SECTION 169 –173
Extraordinary
general meeting
[1994]
80 COMP. CAS. 693 (MAD)
HIGH COURT OF MADRAS
v.
Venkateswara Solvent Extraction (P.) Ltd.
LAKSHMANAN
J.
Company Application No. 602 of
1992 in
Company Petition No. 126 of 1989
A.K.
Mylsamy for the applicant.
A.C.
Muthanna, S. Sandurkar, N.S. Nandahumar, R.L. Narayanan and M. Subramaniam for
the other respondents.
Lakshmanan
J.—The first
petitioner, S. Varadarajan, in the main company petition is the applicant in
Company Application No. 602 of 1992. He filed the above application for an
order of interim injunction restraining the
second respondent, M. Sekaran, from holding the extraordinary general meeting
on April 23, 1992, or any other adjourned date pending disposal of the main
company petition.
This application was
opposed by all the respondents. Elaborate arguments were heard by me on April
21, 1992. Since the meeting was to be held on April 23, 1992, at 4 p.m. and
having regard to the urgency of the matter, I passed an interim order on April
22, 1992, which is reproduced as under:
"Elaborate and lengthy
arguments were advanced by counsel for the applicant as well as counsel for the
respective respondents and very many decisions have been referred to in respect
of the respective contentions.
Since the meeting is to be
held on April 23, 1992, at 4 p.m. it will not be possible for this court for
want of time to pronounce final orders in the above application.
Hence, having regard to the
urgency of the matter and bearing in mind the interest of all parties the
following interim order is passed subject to the ultimate final orders in the
above matter.
The extraordinary general
body meeting to be held on April 23, 1992, pursuant to the notice dated March
28, 1992, will go on and resolutions, if any, passed in the said meeting will
not be implemented and given effect to.
This above order is subject
to final orders in the above application".
The applicant herein and
four others have filed the main company petition under sections 397 and 398 of
the Indian Companies Act, 1956, against the second respondent and his
associates for mismanagement and oppression of the affairs of the first
respondent-company. While the main company petition was pending before this
court, petitioners Nos. 2 to 5 in Company Petition No. 126 of 1989 have sold
their shares to the second respondent. The applicant's counsel has also
received a communication from petitioners Nos. 2 to 5 stating that they are not
interested in prosecuting the main company petition. Hence the applicant alone
has now taken out the present application.
The second respondent,
Sekaran, was appointed as the managing director of the first respondent-company
for a period of three years and his office as managing director came to an end
with effect from September 1, 1990. Thereafter the board of directors of the first respondent
has duly appointed at a meeting of the board held on December 20, 1991, the
third respondent as the managing director of the company (viz., M. Durai Raj).
According to the applicant, the company is being run by the third and fifth
respondents as managing director and wholetime director of the company
respectively. While so, the second respondent has lodged a requisition on
February 8, 1992, under section 169 of the Companies Act calling upon the
company to convene an extraordinary general meeting. Another notice dated March
28, 1992, received by the applicant from the second respondent mentions that he
is convening the extraordinary general meeting since the company did not comply
with his demand as per letter dated February 8, 1992. The convening of the said
meeting is challenged by the applicant herein. The following are the grounds of
challenge:
(a) The meeting convened by the second
respondent on April 23, 1992, is not in order and the same is in violation of
the mandatory provisions of section 169 of the Act.
(b) As per section 169 of the Act, the
requisitionist must lodge the necessary resolution with the company. The board
must convene the meeting within 21 days and if the board of directors of the
company fail to convene the extraordinary general meeting within 21 days from
the date of lodgment of the said requisition, then the requisitionists them
selves within 45 days can convene the extraordinary general meeting.
(c) The notice sent by the second
respondent convening the extra ordinary general meeting on April 23, 1992, is
not valid since the notice itself relies on the earlier requisition dated
February 8, 1992, which does not contain any agenda.
(d) The second respondent cannot convene
the meeting of his own without complying with the mandatory provisions of
section 169 of the Act.
(e) The present notice includes various
items of business not listed in the earlier requisition lodged by the second
respondent with the company.
(f) Section 284 of the Act has not been complied with by the second respondent since he wanted to remove the third respondent as the managing director of the company and he was also not given any opportunity to show cause about the receipt of the requisition from the second respondent.
