Ltd. [1966] 36
Comp. Cas. 365 (Cal.) (para 8) and O.C.L. India Ltd., In re [1999] 95 Comp.
Cas. 429 (Ori.) (para 8).
Ravi
A. for the Petitioner.
Order
The Petition
1. T he
petition is filed by M/s. Hyderabad Industries Limited purportedly under
section 100 read with section 78 of the Companies Act, 1956 (for short, the Act.).
The petitioner company prays for confirmation of adjustment of shares premium
against the permanent loss in value of investment made by the company in Nepal
Metal Company Limited (‘NMCL’ for brevity) as approved be special resolution by
Annual General Meeting of the shareholders of the company. The company also
seeks to dispense with the formality of adding the words ‘and reduce’ after the
name of the company and approval of the Minute/Resolution of the General
Meeting.
Background
of Petition
2. The
events and circumstances leading to filing of the present Petition be noticed
in brief. The petitioner-company was incorporated under the Act in the year
1956 as Hyderabad Asbestos Cement Products Limited under the provisions of the
Hyderabad Companies Act, 1320 Fasli. In 1985 the name of the company was
changed to Hyderabad Industries Limited with effect from 11-11-1985. The
authorised capital of the company is Rs. 1,000 lakhs divided into Rs. 95,00,000
equity shares of Rs. 10 each and 50,000 preference shares of Rs. 100 each.
71,47,631 equity shares are fully paid up, but no preference shares have been
issued. The company was incorporated with the object of carrying business of
manufacturing and marketing of dyers, printers, finishers, and impregnators of
asbestos, cement, cotton, jute etc., and the business of mining and working of
asbestos and other minerals. According to article 15 of Articles of Association
of the Company, it may by special resolution and subject of confirmation by the
Company Court reduce its share capital.
3. The
petitioner-company made investment of Rs. 115.30 lakhs; presumably from out of
its reserve capital, in NMCL, a company promoted by petitioner-company in Nepal
jointly with His Majesty’s, Government of Nepal and others. NMCL however, could
not make much headway due to various reasons, as a result of which, allegedly
the value of investment made by the petitioner-company in NMCL is reduced to
nil.
4. The
petitioner-company issued and allotted 13,05,511 equity shares of Rs. 10 each
at premium of Rs. 50 per share on rights basis in 1992-93. The
petitioner-company also allotted 1,75,000 equity shares of Rs. 10 each at
premium of Rs. 50 per share to Hindustan Motors Limited as a consideration for
taking over of latter’s Heavy Engineering Division situated at Uttarpara in
State of West Bengal. At present the company has a share premium amount of Rs.
740.25 lakhs lying with the company which has not been utilized for any
authorised purposes of the company. The company proposed to set off the loss
incurred by investment made in NMCL against the share premium account. This
would render the company’s accounting method in respect of investments to be in
line with accounting standards of the Institute of Chartered Accountants of
India and also would represent true share value. It is alleged that the set off
will not cause prejudice creditors of the company and the reduction of the
capital does not involve in diminution of any liability in respect of unpaid
capital or payment to any shareholder of any paid up capital. It is also
alleged that the set off proposed would not result in reduction in value of the
security which the creditors of the company have. Therefore, it is averred that
there is no necessity to issue notices to the creditors of the company and to
add words ‘and reduce’ after the name of the company.
5. The
Board of Director of the petitioner-company in their meeting on 23-5-2003
resolved to place the matter before 56th Annual General Meeting (AGM) of
shareholders of the company. Accordingly, a notice was issued to shareholders
of the AGM on 26-9-2003. The AGM of the shareholders unanimously passed a
Resolution to utilize share premium to an amount not exceeding Rs. 115.30 lakhs
for the adjustment against permanent loss in value of investment in shares of
NMCL. Therefore, contending that reduction of capital does not involve either
diminution of the liability in respect of unpaid capital or payment of any
shareholder of paid up capital, and that the creditors of the company are in no
way effected by the proposed adjustment, present application is filed seeking
approval of the Minute, which reads as under :
An
aggregate sum not exceeding Rs. 115.30 lakhs be drawn out of the Company’s
Share Premium Account as permissible to be utilized for the purpose and be
applied/adjusted against permanent loss in value of investment in shares of
NMCL.
6. This
Court admitted this matter on 4-11-2003. This Court also permitted the learned
counsel for the petitioner to carryout publication of petition/notice in
English daily of ‘Times of India’ and Telugu daily of ‘Eenadu’ as contemplated
under rule 47 of the Companies (Court) Rules, 1959. On 9-12-2003 proof of
publication of admission of the petition was filed before the Court.
Submission
Sustaining Petition
7. The
application per se is not one for reduction of share capital. It is not even an
application filed for seeking permission of the Court for the other purposes
than those contemplated under sub-section (2) of section 78 or sub-section (1)
of section 100 of the Act. This is an application seeking permission of this
Court to draw an amount not exceeding Rs. 115.30 lakhs out of ‘share premium
amount’ to be utilized and to be applied/adjusted against permanent loss in
value of investment in shares of NMCL. Prima facie, therefore, application
under section 78 read with section 100 of the Act would not lie. When this
question is raised, learned counsel for the petitioner. Sri S. Ravi made
elaborate submission to sustain such a petition. There is no decided case
directly on the point involved in this petition. Therefore, this Court heard
the learned counsel for a considerable length of time.
8. Learned
counsel for the petitioner sustains the petition on the strength of three
propositions. These are : (i) ‘Share Premium Account’ is otherwise in the
nature of ‘Reserve Fund’ of the Company; (ii) It is permissible for the company
to adjust loss against Reserve Fund; and (iii) Statute does not provide for
specific items expenditure/loss which can be adjusted against ‘Reserve Fund’ or
‘Share Premium Account’. Learned counsel would therefore submit that permanent
loss sustained by a company by reason of investment made by the company or any
other loss can be adjusted against either ‘Share Premium Account’ or ‘Reserve
Fund’. Being a business decision depending on prudence, as long as the same
does not result in reduction in the value of security which the creditors have
in the company or as long as such adjustment of loss against security premium
account does not prejudice any of the shareholders, nothing prevents the
company from doing so. As sub-section (1) of section 78 contemplates the
procedure for reduction of share capital to be followed in the event of
reduction of share premium account, the company has to approach this Court
seeking approval of the Minute. Learned counsel placed reliance on passages
from Palmer’s Company Law and Ford’s principles of Company Law. Reliance is
also placed on the decisions in Bharat Fire & General Insurance Ltd. v. CIT
[1964] 34 Comp. Cas. 683 (SC), CIT v. Allahabad Bank Ltd. [1966] 36 Comp. Cas.
365 (Cal.) and O.C.L. India Ltd., In re [1999] 95 Comp. Cas. 429 (Ori.) in
support of the three propositions made across the Bar.
Point
for Consideration in the Petition
9. The
point that arises for consideration is whether the application under section 78
read with section 100 would lie before the Company Court for approval of Minute
of the Annual General Meeting of the shareholders of the company to draw funds
out of the company’s share premium account for the purpose of utilizing the
amount for applying/adjusting against permanent loss in value of the investment
made by the company in the shares of other company ?
Findings
and Conclusion on the Petition
10. There
cannot be any dispute that the provisions to reduction of share capital would
apply when the shares premium account is to be utilized. Section 78(1)
introduces a fiction and the share premium account is deemed to be ‘paid-up
share capital of the Company’. Sections 100, 101, 102, 103, 104 and 105 deal
with reduction of share capital and the procedure to be adopted, when an
application is made to the Company Court, for confirming the resolution/minutes
of the Members of the Company for reduction of share capital. Reading section
78(1) and (2) together with sections 100, 101 and 102, it becomes clear that
even when the share premium account is to be applied either for the purpose of
writing off the loss (in case a course is permissible) or otherwise, the
procedure under sections 100(2) and 105 has to be followed. Indeed, any
misrepresentation before the Court for the purpose of obtaining imprimature of
the Court is made a penal offence (under section 105) with imprisonment for a
term, which may extend to one year, or with fine, or with both. Keeping this in
mind, section 100 be read which is as under :
“Special resolution for reduction of share
capital.—(1) Subject to confirmation by the Court, a company limited by shares
or a company limited by guarantee and having a share capital, may, if so
authorized by its articles, by special resolution, reduce its share capital in
any way; and in particular and without prejudice to the generality of the
foregoing power, may—
(a) extinguish or reduce the liability on any
of its shares in respect of share capital not paid-up;
(b) either with or without extinguishing or
reducing liability on any of its shares, cancel any paid-up share capital which
is lost, or is unrepresented by available assets; or
(c) either with or without extinguishing or
reducing liability or any of its shares, pay of any paid-up share capital which
is in excess of the wants of the company;
and may, if and so for as is necessary, alter
its memorandum by reducing the amount of its share capital and of its shares
accordingly.
(2) A
special resolution under this section is in this Act referred to as ‘a
resolution for reducing share capital’.”
11. The
heading of section 100 reads ‘Special resolution for reduction of shares
capital’. Nonetheless, it is not only reduction of shares capital as such, but
any decision taken for extinguishing or reducing the liability in respect of
(i) unpaid share capital; (ii) paid-up share capital which is lost and
unrepresented by assets or (iii) payment of paid up shares capital in excess of
requirement. As per sub-section (2), when a Company resorts to a special
resolution under section 100 (1) of the Act, any of the purposes (i), (ii) or
(iii) as mentioned in sub-section (1) of section 100, such resolution is
referred to as ‘a resolution for reducing share capital.’ The intention of
Legislature in enacting such provision is obvious. Take a situation referable
to section 100(1)(a), i.e., extinguishing liability in respect of unpaid share
capital. When the company issues shares to its members, it may require the
payment of face value of the shares or face value with premium as determined by
the company. The company may require the member to face value or face value
with premium at one time or on different calls depending on exigencies or
requirements for the capital. Nonetheless, when once the authorized capital or
part thereof is issued and subscribed, whether or not fully paid, the issued
shares capital forms part of subscribed capital and for all purposes it is the
capital of the company. When the company decides to extinguish unpaid shares,
assuming that such unpaid shares were initially issued for premium, in the
event of the resolution of the company to cancel unpaid shares to the extent of
those shares cancelled, the share premium account also gets reduced. Similar is
the case in the event of cancellation of paid up share capital when
proportionate premium amount gets reduced or in the event of payment by the
company for the fully paid up shares capital, again to that extent there is
reduction in the shares premium account.
12. It
must be noticed that when sections 78 and 100 of the Act speak of share capital
whether unpaid, fully paid or excessively issued share capital, the provisions
refer to share capital of the company and not the investment made by the
company by subscribing to the share capital of another company. Obviously,
therefore, if the subscribed shares capital in another company is lost or not
properly represented by assets, the same cannot and should not fall under
section 78, read with section 100 of the Act. When the company writes off its
loss, or resorts to adjusting loss from the reserve fund, there is no reduction
of share capital as contemplated under sub-section (2) of section 100 of the
Act. The share premium account can only be utilized for any of the purposes
mentioned under section 78(2) of the Act or at the time of winding of or for
the purpose of issuing bonus shares or dividend, whereas the reserve of the
company or the reserve fund, represented by assets, cannot be used for the
purpose of issuing dividend or bonus shares. However, I must hasten to add that
in the event of capitalization of reserve, it can always be used for issue of
bonus shares. Be that as it is, unless and until there is diminution of the
share capital and corresponding reduction of the share premium account, no
company can be allowed to write off or adjust the loss against share premium
account.