Thus,
Mr. A.K. Mylsamy, learned counsel appearing for the applicant, contends that
looking from any point of view the notice convening the extraordinary general
meeting by the second respondent on April 23, 1992, to consider various items
of business as set out in the said notice is illegal and opposed to the
mandatory provisions of the Act. Therefore he prays that an injunction order
should be issued restraining the second respondent and his associates from
holding an extraordinary general meeting on April 23, 1992, pursuant to the
notice dated March 28, 1992, or any other adjourned date pending disposal of
the main company petition.
The
second respondent, M. Sekaran, filed a detailed counter-affidavit. He is
represented by Mr. A.C. Muthanna, learned senior advocate appearing on behalf
of Mr. S. Sandurkar. The main defence raised by the second respondent in his
counter-affidavit at the time of hearing are :
(1) The applicant has no locus standi to
interfere in the requisition meeting convened by the second respondent. As on
date the applicant is neither a director of the company nor is he empowered to
represent the first respondent-company. Hence the present application is misconceived.
(2) The present application cannot be
maintained in this company petition, but only by way of separate suit and as
the main company petition is not maintainable, this application is also not
sustainable.
(3) The conduct of the applicant clearly
brings out the collusion between the applicant and the third and fifth
respondents-directors. The present application has been presented in collusion
with them.
(4) The applicant is holding only 3.5
per cent, of the paid up share capital of the company. Therefore, such a
minority shareholder cannot interfere with the extraordinary general meeting of
the members convened by the second respondent holding nearly 62 per cent, of
the paid-up capital of the respondent-company, in his own capacity and along
with his friends. This is a clear case of the minority oppressing the majority.
(5) The purchase of shares by the second
respondent to seek control of the respondent cannot constitute acts of
oppression. The requisition deposited by the second respondent is in accordance
with the provisions of law. As required by the law the requisition clearly sets
out the matters for consideration of which the meeting is convened. The
allegation that as per section 169 of the Act, the requisitionist must lodge
the necessary resolution with the company is misconceived.
(6) Section 284 of the Act has no
application to any of the matters to be considered at the said requisition
meeting, as there is no proposal to remove any director. In any event, the
present applicant has no locus standi to raise any of the alleged objections
which is purely within the domain of the board and the respondent-company.
(7) The requisition notice has been
properly lodged and the matters to be considered have been properly set out
therein.
(8) Every shareholder of the company has
the right to call an extraordinary general meeting in accordance with the
provisions of the Act.
(9) Since the board of the
respondent-company did not even consider the requisition and it failed and neglected
to take steps to convene the requisition meeting, the requisitionists
themselves have every right to convene this meeting as per the provisions of
law.
Mr.
Subramaniam, learned counsel appearing on behalf of Mr. S. Sandurkar, learned
counsel for the respondents Nos. 3, 6 and 7, has also raised the following
submissions at the time of hearing:
(1) The
applicant has no locus standi to file this application.
(2) The
fundamental requisites under Order 39, rule 1 have not been satisfied.
(3) There
is no violation of section 169 of the Act.
According to Mr.
Subramaniam, there is a distinction between sections 169 and 172 of the Act.
Under section 172 of the Act the statement of the business to be transacted
must be given whereas under section 169, it is enough if the matters are
mentioned. There is no further requirement. It is only when the notice under
section 172 is sent, the details are necessary. Even if the notice contains
additional matters to be considered it is for the general body to decide on the
consideration of these matters. The notice is not invalid on that score. The
word "agenda" is not used anywhere in the Act "Agenda"
means the business to be transacted at the meeting. This has been mentioned in
the requisition and the notice.
(4) In any event, this is a new cause of
action and cannot be agitated by way of an interlocutary application instead of
a separate suit. The meeting by the requisitionists cannot be injuncted as long
as there is a valid requisition.
(5) Section 284 does not apply to the
removal of the managing director. Only the person concerned can question the
resolution. The matter is one of internal management, and the court should not
ordinarily interfere in such matters.
Mr. R.L. Narayanan,
learned counsel appearing for the respondents Nos. 6 and 7, has adopted the
arguments of the other learned counsel appearing for all other respondents.