13. When
can a company by a special resolution resort to any of the purposes under
sub-section (1) of section 100 ? Section 100 or any of the provisions in the
Companies Act does not confer any right on the Company to reduce its share
capital. Such a right has to be conferred by the articles of association.
Sub-section (1) of section 100 makes it very clear that a company if so
authorized by its articles, may by special resolution, reduce its share capital
in any of the three ways and then approach the Company Court for confirmation
of the resolution for reducing share capital under section 102(1) of the Act.
Whether the reduction of share capital (a) by way of extinguishing or reducing
the liability in respect of unpaid share capital; or (b) by way of either with
or without extinguishing or reducing liability, in respect of paid-up share
capital which is lost and unrepresented by assets; or (c) by way of payment of
any paid-up share capital which is in excess, either with or without extinguishing
or reducing liability, such course should have to be specifically authorized to
articles of the Company.
14. A
copy of Memorandum and Articles of Association is placed before this Court
along with the Company Petition. Article 15 deals with reduction of share
capital and reads as under :—
“Reduction
of share capital.—The company may :
(1) By Special Resolution and subject to
confirmation by the Court, reduce its share capital in any way; and, in
particular and without prejudice to the generality of the foregoing power :—
(a) extinguish or reduce the liability on any
of its shares in respect of share capital not paid up;
(b) either with or without extinguishing or
reducing the liability on any of its shares, cancel any paid-up share capital
which is lost or is unrepresented by available assets; or
(c) either with or without extinguishing or
reducing liability on any of its shares, pay off any paid-up share capital
which is in excess of the wants of the company;
and may, if and so far as is necessary,
alter its memorandum by reducing the amount of its share capital and of its
shares accordingly.
(2) By
Special Resolution reduce in any manner and with, and subject to, any incident
authorized and consent required by law:
(a) any
Capital Redemption Reserve Fund; or
(b) any
Share Premium Account.”
15. Except
article 15, there is no article empowering the Company to appropriate funds
from share premium account for the purpose of writing off its losses. Be it
also noted that the company reduce share premium account only when authorized
by law. Does section 78 permit the Company to write off the loss sustained by
the Company by investing in another Company by utilizing the funds in ‘the
share premium account’? The submission of the learned Counsel for the
petitioner is that the share premium account is in the nature of reserve funds
of the Company and as per the accounting procedures when it is permissible to
set off the loss of the Company from the reserve funds, as a necessary
corollary, it is permissible to utilize the funds from share premium account.
This Court, for reasons, infra, cannot countenance the submission.
16. The
learned Counsel for the petitioner placed reliance on Palmer’s Company Law,
Charlesworth Company Law (Eighth edition) and Principles of Company Law by
H.A.J. Ford (1974) to contend that the share premium account can be used for
writing off the loss of the Company.
17. In
paragraph 30.08 of Sir Francis Beaufort Palmer’s Company Law, reserve capital
and reserve liability are elucidated as under :
“Reserve liability.—A company may resolve by
special resolution that part or the whole of the uncalled capital shall not be
called up except in the event of a winding up (section 120). This amount resolved
by the company to meet a contingency in the winding up is sometimes called the
reserve capital, although the Act uses a more accurate term-reserve liability.
A Company which has created reserve liability
resembles, from the business point of view, a company limited by guarantee and
having a share capital. There is, however, this essential difference between a
reserve liability and a guarantee : the former attaches according to the
shareholding of every member, so that the bigger the shareholding, the greater
the reserve liability, whereas the guarantee attaches per capita and is the
same for each member, or, if the amount of the guarantee varies according to
classes of members, for each member of the class in question. Thus the creation
of a reserve liability is still allowed whereas companies limited by guarantee
and having a share capital may no longer be formed.”
18. Though
reserve capital is treated as a type of capital of the company along with other
types of Capital, viz., authorized capital, issued capital, allotted shares
capital, paid-up capital, quasi-capital funds - the share premium account and
capital redemption reserve are treated distinctly. When there is reduction of
capital, the Company can use share premium account. Under section 78(1) share
premium account is treated “as if it is paid up share capital of the company”.
But, a company can also use share premium account for issue of dividend or
issue of bonus shares [See for instance section 78(2)]. But, a company, which
transfers profits available for dividend to the reserve fund, cannot use
reserve for distribution of dividend. The condition precedent for utilizing the
share premium account is only when the Company reduces its capital under
various situations as explained above. In the absence of any proposal for
reduction of shares capital, the share premium account cannot be utilized for
the purpose of writing off the loss.
19. The
share premium account can be applied (i) for paying of bonus shares issued to
members as fully paid shares; or (ii) writing off preliminary expenses or
expenses of or the commission paid or discount allowed on, any issue of shares
of debentures of the Company; or (iii) providing for premium payable by the
company on reduction of redeemable preference shares or of debentures.
According to Palmer, the object of the provisions relating to share premium
account is to prevent dividends being paid out of premiums received on an issue
of shares and it is quasi-capital of company (See Palmer’s Company Law 24th
edn. pp. 425 and 489). Therefore, when a share premium account is distributed
among the shareholders, it is to be regarded as if the Company is reducing its
share capital by paying off paid-up share capital. [See page 176 of
Charlesworth & Cain’s Company Law (Twelfth edition)]. Therefore, though
share premium account is considered as one of the types of capital or
quasi-capital of the Company, the share premium account cannot be equated as a
reserve fund. Be it noted that reserve fund or reserve surplus is generally utilized
for writing off the loss incurred by the Company. In that view of the matter,
the decisions cited by the learned Counsel for the petitioner referred to supra
have no relevance.
20. Reverting
back to section 78 again, sub-section (1) thereof is in two parts. First part
imposed a legal obligation for transferring the share premium to the account
called share premium account. The second part says that except as provided in
section 78, the provisions relating to reduction of share capital would apply.
Sub-section (2) of section 78 contains a non obstante clause. It lays down that
notwithstanding sub-section (1), share premium account may be applied is paying
up unissued shares of the Company to be issued to the members as fully paid
bonus shares; or writing off preliminary expenses of the Company; or writing
off the expenses of, or the commission paid or discount allowed on, any issue
of shares or debentures of the Company; or providing for the premium payable on
the redemption of any redeemable preference shares or of any debentures of the
Company. The proviso to sub-section (3) further clarifies that before
commencement of the Act, if any share premium account is used as “identifiable
part of the Company’s reserves”, the same shall be disregarded because as per
sub-section (3), if any Company had issued shares at a premium, that money also
must be transferred to share premium account. A conspectus of the three
sub-sections of section 78 would reveal that if the shares premium account is
to be applied to any of the purposes mentioned in sub-section (2), the Company
need not seek approval/confirmation of the Company Court. If the Company
desires to apply share premium account for any other purposes, it has to
approach the Company Court for confirmation.
21. There
could be myriad situation, when company may have to use share premium account
or reserve or reserve fund. Schedule VI of the Act, especially, Horizontal Form
of Balance Sheet, contains instructions to the effect that the word ‘Fund’
(after Reserve) should be used only when such reserve is specially represented
by earmarked investments. But such use must be authorised by articles of
association and must be within four corners of law. As observed above, unless
the reduction of the share capital is specifically authorized by the articles
of association, a company cannot do so, nor this Court can approve or sanction
such resolution. Likewise, unless the articles of association of company permit
utilization of shares premium account for purposes other than section 78(2),
the Court cannot approve or sanction such resolution. Indeed, any adjustment
out of the share premium account must be authorized by law and subject to law.
Article 15(2) of the articles of association of petitioner company clearly
shows that the company by special resolution and subject to law may reduce the
capital reduction, reserve fund or share premium account. This only means it is
for the purposes authorized under sections 78 and 100.
22. The
Balance Sheet for the year 2002-03 is annexed to the petition. Schedule 2 of
the same would show that the company has general reserve of Rs. 5,600 lakhs
(Rupees five thousand six hundred lakhs only) apart from capital reserve,
capital reduction reserve, revaluation reserve and debenture reduction reserve.
The company also has share premium amount of Rs. 740.25 lakhs (Rupees seven
hundred and forty lakhs and twenty five thousand only). The company is not in a
position where it cannot write off its loss as against general reserve. The
submission that a prudent business decision which do not effect or prejudice
the interest of the creditors of shareholders must receive the
approval/confirmation of the Court cannot be accepted in the facts of this
case. The Company Court is essentially a Court exercising jurisdiction in
equity and such exercise cannot ignore the law or give relief de hors the
principles of law. I am therefore not inclined to accept the submission.
Further, in the background of this case, it does not fall within the purview of
section 78, read with section 100 and this petition is misconceived.
23. For
the above reasons, the company petition is devoid of merits and this Court
holds that the petitioner company is not entitled for order confirming the
minute of the company dated 25-9-2003. The Company Petition is accordingly
rejected.
[2004] 55 SCL
1 (AP)
HIGH COURT OF ANDHRA PRADESH
Hyderabad
Industries Ltd., In re
B. SUDERSHAN REDDY AND K.C. BHANU, JJ.
o.s.a. NO. 35 OF 2004
JULY 21, 2004
When a
resolution of general body of shareholders resolving
to reduce share capital of company does not prejudicially
affect rights of shareholders and creditors, there is no legal
impediment for Company Court to grant its approval/
confirmation to such a resolution
Section 78, read with section 100, of the
Companies Act, 1956 - Shares - Application of premiums received on issue of -
Appellant -company made certain investment in another company out of its
reserve capital - Value of said investment was subsequently reduced to nil -
Board of Directors, with a view to set off said loss against share premium
account of appellant-company, proposed a special resolution which was passed by
shareholders unanimously in annual general meeting - Company petition seeking confirmation
of said resolution was, however, dismissed by Company Court - Whether since
special resolution had been passed in accordance with articles of association,
and it in no way caused prejudice to creditors of company nor it affected
interest of shareholders in any manner whatsoever, company petition seeking
approval of said resolution was to be allowed - Held, yes - Whether, as a
result, order passed by Company Court was liable to be quashed - Held, yes
Facts
The appellant-company made an investment of Rs. 115.30
lakhs out of its reserve capital in another company, namely, ‘NMCC’. The value
of the investment made in said company was reduced to Nil. The board of
directors of the company with a view to set off the loss incurred by the
investment made in said company against the share premium account, proposed a
special resolution which was passed by the shareholders unanimously in the
annual general meeting. The appellant, thus, filed a company petition seeking the
confirmation of the said resolution. The Company Judge, however, rejected the
said application.
On
appeal :
Held
In the instant case, no objections had been received either
from the shareholders or the creditors. It was nobody's case that the petition
contained any untrue statements. [Para 12]
The
Company Judge, on interpretation of section 78, read with sections 100, 101 and
102, had correctly come to the conclusion that if the share premium account is
to be applied to any of the purposes mentioned in sub-section (2) of section
78, the company need not seek the approval/confirmation of the Company Court.
It is only in case the company desires to apply share premium account for any
other purpose, it has to approach the Company Court for confirmation. The Company
Judge had also rightly observed that there could be myriad situation where the
company may have to use share premium account or reserve or reserve fund
provided such use is authorized by the articles of association and must be
within the four corners of law. [Para 13]
Articles
of association of the appellant-company enabled the company by special
resolution to reduce in any manner any capital redemption reserve fund or any
share premium account. Hence, the view taken by the Company Judge in that regard
could not be accepted. The redemption in the capital redemption reserve fund or
share premium account by way of a special resolution can be only for the
purposes authorized under sections 78(2) and 100. There can be a variety of
situations where the company may be required to use share premium account, or
reserve fund for such lawful purposes as it may consider necessary. It is
needless to observe that for utilization of the share premium account for
purposes mentioned in section 78(2), no approval or sanction of the court is
required. [Para 16]
It
is very well-settled and needs no restatement that the court does not exercise
any appellate power over the decision of the company or its management. The
Company Court in its equity jurisdiction is required to satisfy itself and see
that the procedure, by which resolution is carried through, is legally correct
and the shareholders and creditors are not prejudiced. It is also the duty of
the court to see that the scheme is fair and equitable between the different
classes of shareholders. It is no doubt true that it is the duty of the court
to protect the interests of the creditors and it must be safeguarded. Public
interest is also a paramount consideration. [Para 17]
In
the instant case, the special resolution had been passed in accordance with the
articles of association. Neither the creditors nor the shareholders were before
the court objecting to passing of the resolution. Nothing was brought to the
notice of the court that the special resolution affected the interests of the
shareholders. There was no material available on record that the special
resolution had caused any prejudice to any of the shareholders. [Para 18]
With
the aforesaid adjustment, the company’s accounting method in respect of
investments would fall in line with the accounting standards of Institute of
Chartered Accountants of India and represent true shareholder value. The set
off would not cause any prejudice to the creditors of the company. The
reduction of capital did not either result in the diminution of any liability
in respect of unpaid capital or the payment to any shareholder of any paid-up
capital. No compromise or arrangement was contemplated. There was no reduction
in the value of the security, which the creditors had in the company. [Para 18]
The
purposes for which the special resolution was introduced and approved by the
general body were stated in clear and specific terms. The course adopted, by
the appellant in no way caused any prejudice to the creditors of the company
nor the interest of the shareholders was effected in any manner whatsoever.
[Para 19]
For
all the aforesaid reasons, the resolution of the general body resolving to
utilize an amount not exceeding Rs. 115.30 lakhs out of the amount standing to
the credit of share premium account of the company for the adjustment against
permanent loss in value of investment in shares of NMCL did not suffer from any
legal infirmity. The rights of the shareholders and the creditors were not
prejudicially affected. The resolution, in no manner, prejudicially affected
the public interest. There was no legal impediment for granting the
approval/confirmation by the High Court. [Para 25]
For
the aforesaid reasons, the instant order under appeal was set aside. The company
petition was allowed. [Para 26]
The
appeal was, accordingly, allowed. [Para 27]
Cases referred to
OCL India Ltd., In re [1999] 95 Comp. Cas. 429 (Ori.) (para
20), Coca-Cola Amatil Ltd., In re 1998 NSW LEXIS 1786 (para 21), Yoshiya
International Corpn. Ltd., In re [2002] 1207 HKCUI (para 21) and Medlife Com.
Ltd. [C.P. No. 165 of 2003, dated 31-3-2003] (para 23).
Ravi S. for the
Appellant.
Order
B. Sudershan Reddy, J.
- The petitioner in Company Petition No. 169 of 2003 is the appellant in this
appeal preferred under Clause 15 of the Letters Patent and section 483 of the
Companies Act, 1956 (for short ‘the Act’) against the order dated 27-4-2004 of
the learned Company Judge dismissing the application filed under section 100
read with section 78 of the Act.
2. The appellant
herein filed the petition seeking the relief of confirmation of adjustment of
share premium against the permanent loss in value of investment made by it in
Nepal Metal Company Limited (‘NMCL’ for brevity) as approved by Special Resolution
by the Annual General Meeting of the shareholders of the company.
3. The learned
Company Judge after an elaborate consideration of the matter rejected the
application and accordingly refused the approval/confirmation of the resolution
passed by the Annual General Meeting.
4. In order to
appreciate as to whether the order under appeal suffers from any infirmities
requiring our interference, a few relevant facts and circumstances leading to
filing of this appeal are required to be noticed.
5. The appellant-company
was incorporated under the provisions of the Act in the year 1956 as Hyderabad
Asbestos Cement Products Limited. The name of the company was changed to
Hyderabad Industries Limited with effect from 11-11-1985. The authorized
capital of the company is Rs. 1,000 lakhs divided into Rs. 95,00,000 equity
shares of Rs. 10 each and 50,000 preference shares of Rs. 100 each. 71,47,631
equity shares are fully paid, but no preference shares have been issued. Any
further details in this regard are not required to be noticed.
6. The case of
the appellant is that it made investment of Rs. 115.30 lakhs out of its reserve
capital in NMCL, a company promoted by the appellant company in Nepal jointly
with the Government of Nepal and others. For whatever reasons, the value of the
investment made by the appellant company in NMCL is reduced to ‘Nil ’. The
Board of Directors of the company, with a view to set off the loss incurred by
the investment made in NMCL against the share premium account, proposed the
following resolution as a Special Resolution.
“Resolved that pursuant to
the provisions of sections 78, 100 and other applicable provisions, if any, of
the Companies Act, 1956 read with Article 15 of the Articles of Association of
the Company and subject to the confirmation of the Honourable High Court of
Judicature of Andhra Pradesh at Hyderabad, an amount not exceeding Rs. 115.30
lakhs out of the amount standing to the credit of Share Premium Account of the
company be utilized for the adjustment against permanent loss in value of
investment in shares of Nepal Metal Company Limited as at March 31, 2003.
Resolved Further that for the purpose of giving
effect to the aforesaid resolution, the Board of Directors of the Company or a
Committee of Directors, be and is hereby authorized to do and perform all acts,
deeds, matters and things and take all such actions as may be considered
necessary and desirable to give effect to the same.”
7. The
resolution was placed before the 56th Annual General Meeting (AGM) of the shareholders
of the Company. Notices were issued to the shareholders of the AGM on
26-9-2003. The AGM of the shareholders unanimously passed a resolution to
utilize the share premium to an amount not exceeding Rs. 115.30 lakhs for the
adjustment against permanent loss in value of investment in shares of NMCL.
8. It is under
those circumstances, the company moved this Court inter alia contending that
reduction of capital does not involve either diminution of the liability in
respect of unpaid capital or payment of any shareholder of paid up capital, and
that the creditors of the company are in no way effected by the proposed
adjustment. The application has been filed seeking confirmation of the
resolution.
9. The Court
having admitted the petition on 4-11-2003, directed the company to carry out
publication of notices as contemplated under Rule 47 of the Companies (Court)
Rules, 1959.
10. In response to
the notices published, neither any shareholder nor any creditor approached this
Court and expressed their objection.
Section 78 of the Act reads as follows :
Application of premiums received
on issue of shares—(1) Where a company issues shares at a premium, whether for
cash or otherwise, a sum equal to the aggregate amount or value of the premiums
on those shares shall be transferred to an account, to be called ‘the
securities premium account’ and the provisions of this Act relating to the
reduction of the share capital of a company shall, except as provided in this
section, apply as if the securities premium account were paid-up share capital
of the company.
(2)
The securities premium account may,
notwithstanding anything in sub-section (1) be applied by the company—
(a) in paying up unissued shares of the
company to be issued to members of the company as fully paid bonus shares;
(b) in writing off the preliminary expenses of the company;
(c) in writing off the expenses of, or the
commission paid or discount allowed on, any issue of shares or debentures of
the company; or
(d) in providing for the premium payable on
the redemption of any redeemable preference shares or of any debentures of the
company.
(3)
Where a company has, before the
commencement of this Act, issued any shares at a premium, this section shall
apply as if the shares had been issued after the commencement of this Act:
Provided that any part of the premiums
which has been so applied that it does not at the commencement of this Act form
an identifiable part of the company’s reserves within the meaning of Schedule
VI, shall be disregarded in determining the sum to be included in the
securities premium account.”
11. There is no
dispute whatsoever that the aggregate sum not exceeding Rs. 115.30 lakhs now
sought to be drawn out of the company’s Share Premium Account does not fall
under any of the contingencies provided for under sub-section (2) of section 78
of the Act. Section 100 of the Act deals with ‘reduction of share capital by
way of special resolution’ provided the Articles of Association so authorises
the company to reduce its share capital. The special resolution under section
100 is referred to as “a resolution for reducing share capital”. Section 101 of
the Act deals with an application to Court for confirming the reduction.
Section 102 of the Act provides that the Court, if satisfied with respect to
every creditor of the company who under section 101 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,
it may make an order confirming the reduction on such terms as it thinks fit.
12. We are required
to notice that in the instant case no objections have been received either from
the shareholders or the creditors. It is nobodies case that the petition contains
any untrue statements.
13. The learned
Company Judge on a true interpretation of section 78 of the Act read with
sections 100, 101 and 102 correctly came to the conclusion that if the Share
Premium Account is to be applied to any of the purposes mentioned in
sub-section (2) of section 78, the company need not seek the
approval/confirmation of the Company Court. It is only in case the company
desires to apply Share Premium Account for any other purpose, it has to
approach the Company Court for confirmation. The learned Company Judge had also
rightly observed that there could be myriad situation where the Company may
have to use Share Premium account or reserve fund provided such use is
authorized by the Articles of Association and must be within the four corners
of law.
14. The question
that falls for consideration is whether the Articles of Association of the
appellant company permit utilization of Share Premium Account for purposes
other than as provided for under section 78(2) of the Act.
15. Article 15(2)
of the Articles of Association of the appellant Company reads as follows :
“By Special Resolution reduce in
any manner and with, and subject to, any incident authorized and consent
required by law.
(a) any
Capital Redemption Reserve Fund; or
(b) any
Share Premium Account.”
16. Article 15 of
the Articles of Association of the appellant-company is couched in wide
language which enables the company by Special Resolution reduce in any manner
any Capital Redemption Reserve Fund or any Share Premium Account. Hence, we are
unable to subscribe to the view taken by the learned Company Judge in this
regard. The redemption in the Capital Redemption Reserve Fund or Share Premium
Account by way of a Special Resolution could be only for the purposes
authorized under sections 78(2) and 100 of the Act. That as has been observed
by the learned Company Judge there could be variety of situations where the
company may be required to use Share Premium Account, Reserve or Reserve Fund
for such lawful purposes as it may consider necessary. It is needless to
observe that for utilization of the Share Premium Account for purposes
mentioned in section 78(2) of the Act, no approval or sanction of this Court is
required.
17. It is very well
settled and needs no restatement that this Court does not exercise any
appellate power over the decision of the Company or its management. The Company
Court in this equity jurisdiction is required itself to satisfy and see that
the procedure by which resolution is carried through is legally correct and the
shareholders and creditors are not prejudiced. It is also the duty of the Court
that it had to see that the scheme is fair and equitable between the different
classes of shareholders. It is no doubt true that it is the duty of the Court
to protect the interests of the creditors and it must be safeguarded. Public
interest is also a paramount consideration.