In
the light of the rival contentions urged by learned counsel for both the sides,
the following five crucial points arise for consideration:
(1) Whether the notice sent on March 28,
1992, requisitioning the extraordinary general meeting is valid or not and
whether the notice of the extraordinary general meeting dated March 28, 1992,
conforms to the requirements of the statute or not ;
(2) Whether the requirements of section
173(2) should be satisfied where the requisitionists issue the notice of
extraordinary general meeting ;
(3) Whether the requirements of section
284 require to be satisfied in the present case ;
(4) Whether the petitioner has locus
standi to maintain the present application for injunction ;
(5) Whether
the petitioner is entitled for an order of injunction as prayed for.
In order to
appreciate the above points, it is necessary to refer to the provisions of
sections 169, 172, 173 and 284 of the Companies Act. The said sections run as
follows:
"169. Calling of
extraordinary general meeting on requisition,--(1) The board of directors of a
company shall, on the requisition of such number of members of the company as
is specified in sub-section (4), forthwith proceed duly to call an
extraordinary general meeting of the company.
(2)
The requisition shall set out the matters for the consideration of which the meeting
is to be called, shall be signed by the requisitionists and shall be deposited
at the registered office of the company.
(3)
The requisition may consist of several documents in like form, each signed by
one or more requisitionists.
(4)
The number of members entitled to requisition a meeting in regard to any matter
shall be—
(a) in the case of a company having a share
capital, such number of them as hold at the date of the deposit of the
requisition not less than one-tenth of such of the paid up capital of the
company as at that date carries the right of voting in regard to that matter ;
(b) in the case of a company not having a share
capital, such number of them as have at the date of deposit of the requisition
not less than one-tenth of the total voting power of all the members having at
the said date a right to vote in regard to that matter.
(5)
Where two or more distinct matters are specified in the requisition, the
provisions of sub-section (4) shall apply separately in regard to each such
matter ; and the requisition shall accordingly be valid only in respect of
those matters in regard to which the condition specified in that sub-section is
fulfilled.
(6)
If the board does not, within twenty-one days from the date of the deposit of a
valid requisition in regard to any matters, proceed duly to call a meeting for
the consideration of those matters on a day not later than forty-five days from
the date of the deposit of the requisition, the meeting may be called—
(a) by
the requisitionists themselves ;
(b) in the case of a company having a share
capital, by such of the requisitionists as represent either a majority in value
of the paid- up share capital held by all of them or not less than one-tenth of
such of the paid-up share capital of the company, as is referred to in clause
(a) of sub-section (4) whichever is less ; or
(c) in
the case of a company not having a share capital, by such of the
requisitionists as represent not less than one-tenth of the total voting power
of all the members of the company referred to in clause (b) of sub-section (4).
Explanation.—For the
purpose of this sub-section, the board shall, in the case of a meeting at which
a resolution is to be proposed as a special resolution, be deemed not to have
duly convened the meeting if they do not give such notice thereof as is
required by sub-section (2) of section 189.
(7) A meeting called
under sub-section (6) by the requisitionists or any of them—
(a) shall be called in the same manner, as
nearly as possible as that in which meetings are to be called by the board ;
but
(b) shall not be held after the expiration of
three months from the date of the deposit of the requisition.
Explanation.—Nothing
in clause (b) shall be deemed to prevent a meeting duly commenced before the
expiry of the period of three months aforesaid, from adjourning to some day
after the expiry of that period.
(8)
Where two or more persons hold any shares or interest in a company jointly, a
requisition, or a notice calling a meeting, signed by one or some only of them
shall, for the purposes of this section, have the same force and effect as if
it had been signed by all of them.
(9)
Any reasonable expenses incurred by the requisitionists by reason of the
failure Of the board duly to call a meeting shall be repaid to the
requisitionists by the company ; any sum so repaid shall be retained by the
company out of any sums due or to become due from the company by way of fees or
other remuneration for their services to such of the directors as were in
default".
"172. Contents
and manner of service of notice and persons on whom it is to be serued.-(1)
Every notice of meeting of a company shall specify the place and the day and
hour of the meeting, and shall contain a statement of the business to be
transacted thereat.