18. In the instant
case, the Special Resolution has been passed in accordance with the Articles of
Association. Neither the creditors nor the shareholders are before the Court
objecting to passing off the resolution. Nothing is brought to the notice of
the Court that the Special Resolution affects the interests of the
shareholders. There is no material available on record that the Special
Resolution had caused any prejudice to any of the shareholders. In the company
petition, it is specifically stated that “the company has made an investment of
Rs. 115.30 lakhs in NMCL and owing to various concerns about the economic
viability of the project being put up by NMCL, the pace of the work in the said
project has slowed down. The company proposes to disinvest its shareholding
favouring the present promoters and/or their associates at a mutually
acceptable price. However, the company considers it prudent to align the
investment to reflect their true and fair value........the company proposes to
set off the above amount against Share Premium Account. With the said
adjustment, the Company’s accounting method in respect of investments would
fall in line with Accounting Standards of Institute of Chartered Accountants of
India and represent true shareholder value. The set off will not cause any
prejudice to the creditors of the Company. The reduction of capital does not
involve either result in the diminution of any liability in respect of unpaid
capital or the payment to any shareholder of any paid-up capital. No compromise
or arrangement is contemplated. There is no reduction in the value of the security,
which the creditors have in the Company.
19. The purposes
for which the Special Resolution was introduced and approved by the General
body thus are stated in clear and specific terms. The course adopted, in our
considered opinion, in no way causes any prejudice to the creditors of the
Company nor the interest of the shareholders is effected in any manner
whatsoever. It may be a prudent business decision about which we do not propose
to express any opinion.
20. In OCL India
Ltd. In re, the Orissa High Court speaking through Sri A. Pasayat, J., as his
lordship then was, while interpreting section 100 of the Act observed :
“Section 100 of the Act deals with
special resolution for reduction of share capital. In exercising its power the
court will have due regard to the interests of the creditors, who may consent
or object to the reduction. For a company to reduce its share capital in any
manner set out in section 100, it must have power given to it under its
articles to do so. Subject to confirmation by the court as required under
section 101 of the Act, a company may, if authorized by its articles, effect a
reduction of its share capital in any way which it may think fit by special
resolution, including in particular any of the following ways:
(1)
it may reduce or altogether
extinguish the liability on any paid or partly paid-up shares;
(2)
it may, by reducing the face value
of any shares or otherwise, cancel any paid-up share capital which is lost or
cancel it to the extent to which there is found deficiency in available assets;
(3)
it may pay off any paid up share
capital which is found to be in excess of the capital requirements of the
company.
Reduction
of the capital in the following ways is within the Act:
(1)
diminishing the nominal amount of
the shares so as to leave a less sum unpaid;
(2)
diminishing the nominal amount of
any shares by writing off or repaying paid up capital;
(3)
diminishing the nominal amount by
combining both (1) and (2);
(4)
diminishing the number of shares by
extinguishing the existing liability on certain shares, writing off or repaying
the whole amount paid up thereon, and cancelling them. The statute has not
prescribed the manner in which the reduction is to be carried out nor has it
prohibited any method of effecting that object-per Lord Herschell L.C. in
British American Trustee & Finance Corpn. v. Couper [1894] AC 397, at page
405, quoted with approval by Lord Reid in Westburn Sugar Refineries Ltd., In re
[1951] 1 ALL ER 881, at page 885, who added that “paying off capital can be
done otherwise than by payment of money”. Important though its task is to see
that the procedure, by which a resolution is carried through, is formally
correct and that creditors are not prejudiced, it has the further duty of
satisfying itself that the scheme is fair and equitable between the different
classes of shareholders. 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 interests of
shareholders may have to be considered but in the 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.
The court has first to be
satisfied that in the case of the creditors who had objected to the reduction
either their consent of the reduction has been obtained or their debts or
claims have been discharged or settled or secured. The court has the power to
dispense with this procedure if there is strong cause. Thus, in Meux’s Brewery
Co. Ltd., In re (1918-19) 1 All ER 1192; (1919) 1 Ch 28, debenture-holders
unsuccessfully objected that the proposed reduction would be prejudicial to their
security by enabling the company to pay dividends out of profits instead of
such profits being applied in making good the lost capital. No evidence was
adduced, however, to show what part of the lost capital was attributable to
circulating capital. The court can also correct immaterial errors in the
resolution; Willaire Systems Plc., In re [1987] BCLC 67.
Special circumstances which would
justify a direction for dispensing with creditors’ objections must be such as
would satisfy the court that so far as could be reasonably foreseen the
relevant creditors would not be adversely affected by the proposed reduction.
But if the creditors did actually appear and object, the court would dispense
with a creditor’s assent only if the company secured payment of his claim by
appropriating a sufficient sum. Lucania Temperance Billiad Halls (London) Ltd.,
In re [1965] 3 All ER 879; [1966] 36 Comp. Cas. 356; (1966) 1 Comp. LJ 334
(Ch.D.). “The power under section 102 is conferred on the court in order to
enable it to protect the interests of dissenting shareholders and even those
who do not appear. Before confirming a reduction the court must see that the
interests of the minority shareholders and of the creditors are adequately
protected and that there is no unfairness even though this is an internal
matter of the company”. Indian National Press (Indore) Ltd., In re [1989] 66
Comp. Cas. 387 (MP).”
21. It is
unnecessary to refer in detail to various orders passed by the Courts in India
approving/confirming such resolutions relating to reduction of share capital.
Nor is it necessary to refer to the orders in detail passed by the Supreme
Court of New South Wales Equity Division in the matter of Coca-Cola Amatil Ltd,
In re 1998 NSW Lexis 1786 and the decision of the High Court of Hong Kong
Special Administrative Region in Yoshiya International Corpn. Ltd. In re [2002]
1207 HKCU 1. The Hong Kong High Court observed that the Principles that the
Court will require to be satisfied for sanctioning a reduction of capital are
well established. Firstly, the shareholders should be treated equitably in the
proposed reduction; secondly, the shareholders in general meeting should have
had the proposals properly explained to them so that they could exercise an
informed judgment on the proposed reduction and thirdly, the creditors of the
company should be safeguarded.
22. This Court in
Company Petition No. 21 of 1998 dated 10-4-1998 allowed the application for
reducing the share capital on the ground that no diminution of liability in
respect of any paid up share capital was involved.
23. The Delhi High
Court in Medlife Com. Ltd. CP No. 165 of 2003, dated 31-3-2003, by its order
dated 31-6-2003 confirmed the resolution resolving the reduction of share
capital of the company on the ground that it does not involve either the
diminution of any liability in respect of unpaid capital or the payment to any
shareholder of any paid up capital.
24. It is
unnecessary to burden this order with various such pronouncements of various
Courts in the country.
25. For all the
aforesaid reasons, we find that the resolution of the General Body dated
26-9-2003 resolving to utilize an amount not exceeding Rs. 115.30 lakhs out of
the amount standing to the credit of Share Premium Account of the Company for
the adjustment against permanent loss in value of investment in shares of NMCL
as at 31-3-2003, does not suffer from any legal infirmity. The rights of the
shareholders and the creditors are not prejudicially affected. The resolution
in no manner prejudicially affects the public interest. We find no legal
impediment for granting the approval/confirmation by this Court.
26. For the
aforesaid reasons, the order under appeal is set aside. Company Petition No.
169 of 2003 is allowed as prayed for. No costs.
27. The appeal is accordingly allowed.
[2005] 57 scl 164 (ap)
High Court of Andhra Pradesh
V.V.S. Rao, J.
Company Petition No. 57 of 2004
September 3, 2004
|
Unless and until
there is diminution of share capital and corresponding reduction in share
premium account, no company can be allowed to write off or adjust loss
against share premium account |
Section 100, read with section
78, of the Companies Act, 1956 - Reduction of share capital - Special
resolution for - Whether share premium account or security premium account,
though treated as paid-up capital of company for a limited purpose, cannot be
treated as reserve fund and, therefore, a company cannot write off its losses
against share premium account unless it is permitted by law - Held, yes -
Whether unless and until there is diminution of share capital and corresponding
reduction in share premium account, no company can be allowed to write off or
adjust loss against share premium account - Held, yes - Whether company court
cannot mechanically approve minute of banking company to adjust its cumulative
losses against share premium account, especially when such company has already
appropriated all reserves for writing off its losses and bad debts - Held, yes
Facts
During the financial years 2001-02
and 2002-03, the petitioner-company having fully utilized the free reserves and
the statutory reserves for making provisions towards non-performing assets and
for writing off allegedly irrecoverable bad debts, proposed to utilize the
balance in the share premium account for making provisions towards bad and
doubtful debts/writting off irrecoverable debts as of 31-3-2004 and to reduce
the share capital. Accordingly, the annual general meeting of the company was
held and a resolution was passed. Thereafter, the petitioner-company filed the
petition under section 100 read with section 78 seeking approval and sanction
for the aforesaid adjustments.
Held
It is no
doubt true that in law a company can always reduce its capital if the same is
lost or unrepresented by available assets. In a case where banking company
writes off its losses and/or bad debts against statutory reserve, the same
would result in losing the capital. Only in such an event, there can be
reduction in capital. But action of the company in writing off the bad debts
against share premium account, if permissible, does not immediately result in
reduction of capital, and, hence, the same is not permissible under the law.
[Para 8]
Reserve is
created generally out of the profits earned by the company, whereas the share
premium account or securities premium account created under section 78 is not a
capital and has no characteristics of statutory reserve or capital reserve.
Therefore, there may be justification for any company to write off the losses
or bad debts against statutory reserve or capital reserve created out of
profits earned in yester years, but a company cannot be permitted to write off
its bad debts against share premium account. It would be illogical and unsound
business prudence to touch securities premium account to write off the bad
debts. A company can always carry the bad debts or losses to the balance sheet
to the next year and may decline to distribute dividend in future years till
the bad debts/losses are adjusted against future profits. [Para 9]
As per the
provisions of the Act, including sections 78 and 100 thereof, or section 203,
read with Schedule VI, a company cannot set off its loss or cumulative loss
against share premium account, because share premium account or security
premium account, though treated as paid-up capital of the company for a limited
purpose, namely, getting approval of the company court, cannot be treated as
the reserve fund, nor there is a concept like share premium account in future.
[Para 10]
In view of
the legal fiction introduced by section 78(1), share premium account is deemed
to be paid-up share capital for the purpose of sections 100 to 105. These are
mandatory provisions which have to be complied with by the company seeking to
reduce its share capital. While considering the application for reduction of
share capital including applications under sub-sections (1) and (2) of section
78, the Company Court has to apply the principles entrenched in section 100.
Merely because the company proposes to utilize the share premium account for
the purpose of writing off the losses, it does not mean that the company can
ignore the provisions of law in section 100(1). Be it noted, section 100(1)
enumerates the situations where the share capital can be reduced by the
company. Not only memorandum or articles of association of the company and the
provisions of the Act, but also the other provisions of relevant laws govern
the exercise of right of the company to reduce its share capital. Therefore, a
company cannot be permitted to resort to the provisions of section 78, read
with section 100 and write off its losses against share premium account unless
it is permitted by law. [Para 11]
In case of
banking company, as defined under the provisions of the Banking Companies
Regulations Act, 1949 and the Reserve Bank of India Act, 1934, the affairs of
the company are not mere contractual relations among the company and its
members. All the affairs of such company have public character, and any action
of the banking company which is derogatory to public interest gives rise to a
situation of distrust by public. The Company Court cannot mechanically approve
the minute of the banking company to adjust its cumulative loss against the
share premium account, especially when such company has already appropriated
all the reserves for writing off its losses and bad debts. If such course is
permitted by the Company Court, the same might, in a given situation, result in
manipulation of accounts of the company and artificially bolstering the book
value or market value of the stock of the company. [Para 12]
There cannot
be any dispute that the provisions as to reduction of share capital would apply
when the share premium account is to be utilized. Section 78(1) introduces a
fiction and the share premium account is deemed to be paid-up share capital of
the company. Reading section 78(1) and (2) together with sections 100, 101 and
102, it becomes clear that even when the share premium account is to be applied
either for the purpose of writing off the loss (in case such a course is
permissible) or otherwise, the procedure under sections 100(2) and 105 has to
be followed. Indeed, any misrepresentation before the Court for the purpose of
obtaining imprimatur of the Court is made a penal offence (under section 105)
with imprisonment for a term, which may extend to one year, or with fine or
with both. [Para 14]
The heading
of section 100 reads ‘Special resolution for reduction of share capital’.
Nonetheless, it is not only reduction of share capital as such, but any
decision taken for extinguishing or reducing the liability in respect of (i)
unpaid share capital; (ii) paid-up share capital which is lost and
unrepresented by assets or (iii) payment of paid-up share capital in excess of
requirement. As per sub-section (2), when a company resorts to a special
resolution under section 100(1), for any of the purposes: (i), (ii) or (iii) as
mentioned in sub-section (1) of section 100, such resolution is referred to as
a resolution for reducing share capital. The intention of the Legislature in
enacting such provision is obvious. [Para 15]
When
sections 78 and 100 speak of share capital whether unpaid, fully paid or
excessively issued share capital, the provisions refer to share capital of the
company and not the investment made by the company by subscribing to the share
capital of another company. Obviously, therefore, if the subscribed share
capital in another company is lost or not properly represented by assets, the
same cannot and should not fall under section 78, read with section 100. When
the company writes off its loss, or resorts to adjusting loss from the reserve
fund, there is no reduction of share capital as contemplated under section
100(2). The share premium account can only be utilized for any of the purposes
mentioned under section 78(2) or at the time of winding up of or for the
purpose of issuing bonus shares or dividend, whereas the reserve of the company
or the reserve fund, represented by assets, cannot be used for the purpose of
issuing dividend or bonus shares. However, in the event of capitalization of reserve,
it can always be used for issue of bonus shares. Be that as it is, unless and
until there is diminution of the share capital and corresponding reduction of
the share premium account, no company can be allowed to write off or adjust the
loss against share premium account. [Para 16]
Section 100
or any of the provisions in the Act does not confer any right on the company to
reduce its share capital. Such a right has to be conferred by the articles of
association. Section 100(1) makes it very clear that a company if so authorized
by its articles, may by special resolution, reduce its share capital in any of
the three ways and then approach the Company Court for confirmation of the
resolution for reducing share capital under section 102(1). Whether the reduction
of share capital - (a) by way of extinguishing or reducing the liability in
respect of unpaid share capital; (b) by way of either with or without
extinguishing or reducing liability, in respect of paid-up share capital which
is lost and unrepresented by assets; or (c) by way of payment of any paid-up
share capital which is in excess, either with or without extinguishing or
reducing liability, should have to be specifically authorized by articles of
the company. [Para 17]
In the
instant case, the articles of association of the petitioner-company did not
authorize or permit the petitioner-company, which was a banking company to
write off its losses or bad debts against share premium account. No provision
of law was brought to the notice of the High Court, which would authorize such
course of action. The Company (Transfer of Profits to Reserves) Rules, 1975,
the Companies (Declaration of Dividends out of Reserves) Rules, 1975, do not
permit a banking company to do so. Section 209, read with Schedule VI which
deals with books of account to be kept with by the company, do not permit the
company to treat the share premium account as reserve fund. [Para 18]
Section 29
of the Banking Regulation Act, 1949 Act deals with accounts and balance sheet
of a banking company. Section 29(3) lays down that notwithstanding that the
balance sheet of a banking company is required to be prepared in a form other
than the form set out in Part-I of Schedule VI to the 1956 Act, the requirement
of the Act relating to balance sheet and profit and loss account of a company,
insofar as the said balance sheet in form set out in Schedule VI is concerned,
is not inconsistent with the provisions of the Act. It only means that the
banking company incorporated under the Act has to modify its balance sheet and
profit and loss account in such a manner so as to comply with the provisions of
the 1949 Act. Section 17(1) of the 1949 Act requires a banking company
incorporated to create a reserve fund and to transfer 20 per cent of balance of
profit each year as disclosed in profit and loss account to such reserve fund.
Section 17 only authorizes a banking company to transfer 20 per cent of the
profit to reserve fund and it does not authorize a banking company to transfer
its share premium account to reserve fund. The reserve fund created under
section 17(1) of the 1949 Act, and the share premium account created as per
section 78(1) are different. Though section 78 introduces a legal fiction and
hypothetically deems the share premium as paid-up share capital of the company,
the legal fiction created by the statute must not be enlarged so as to enable
the banking company to transfer its share premium account to reserve fund as
required under section 17(1) of the 1949 Act. Indeed, it was not the case of the
petitioner-company that it had transferred the share premium account to reserve
fund as required under section 17(1) of the 1949 Act, and, therefore, reliance
placed on sections 17 and 29 of the 1949 Act was devoid of any merit and could
not be countenanced. [Para 20]
It is
well-settled that in interpreting a provision creating legal fiction, the Court
has to ascertain the purpose for which such fiction is created. The Court
should give full effect to such legal fiction. But, in so construing the fiction,
the Court cannot extend the legal fiction beyond the purpose for which it is
created. Therefore, the share premium account which is created by transferring
the sum equal to aggregate amount on the premium on the shares has to be deemed
as paid-up share capital of the company only for the purpose of section 100,
i.e., requiring the approval of the minute by the Company Court, and cannot be
extended any further, especially having regard to section 78(2). The
Legislature introduced the fiction treating the share premium account as
paid-up share capital of the company only for the purpose of section 100 and no
further. The share premium account has been treated always separate from the
reserve fund under the Act as well as the accounting procedures stipulated
under the Act. [Para 21]
Share
premium account in Indian Company Law is deemed to be paid up share capital
only for the purpose of sections 100 to 104 and the company cannot enlarge the
scope of deeming provision by appropriating share premium account for adjusting
the loss suffered by it. Unless and until the action of the company to apply
share premium account for any purpose, actually results in reduction of share
capital, the company cannot be permitted to apply share premium account for any
other purpose as per its ipse dixit. It was not the case of the
petitioner-company that by giving effect to the minute as passed by the company
it would result in reduction of share capital and that the authorized share
capital as well as paid-up share capital would remain the same and, therefore,
the share premium account would be utilized for the said purpose. [Para 25]
In the
Indian Company Law, the affairs of the company by and large are governed by
memorandum of association and articles of association insofar as they are not
ultra vires the provisions of the Act and other laws. Generally, the
administration and management of the company is entrusted by the general body
of the shareholders of the company to the duly constituted board of directors.
The board of directors is conferred with powers to deal with all matters and
only certain subjects like appointment of directors, giving of guarantees to
the others, issue of unsubscribed share capital and enhancing authorized
capital, reduction of share capital, scheme of arrangement or compromise with
other persons or company, amendment of memorandum of association or articles of
association, etc., are to be placed before the general body. The decision taken
by the general body in respect of these subjects is considered as final and has
to be respected. However, at least from 1913 onwards, the Company Law enforced
has provided safeguard to shareholders and other members of the company as well
as public at large who deal with the company. In matters of scheme of arrangement,
compromise, reduction of share capital, etc., law provides that a company has
to apply and get approval or sanction of the Company Court. While considering
scheme of arrangement for amalgamation or compromise or any other arrangement
or considering a minute for reduction of share capital, the law does not
envisage an automatic routine sanction by the Court. [Para 26]
It would be
a myth to assume that the shareholders resolution must be given effect to by
the Company Court whatever be consequences that might follow on implementation
of such minute. The power of the High Court to approve minute of reduction of
share capital includes the power to reject approval if such resolution is found
to be unconscionable, illegal or unjust to the class of the shareholders or the
creditors who may be voiceless minority shareholders or indifferently apathetic
low visibility shareholders or ill-informed consumers. It must not be forgotten
that a company is incorporated not just for making profits for distribution
among its shareholders. A company incorporated is a juristic person with
perpetual succession and it should also mould and take its decisions and
actions keeping in view the future of its shareholders, who at the relevant
time find place in the register of members, and the persons who might
subsequently purchase shares from the company or from shareholders of the
company. This becomes more relevant in the case of a listed company. A person,
it must be presumed, prefers to buy stock of a particular company having regard
to its fundamentals (assets, liabilities, performance and potential). While
doing so, a person necessarily looks to reserve fund, share premium
accumulation and all other liquid assets of the company apart from capital
assets of the company. If a company is allowed to eat into its share premium
account, which is deemed to be paid-up share capital for a limited purpose, the
same would weaken the foundation of the company and would be unfair to those
persons, who deal with company either as customers or depositors or creditors.
This is more relevant in the case of a banking company which is entirely
governed by the 1949 Act and the 1934 Act and various regulations promulgated
under various physical statutes. [Para 29]
In the
result, for the above reasons, the instant company petition was misconceived
and the minute of the meeting of the shareholders dated 24-12-2003 could not be
approved as it would be illegal and unfair and not authorized by law. Company
petition was, accordingly, dismissed.[Para 30]
Cases referred to
Hyderabad Industries Ltd. In re
2004 (3) ALD 832 (para 13), State of Maharashtra v. Narayana Rao Sham Rao
Deshmukh AIR 1985 SC 716 (para 21), Union of India v. Sampath Raj Dugar AIR
1992 SC 1417 (para 21), M. Venugopal v. Divisional Manager, LIC of India AIR
1994 SC 1343 (para 21), Coca-cola Amatil Ltd. 1998 NSW LEXIS 1786 (para 24),
Yoshiya International Corpn. Ltd. In re 2002 HKCU LEXIS 1601 (para 24), Drown
v. Gaumont-British Picture Corpn. Ltd. (1937) Ch. 402 (para 24), Hindustan
Lever Employees’ Union v. Hindustan Lever Ltd. 1995 Supp. (1) SCC 499 (para 27)
and Miheer H. Mafatlal v. Mafatlal Industries Ltd. [1997] 1 SCC 579 (para 28).
G.V. Suresh for the Petitioner.
Order
1. This petition is filed under section 100, read
with section 78 of the Companies Act, 1956 (for short, ‘the Act’). The
petitioner herein, namely, Global Trust Bank Limited (hereafter referred to as
‘GTBL’), seeks the following prayers:—
(A) The utilization of share premium for making
provisions for bad and doubtful debts/writing off irrecoverable bad debts as
approved by the special resolution set out in paragraph 13 with the
consequential changes in the accounts of the company be confirmed effective
31-3-2004.
(B) The requirement to add the words ‘and
reduced’ after the name of the company be dispensed with.
(C) To this end all enquiries and
directions necessary and proper be made and given.
(D) The
proposed Minute be approved; and
(E) Such further or other orders be
passed in the premises as the Court shall deem fit.
2. In a nutshell it is the case of petitioner
that during the financial year 2001-2002 it was compelled to write off bad
loans to the tune of Rs. 285.38 crores. During that year GTBL utilized general
reserve to a tune of Rs. 181.95 crores and contingency reserves of Rs. 20
crores for the financial year ended 31-3-2002. Again during the subsequent
financial year GTBL had to write off irrecoverable bad loans to the tune of Rs.
225 crores, which it met partially from accrued profits and partially from
statutory reserves which according to them stood at Rs. 467.05 crores,
including the share premium account of Rs. 130.19 crores. GTBL seeks imprimatur
of this Court for its strategy adopted to write off the loans.
3. GTBL is a Public Limited Company registered
under the Companies Act on 29-10-1993, having its Registered Office at
Secundrabad. It is a Banking Company governed by - in addition to the
provisions of the Companies Act; the provisions of the Banking Companies Regulations
Act, 1949 (BR Act) and Reserve Bank of India established under Reserve Bank of
India Act, 1934 (RBI Act), has the power to regulate the affairs and banking
operations of GTBL. It has authorized share capital of Rs. 650 crores divided
into 65,00,00,000 of equity share of Rs. 10 each out of which the paid up
capital is Rs. 1,21,35,90,000 divided into 12,13,59,000 of equity shares of Rs.
10 each. The shares of the company are listed on various stock exchanges,
namely, Ahmedabad, Coimbatore, Madras, Mumbai and National Stock Exchanges. As
stated in the petition during the financial years 2001-2002 and 2002-2003 GTBL
fully utilized the free reserves and statutory reserves amounting to Rs. 346.71
crores for making provisions towards Non-Performing Assets (NPAs) and for
writing off allegedly irrecoverable bad debts. The company states that it has
balance in the share premium account amounting to Rs. 1,29,44,25,000 as on
31-3-2003. Having exhausted all the free and statutory reserves, GTBL proposed
to utilize this balance in the share premium account for making provisions
towards bad and doubtful debts/writing off irrecoverable debts as of 31-3-2004.
4.
The company gives the following reasons for utilization of balance in share
premium account, which are as under :—
“(a) The Reserves & Surplus amount
includes the balances in the free and statutory reserve accounts and also share
premium account, which is not created out of profits but is created when the
shares of the Banking Company are issued at a premium.
(b) Right from the inception (i.e.
incorporation) of the Bank, the Bank has been consistently appropriating
profits by transferring to Reserves. The Bank had a Reserves strength of Rs.
467.05 crores by the end of Financial Year 2000-01. This includes balance in
Share Premium Account to the tune of Rs. 130.19 crs.
(c) In the year 2001-02, the Bank had a
high Capital Market exposure. The down swing in the Capital Markets at that
time badly affected the asset quality of the Bank, thereby compelling the Bank
to write off bad loans to the tune of Rs. 285.38 crores. To support the write
off, the Bank utilized General Reserve (Rs. 181.95 crores) and Contingency
Reserve (Rs. 20 crs.) for the financial year ended 31-3-2002.
(d) The financial year 2002-2003 was a
very stressful period for the Bank and it was trying to come out of the
challenges. Due to the increase in the Non-Performing Assets, on account of the
earlier year’s Capital Market exposure, the Bank had to write off irrecoverable
bad loans to the tune of Rs. 225 crores. The write off was met partially from
Operating Profits and partially from Statutory Reserves.
(e) By the financial year-end of March,
2004, the Bank anticipates increase in Non-Performing Assets pertaining to
earlier years which are irrecoverable in nature thereby requiring either 100
per cent provision or need to be written off from the books.
(f) The expected Profits for the
financial year 2003-2004 will not be sufficient to adhere to the provisioning
norms of RBI. It is also evident from the above that the Bank had exhausted all
the Reserves except the balance in the Share Premium Account. With an intention
of cleaning up its Balance Sheet and building a quality credit portfolio in the
future, the Bank has obtained the approval of the Members for utilizing the
balance in Share Premium Account for making provision towards Non-Performing
Assets and writing off of irrecoverable bad debts.”
5.
The Board of Directors at the meeting held on 22-11-2003 made such proposal and
the Tenth Annual General Meeting of the company which was convened on
24-12-2003 passed the resolution and notices were sent to shareholders under
section 173(2) of the Act along with an explanatory note. On the appointed
date, the shareholders passed resolutions as under :—
“Resolved that pursuant to section 78, read with section 100 and other
applicable provisions, if any, of the Companies Act, 1956, and subject to the
provisions of the Banking Regulation Act, 1949, the Articles of Association of
the Company, the confirmation/order of the Hon’ble High Court of Andhra Pradesh
and other appropriate authorities in this regard, and such other approvals,
permissions and sanctions as may be necessary, and subject to such conditions
and modifications as may be prescribed in granting such approvals, permissions,
which may be agreed to by the Board of Directors of the Company (hereinafter
referred to as ‘the Board’ which term shall include any committee(s) to which
the Board may delegate the powers of the Board including powers conferred by
these Resolutions) at its sole discretion, the consent of the Company be and is
hereby accorded for utilizing amount of Rs. 1,29,44,25,000 lying in the Share
Premium Account as on 31-3-2003 for making provisions towards bad and doubtful
debts/write off the irrecoverable debts and for the consequential reduction of
Share Premium to that extent with effect from 31-3-2004.
Resolved
further that for the purpose of giving effect to
the above, the Board be and is hereby authorized to give such directions as it may
think fit and proper, including directions for settling any questions or
difficulties that may arise and to do all acts, deeds, matters and things of
whatsoever nature as the Board in its absolute discretion consider necessary,
expedient and proper.
Resolved
further that the Board be and is hereby
authorized to delegate all or any of the powers herein conferred to any
Committee of Board to give effect to the resolution.” [Emphasis supplied]
6.
In the circumstances as above, GTBL approached this Court purportedly under
section 100, read with section 78 of the Act. The form of the Minute proposed
to be registered under section 103 is as under:—
An aggregate sum not exceeding
Rs. 1,29,44,25,000 drawn out of the Company’s share premium account as
permissible to be utilized for the purpose and be applied/adjusted for making
provisions for bad and doubtful debts/writing off irrecoverable bad debts as at
31-3-2004.
7.
This Court admitted the petition and directed the learned counsel for GTBL to
advertise the petition in Deccan Chronicle English daily and Andhra Jyoti
Telugu daily newspapers published from Hyderabad. Accordingly, the petition was
advertised and proof of service was produced before this Court on 10-5-2004.
The matter was listed for orders and it was heard at length on 14-6-2004,
16-6-2004 and 17-6-2004.
8.
It is no doubt true that in law a company can always reduce its capital if the
same is lost or unrepresented by available assets. In a case where banking
company writes off its losses and/or bad debts as against statutory reserve,
the same would result in losing the capital. Only in such an event, there can
be reduction of capital. But action of company in writing off the bad debts as
against share premium account, if permissible, does not immediately result in
reduction of capital, and hence the same is not permissible under law.
9.
Reserve is created generally out of the profits earned by the company, where as
the share premium account or securities premium account created under section 78
of the Act is not a capital and has no characteristics of statutory reserve or
reserve. Therefore, there may be justification for any company to write off the
losses or bad debts as against statutory reserve or capital reserve created out
of profits earned in yester years, but a company cannot be permitted to write
off its bad debts as against share premium account. It would be illogical and
unsound business prudence to touch securities premium account to write off the
bad debts. A company can always carry the bad debts or losses to the Balance
Sheet to the next year and may decline to distribute dividend in future years
till the bad debts/losses are adjusted against future profits.
10.
As per the provisions of the Companies Act, including sections 78 and 100
thereof, or section 203, read with Schedule VI, a company cannot set off its
loss or cumulative loss as against share premium account, because share premium
account or security premium account though treated as paid up capital of the
company for a limited purpose, namely, getting approval of the company court,
cannot be treated as the reserve fund, nor there is a concept like share
premium account in future. These principles are fundamental for considering
this petition for approval of the Minute as noticed hereinabove.
11.
In view of legal fiction introduced by section 78(1) of the Act, share premium
account is deemed to be paid up share capital for the purpose of sections 100
to 105. These are mandatory provisions which have to be complied with by the
company seeking to reduce its share capital. While considering the application
for reduction of share capital including applications under sections (1) and
(2) of section 78 of the Act, the Company Court has to apply the principles
entrenched in section 100. Merely because the company proposes to utilize the
share premium account for the purpose of writing of losses, it does not mean
that the company can ignore the provisions of law in section 100(1). Be it
noted section 100(1) enumerates the situations where the share capital can be
reduced by the company. While doing so not only memorandum or articles of
association of the company and provisions of the Companies Act, but also other
provisions of relevant laws govern the exercise of right of the company to
reduce its share capital. Therefore, a company cannot be permitted to resort to
the provisions of section 78, read with section 100 and write off its losses
against share premium account unless it is permitted by law.
12.
In case of banking company, as defined under provisions of BR Act, and RBI Act,
the affairs of the company are not mere contractual relations among the company
and its members. All the affairs of such company have public character, and any
action of the banking company which is derogatory to public interest gives rise
to a situation of distrust by public. The Company Court cannot mechanically
approve the Minute of the banking company to adjust its cumulative loss from
the share premium account, especially when such company has already appropriated
all the reserves for writing off its losses and bad debts. If such course is
permitted by the Company Court, the same might, in a given situation, result in
manipulation of accounts of the company and artificially bolstering the book
value or market value of the stock of the company.
13.Hyderabad
Industries Ltd. In re 2004 (3) ALD 832 the question for consideration was
whether a company can draw funds out of share premium account for the purpose
of utilizing the amount for applying/adjusting against permanent loss in value
of the investment. In that context, this Court analyzed the provisions of
sections 78 and 100 of the Act in paragraphs 10 to 13 of the judgment. Instead
of again redoing the same thing, it would be appropriate to incorporate those
passages in this judgment as the next four paragraphs of this judgment.
14. There cannot be any dispute that the provisions
as to reduction of share capital would apply when the share premium account is
to be utilized. Section 78(1) introduces a fiction and the share premium
account is deemed to be “paid-up share capital of the company”. Sections 100,
101, 102, 103, 104 and 105 deal with reduction of share capital and the
procedure to be adopted, when an application is made to the Company Court, for
confirming the resolution/minute of the Members of the company for reduction of
share capital. Reading section 78(1) and (2) together with sections 100, 101
and 102, it becomes clear that even when the share premium account is to be
applied either for the purpose of writing off the loss (in case such a course
is permissible) or otherwise, the procedure under sections 100 (2) and 105 has
to be followed. Indeed, any misrepresentation before the Court for the purpose
of obtaining imprimatur of the Court is made a penal offence (under section
105) with imprisonment for a term, which may extend to one year, or with fine
or with both. Keeping this in mind, section 100 be read which is as under :
“100. Special resolution for
reduction of share capital.—(1) Subject to confirmation by the Court, a company
limited by shares or a company limited by guarantee and having a share capital,
may, if so authorized by its articles, by special resolution , reduce its share
capital in any way; and in particular and without prejudice to the generality
of the foregoing power, may—
(a) extinguish or reduce
the liability on any of its shares in respect of share capital not paid-up;
(b) either with or
without extinguishing or reducing liability on any of its shares, cancel any
paid-up share capital which is lost, or is unrepresented by available assets;
or
(c) either with or
without extinguishing or reducing liability on any of its shares, pay of any
paid-up share capital which is in excess of the wants of the company;
and may, if and so far as is
necessary, alter its memorandum by reducing the amount of its share capital and
of its shares accordingly.
(2) A special resolution under
this section is in this Act referred to as ‘a resolution for reducing share
capital’.”
15. The heading of section 100 reads ‘Special
resolution for reduction of share capital’. Nonetheless, it is not only
reduction of share capital as such, but any decision taken for extinguishing or
reducing the liability in respect of (i) unpaid share capital; (ii) paid-up
share capital which is lost and unrepresented by assets or (iii) payment of
paid up share capital in excess of requirement. As per sub-section (2), when a
company resorts to a special resolution under section 100(1) of the Act, any of
the purposes (i), (ii) or (iii) as mentioned in sub-section (1) of section 100,
such resolution is referred to as ‘a resolution for reducing share capital’.
The intention of Legislature in enacting such provision is obvious. Take a
situation referable to section 100(1)(a), i.e., extinguishing liability in
respect of unpaid share capital. When the company issues shares to its members,
it may require the payment of face value of the shares or face value with
premium as determined by the company. The company may require the member to pay
face value or face value with premium at one time or on different calls
depending on exigencies or requirements for the capital. Nonetheless, when once
the authorized capital or part thereof is issued and subscribed, whether or not
fully paid, the issued share capital forms part of subscribed capital and for
all purposes it is the capital of the company. When the company decides to
extinguish unpaid shares, assuming that such unpaid shares were initially
issued for premium, in the event of the resolution of the company to cancel
unpaid shares to the extent of those shares cancelled, the share premium
account also gets reduced. Similar is the case in the event of cancellation of
paid-up share of capital when proportionate premium amount gets reduced or in the
event of payment by the company for the fully paid up share capital, again to
that extent there is reduction in the share premium account.
16. It must be noticed that when sections 78
and 100 of the Act speak of share capital whether unpaid, fully paid or
excessively issued share capital, the provisions refer to share capital of the
company and not the investment made by the company by subscribing to the share
capital of another company. Obviously, therefore, if the subscribed shares
capital in another company is lost or not properly represented by assets, the
same cannot and should not fall under section 78, read with section 100 of the
Act. When the company writes off its loss, or resorts to adjusting loss from
the reserve fund, there is no reduction of share capital as contemplated under
sub-section (2) of section 100 of the Act. The share premium account can only
be utilized for any of the purposes mentioned under section 78(2) of the Act or
at the time of winding up of or for the purpose of issuing bonus shares or
dividend, whereas the reserve of the company or the reserve fund, represented
by assets, cannot be used for the purpose of issuing dividend or bonus shares.
However, I must hasten to add that in the event of capitalization of reserve,
it can always be used for issue of bonus shares. Be that as it is, unless and
until there is diminution of the share capital and corresponding reduction of
the share premium account, no company can be allowed to write off or adjust the
loss against share premium account.
17. When can a company by a special resolution
resort to any of the purposes under sub-section (1) of section 100? Section 100
or any of the provisions in the Companies Act does not confer any right on the
company to reduce its share capital. Such a right has to be conferred by the
Articles of Association. Sub section (1) of section 100 makes it very clear
that a company if so authorized by its Articles, may by special resolution,
reduce its share capital in any of the three ways and then approach the Company
Court for confirmation of the resolution for reducing share capital under
section 102(1) of the Act. Whether the reduction of share capital - (a) by way
of extinguishing or reducing the liability in respect of unpaid share capital;
(b) by way of either with or without extinguishing or reducing liability, in
respect of paid-up share capital which is lost and unrepresented by assets; or
(c) by way of payment of any paid-up share capital which is in excess, either
with or without extinguishing or reducing liability, such course should have to
be specifically authorized by articles of the company.
18. I have perused the Articles of Association
of the company. They do not authorise or permit the petitioner company, which
is a banking company to write off its losses or bad debts against share premium
account. No provision of law is brought to the notice of this Court, which
would authorize such course of action. The Companies (Transfer of Profits to
Reserves) Rules, 1975, the Companies (Declaration of Dividends out of Reserves)
Rules, 1975, do not permit a banking company to do so. Section 209, read with
Schedule VI of the Act which deal with books of account to be kept with by the
company do not permit the company to treat the share premium account as reserve
fund. In Hyderabad Industries Ltd’s case (supra), this Court after referring to
‘Treatise on Company Law’ by Palmer (eighth edition), ‘Principles of Company
Law’ by H.A.J. Ford (1974), ‘Charlesworth and Cain’s Company Law’ (twelfth
edition) and relevant provisions of the Act, laid down as under :—
“The share premium account can be applied (i) for paying of bonus
shares issued to members as fully paid shares; or (ii) writing off preliminary expenses
or expenses of or the commission paid or discount allowed on, any issue of
shares or debentures of the Company; or (iii) providing for premium payable by
the Company on reduction of redeemable preference shares or of debentures.
According to palmer, the object of the provisions relating to share premium
account is to prevent dividends being paid out of premiums received on an issue
of shares and it is quasi-capital of company (See Palmer’s Company Law 24th
edn. pp.425 and 489). Therefore, when a share premium account is distributed
among the shareholders, it is to be regarded as if the Company is reducing its
share capital by paying off paid-up share capital. [See page 176 of
Charlesworth & Cain’s Company Law (Twelfth edition)]. Therefore, though share
premium account is considered as one of the types of capital or quasi-capital
of the Company, the share premium account cannot be equated as a reserve fund.
Be it noted that reserve fund or reserve surplus is generally utilized for
writing off the loss incurred by the Company. In that view of the matter, the
decisions cited by the learned Counsel for the petitioner referred to supra
have no relevance.”
19. Learned counsel for the petitioner placed
strong reliance on sections 17 and 29 of the BR Act in support of the
contention that it is always permissible for the banking company to write off
its losses or bad debts to treat the share premium account as reserve fund of
the company and therefore it is permissible for such company to write off its
losses as against reserve fund. This submission is wholly misconceived.
Sections 17 and 29 of the BR Act read as under :—
“17. Reserve Fund.—(1) Every banking company incorporated in India
shall create a reserve fund and shall, out of the balance of profit of each
year, as disclosed in the profit and loss account prepared under section 29 and
before any dividend is declared, transfer to the reserve fund a sum equivalent
to not less than twenty per cent of such profit.
(1A) Notwithstanding anything contained in sub-section (1), the
Central Government may, on the recommendation of the Reserve Bank and having
regard to the adequacy of the paid-up, capital and reserves of a banking
company in relation to its deposit liabilities, declare by order in writing
that the provisions of sub-section (1) shall not apply to the banking company
for such period as may be specified in the order:
Provided that no such order shall be made unless, at the time it
is made, the amount in the reserve fund under sub-section (1), together with
the amount in the share premium account is not less than the paid up capital of
the banking company.
(2) Where a banking company appropriates any sum from the reserve
fund or the share premium account, it shall, within twenty-one days from the
date of such appropriation, report the fact to the Reserve Bank, explaining the
circumstances relating to such appropriation:
Provided that the Reserve Bank may, in any particular case, extend
the said period of twenty-one days by such period as it thinks fit or condone
any delay in the making of such report.”
“29. Accounts and balance-sheet.—(1) At the expiration of each
calendar years or at the expiration of a period of twelve months ending with
such date as the Central Government may, by notification in the Official
Gazette, specify in this behalf, every banking company incorporated in India in
respect of all business transacted by it, and every banking company
incorporated outside India in respect of all business transacted through its
branches in India shall prepare with reference to that year or period, as the
case may be, a balance sheet and profit and loss account as on the last working
day of the year or the period, as the case may be, in the Forms set out in the
Third Schedule or as near thereto as circumstances admit:
Provided that with a view to facilitating the transition from one
period of accounting to another period of accounting under this sub-section,
the Central Government may by order published in the Official Gazette, make
such provisions as it considers necessary or expedient for the preparation of,
or for other matters relating to the balance-sheet or profit and loss account
in respect of the concerned year or period, as the case may be.
(2) The balance sheet and
profit and loss account shall be signed—
(a) in the case of a
banking company incorporated in India by the manager or the principal officer
of the company and where there are more than three Directors of the company, by
at least three of those Directors, or where there are not more than three
Directors, by all the Directors, and
(b) in the case of a
banking company incorporated outside India by the Manager or Agent of the
principal office of the company in India.
(3) Notwithstanding that the
balance-sheet of a banking company is under sub-section (1) required to be
prepared in a form other than the form set out in Part I of Schedule VI to the
Companies Act, 1956 (1 of 1956), the requirements of that Act relating to the
balance-sheet and profit and loss account of a company shall, insofar as they
are not inconsistent with this Act, apply to the balance-sheet or profit and
loss account, as the case may be, of a banking company.
(3A) Notwithstanding
anything to the contrary contained in sub-section (3) of section 210 of the
Companies Act, 1956 (1 of 1956), the period to which the profit and loss
account relates shall, in the case of a banking company, be the period ending
with the last working day of the year immediately preceding the year in which
the annual general meeting is held.
Explanation: In sub-section (3A) ‘Year’ means the year or, as the
case may be, the period referred to in sub-section (1).
(4) The Central Government
after giving not less than three months notice of its intention so to do by a
notification in the Official Gazette, may from time to time by a like
notification amend the Forms set out in the Third Schedule.”
20. Section 29 of the BR Act deals with
accounts and balance sheet of a banking company. Sub-section (3) of section 29
lays down that notwithstanding that the balance sheet of a banking company is
required to be prepared in a form other than the form set out in Part I of
Schedule VI to the Companies Act, the requirements of the Companies Act
relating to balance sheet and profit and loss account of a company, insofar as
the said balance sheet in form Schedule VI is not in consistent with the
provisions of the Act. It only means that the banking company incorporated
under the Companies Act has to modify its balance sheet and profit and loss
account in such a manner so as to comply with the provisions of the BR Act.
Section 17(1) of the BR Act requires a banking company incorporated to create a
reserve fund and to transfer 20 per cent of balance of profit each year as
disclosed in profit and loss account to such reserve fund. Section 17 only
authorize a banking company to transfer 20 per cent of the profit to reserve
fund and it does not authorize a banking company to transfer its share premium
account to reserve fund. The reserve fund created under section 17(1) of the BR
Act, and the share premium account created as per section 78(1) of the
Companies Act are different. Though section 78 introduces legal fiction and
hypothetically deems the share premium as a paid up share capital of the
company, the legal fiction created by Statute must not be enlarged so as to
enable the banking company to transfer its share premium account to reserve
fund as required under section 17(1) of the BR Act. Indeed, it is not the case
of the petitioner company that it has transferred the share premium account to
reserve fund as required under section 17(1) of the BR Act, and, therefore,
reliance placed on sections 17 and 29 of the BR Act is devoid of any merit and
cannot be countenanced.
21. It is well settled that in interpreting a
provision creating legal fiction, the Court has to ascertain the purpose for
which such fiction is created. The Court should give full effect to such legal
fiction. But, in so construing the fiction, the Court cannot extend the legal
fiction beyond the purpose for which it is created (See State of Maharashtra v.
Narayana Rao Sham Rao Deshmukh AIR 1985 SC 716, Union of India v. Sampath Raj
Dugar AIR 1992 SC 1417 and M.V. Venugopal v. Divisional Manager, LIC of India
AIR 1994 SC 1343. Therefore, the share premium account which is created by
transferring the sum equal to aggregate amount on the premiums on the shares
has to be deemed as paid up share capital of the company only for the purpose
of section 100 of the Act, i.e., requiring the approval of the Minute by the
Company Court, and cannot be extended any further, especially having regard to
sub-section (2) of section 78 of the Act. In my considered opinion, the
Legislature introduced the fiction treating the share premium account as paid
up share capital of the company only for the purpose of section 100 of the Act
and no further. The share premium account has been treated always separate from
the reserve fund under the Act as well as the accounting procedures stipulated
under the Act.
22. Learned counsel for the petitioner placed
reliance on two unreported orders and judgments of the High Court of Judicature
at Madras in Company Petition No. 21 of 2003, dated 28-2-2003 and in Company
Petition No. 202 of 2003, dt. 19-6-2003 in support of the contention that it is
permissible to set off losses against share premium account. These judgments
cannot be precedents for such proposition for the copies produced before this
Court only contain the approval of the Minute and the question did not crop up
before the High Court of Madras. Similar is the situation regarding the
unreported order and judgment of the High Court of Delhi in Company Petition
No. 165 of 2003, dt. 6-8-2003 on which petitioner’s counsel placed reliance.
Attention of this Court has also been invited to the unreported judgment of
this Court in Company petition No. 6 of 2004, dt. 26-3-2004 in M/s.
Synergies-Dooray Automative Limited. That was a case where the company resolved
to reduce issued, subscribed and paid up capital and there was no element of
using share premium account for writing off the loss. In that context, this
Court observed:
“As seen from the resolution of the Board of Directors, it was not
specifically resolved to write off the share premium account amount to Rs.
2,18,40,000 (Rupees Two Crore Eighteen Lakh Forty Thousand only) which capital
is lost and unpresented by assets, though in the resolution it is mentioned
that the reduction of paid up capital to Rs. 1,717.60 lacs containing
1,71,76,000 shareholders involves cancellation of paid up share capital which
is lost. However, the resolution passed by the EGM also contains a clause to
the effect that the share premium account which is lost and unrepresented by
assets be written off to that extent the formalities required under the provisions
have been complied with.”
23. Therefore, it was a clear case where the
company’s decision to treat large quantity of paid up shares as un-issued
shares would result in reduction of share capital as well as share premium
account. The same has no application to the facts in this case.
24. The decision of the Supreme Court of New
South Wales (Equity Division). In the matter of Coca-cola Amatil Ltd. 1998 SW
LEXIS 1786 (decision dt. 23-6-1998) and the
decision of High Court of the Hong Kong (Special Administrative Region) Yoshiya
International Corpn. Ltd. In re 2002 HKCU LEXIS 1601, (decision dt.
15-10-2002), have also been relied on by the learned counsel petitioner in
support of the contention that share premium account is a capital of the
company and therefore it is always permissible to adjust the loss suffered by
the company in the future as against the share premium account. In these two
judgments it was held that share premium account is in the nature of capital of
company. Yoshyiya International Corpn. Ltd.’s case (supra), the Extraordinary
General Meeting of Yoshiya International Corpn. Limited passed a special
resolution subject to capital reduction to reduce and cancel stipulated amount
standing to the credit of the share premium account. It was not the case of
writing off losses against share premium account. In the matter of Coca-cola
Amatil Ltd. (supra) the issue before the Court was confirmation of reduction of
capital by way of distribution from the share premium account and it is not the
case of reduction of share premium account for writing off losses or bad debts.
The Supreme Court of New South Wales Coca-cola Amatil Ltd. (supra) referred to
the decision in Drown v. Gaumont-British Picture Corpn. Ltd. [1937] Ch. 402. It
is apposite to quote the following passage from the said judgment, delivered by
Clauson, J.—
“Subject always to anything in the articles of association to the
contrary, there is nothing legally wrong, so far as I am aware, in a company
dividing among its shareholders a premium obtained on the issue of shares. The
premium from its very nature is not part of the capital paid up on the shares;
it is the surplus of the sum received in respect of the share over the amount
required to pay up the share to the extent to which it is treated by the
company as paid up. The capital paid up on the share must not be divided in the
dividend; but the premium is not capital paid-up on the share but a sum
received by the company in excess of the capital paid-up on the share; and the
principle that capital paid-up on the share must not be divided is in no way
infringed by distributing the premium in dividend.”
25. As already held supra, share premium
account in Indian Company Law is deemed to be paid up share capital only for the
purpose of sections 100 to 104 of the Act and the company cannot enlarge the
scope of deeming provision by appropriating share premium amount for adjusting
the loss suffered by it. As held by me in Hyderabad Industries Ltd.’s case
(supra), unless and until the action of the company to apply share premium
account for any purpose, actually results in reduction of share capital, the
company cannot be permitted to apply share premium account for any other
purpose as per its ipse dixit. It is not the case of the petitioner company
that by giving effect to the Minute as passed by the company would result in
reduction of share capital and that the authorized share capital as well as
paid up share capital remain the same and, therefore, the share premium account
would be utilized for the said purpose.
26. In Indian Company Law, the affairs of the
company by and large are governed by Memorandum of Association and Articles of
Association insofar as they are not ultra vires the provisions of the Companies
Act and other laws. Generally, the administration and management of the company
is entrusted by the General Body of the shareholders of the company to the duly
constituted Board of Directors. The Board of Directors is empowered with powers
to deal with all matters and only in respect of certain items like appointment
of Directors, giving of guarantees to the others, issue of un-subscribed share
capital and enhancing authorized capital, reduction of share capital, scheme of
arrangement or compromise with other persons or company, amendment of
Memorandum of Association or Articles of Association etc., are to be placed
before the General Body. The decision taken by the general body in respect of
these subjects is considered as final and has to be respected. However at least
from 1913 onwards, company law enforced in this country has provided safeguard
for the shareholders and other members of the company as well as public at
large who deal with the company. In matters of scheme of arrangement,
compromise, reduction of share capital etc., law provides that a company has to
apply and get approval or sanction of the Company Court. While considering
scheme of arrangement for amalgamation or compromise or any other arrangement
or considering a Minute for reduction of share capital does a law envisage an
automatic routine sanction by the Court ? The answer must be definitely in the
negative.
27. In Hindustan Lever Employees’ Union v.
Hindustan Lever Ltd. 1995 Supp. (1) SCC 499 a three-Judges Bench of the Supreme
Court (majority judgment by Justice Suhas C. Sen) considered the scope of
jurisdiction of the Court while considering scheme of amalgamation. The
following ratio decidendi emerges (See paras 73 to 77 of SCC).
“This is against public policy. In my judgment, what has been
expressly authorised by the statute cannot be struck down as being against the
public policy. A foreign company under the new economic policy of the
Government has been allowed to acquire controlling share of an Indian company.
. . .Nor do we think that “public interest” which is to be taken into account
as an element against approval of amalgamation would include a mere future
possibility of merger resulting in a situation where the interests of the
consumer might be adversely affected. If, however, in future the working of the
Company turns out to be against the interest of the consumers or the employees,
suitable corrective steps may be taken by appropriate authorities in accordance
with law.”
28. In Miheer H. Mafatlal v. Mafatlal
Industries Ltd. [1997] 1 SCC 579, the Supreme Court considered the scope of
jurisdiction of the Company Court, while sanctioning the scheme of amalgamation
as per the provisions of sections 391 and 393 of the Act. The law laid down by
the Supreme Court therein is applicable even to jurisdiction of this Court
while sanctioning/approving the Minute of the company for reduction of share
capital. It is apposite to quote the following :
“. . .On a conjoint reading of the relevant provisions of sections
391 and 393 it becomes at once clear that the Company Court which is called
upon to sanction such a scheme has not merely to go by the ipse dixit of the
majority of the shareholders or creditors or their respective classes who might
have voted in favour of the scheme by requisite majority but the Court has to
consider the pros and cons of the scheme with a view to finding out whether the
scheme is fair, just and reasonable and is not contrary to any provisions of
law and it does not violate any public policy. This is implicit in the very
concept of compromise or arrangement which is required to receive the
imprimatur of a court of law. No court of law would ever countenance any scheme
of compromise or arrangement arrived at between the parties and which might be
supported by the requisite majority if the Court finds that it is an
unconscionable or an illegal scheme or is otherwise unfair or unjust to the
class of shareholders or creditors for whom it is meant. ....It can be
postulated that even in case of such a scheme of compromise and arrangement put
up for sanction of a Company Court it will have to be seen whether the proposed
scheme is lawful and just and fair to the whole class of creditors or members
including the dissenting minority to whom it is offered for approval and which
has been approved by such class of persons with requisite majority vote.
[Emphasis supplied]
29. It would be a myth to assume that the
shareholders resolution must be given effect to by the Company Court whatever
be consequences that might follow on implementation of such Minute. The power
of this Court to approve Minute of reduction of share capital includes the
power to reject approval if such resolution is found to be unconscionable,
illegal or unjust to the class of the shareholders or the creditors who may be
voiceless minority shareholders or indifferently apathetic low visibility
shareholders or ill-informed consumers. It must not be forgotten that a company
is incorporated not just for making profits for distribution among its
shareholders. A company incorporated is a juristic person with perpetual
succession and it should also mould and take its decisions and actions keeping
in view the future of its shareholders, who are at the relevant time find place
in the register of members, and the persons who might subsequently purchase
shares from the company or from shareholders of the company. This becomes more
relevant in the case of a listed company. A person, it must be presumed;
prefers to buy stock of a particular company having regard to its fundamentals
(assets, liabilities, performance and potential). While doing so, a person
necessarily looks to reserve fund, share premium accumulation and all other
liquid assets of the company apart from capital assets of the company. If a
company is allowed to eat into its share premium account, which is deemed to be
paid up share capital for a limited purpose, in the considered opinion of this
Court, the same would weaken the fundamentals of the company and would be
unfair to those persons, who deal with company either as customers or
depositors or creditors. This is more relevant in the case of a banking company
which is entirely governed by the Banking Regulation Act and the Reserve Bank
of India Act and various regulations promulgated under various physical Statutes.
30. In the result, for the above reasons, this
Company petition is misconceived and the Minute of the Meeting of the
shareholders dated 24-12-2003 cannot be approved, as it would be illegal and
unfair and not authorized by law. Company petition is accordingly dismissed.