(2) Notice of every
meeting of the company shall be given—
(i) to every member of the company, in any
manner authorised by sub-sections (1) to (4) of section 53 ;
(ii) to the persons entitled to a share in
consequence of the death or insolvency of a member, by sending it through post
in a prepaid letter addressed to them by name, or by the title of
representatives of the deceased, or assignees of the insolvent, or by any like
description, at the address, if any, in India supplied for the purpose by the
persons claiming to be so entitled, or until such an address has been supplied,
by giving the notice in any manner in which it might have been given if the
death or insolvency had not occurred ; and
(iii) to the auditor or auditors for the time being
of the company in any manner authorised by section 53 in the case of any member
or members of the company:
Provided that where
the notice of a meeting is given by advertising the same in a newspaper
circulating in the neighbourhood of the registered office of the company under
sub-section (3) of section 53, the statement of material facts referred to in
section 173 need not be annexed to the notice as required by that section but
it shall be mentioned in the advertisement that the statement has been forwarded
to the members of the company.
(3)
The accidental omission to give notice, 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".
"173.
Explanatory statement to be annexed to notice.-(1) For the purposes of this
section—
(a) in the case of an annual general meeting,
all business to be transacted at the meeting shall be deemed special, with the
exception of business relating to (i) the consideration of the accounts, balance-sheet
and the reports of the board of directors and auditors, (ii) the declaration of
dividend, (iii) the appointment of directors in the place of those retiring,
and (iv) the appointment of, and the fixing of the remuneration of, the
auditors, and
(b) in
the case of any other meeting all business shall be deemed special.
(2)
Where any items of business to be transacted at the meeting are deemed to be
special as aforesaid, there shall be annexed to the notice of the meeting a
statement setting out all material facts concerning each such item of business,
including in particular (the nature of the concern or interest), if any,
therein of every director, and the manager, if any:
Provided that where
any item of special business as aforesaid to be transacted at a meeting of the
company relates to, or affects, any other company, the extent of shareholding
interest in that other company of every director and the manager, if any, of
the first mentioned company shall also be set out in the statement if the extent
of such shareholding interest is not less than twenty per cent, of the paid-up
share capital of that other company.
(3) Where any item of business consists of the
according of approval to any document by the meeting, the time and place where
the document can be inspected shall be specified in the statement
aforesaid".
"284.Removal
of directors-(1) A company may, by ordinary resolution, remove a director (not
being a director appointed by the Central Government in pursuance of section
408) before the expiry of his period of office:
Provided that this sub-section shall not, in
the case of a private company, authorise the removal of a director holding
office for life on the 1st day of April, 1952, whether or not he is subject to
retirement under an age limit by virtue of the articles or otherwise:
Provided further that nothing contained in this
sub-section shall apply where the company has availed itself of the option
given to it under section 265 to appoint not less than two-thirds of the total
number of directors according to the principle of proportional representation.
(2) Special notice shall be
required of any resolution to remove a director under this section, or to
appoint somebody instead of a director so removed at the meeting at which he is
removed.
(3) On receipt of notice of a resolution to remove a director under
this section, the company shall forthwith send a copy thereof to the director
concerned, and the director (whether or not he is a member of the company)
shall be entitled to be heard on the resolution at the meeting.
(4) Where notice is given of a resolution to remove a director under
this section and the director concerned makes with respect thereto
representations in writing to the company (not exceeding a reasonable length)
and requests their notification to members of the company, the company shall,
unless the representations are received by it too late for it to do so,--
(a) in any notice of the resolution given to members of the company
state the fact of the representations having been made ; and
(b) send a copy of the representations to every member of the company
to whom notice of the meeting is sent (whether before or after receipt of the
representations by the company) ;
and if a copy of the representations is not
sent as aforesaid because they were received too late or because of the
company's default, the director may (without prejudice to his right to be heard
orally) require that the representations shall be read out at the meeting:
Provided that copies of the representations
need not be sent out and the representations need not be read out at the
meeting if, on the application either of the company or of any other person who
claims to be aggrieved, the Company Law Board is satisfied that the rights
conferred by this sub-section are being abused to secure needless publicity for
defamatory matter ; and the Company Law Board may order the company's costs of the application to be
paid in whole or in part by the director notwithstanding that he is not a party
to it.
(5) A vacancy created by the removal of a
director under this section may, if he had been appointed by the company in
general meeting or by the board in pursuance of section 262, be filled by the
appointment of another director in his stead by the meeting at which he is
removed, provided special notice of the intended appointment has been given
under sub-section (2).
A director so
appointed shall hold office until the date up to which his predecessor would
have held office if he had not been removed as aforesaid.
(6) If the vacancy is not filled under
sub-section (5), it may be filled as a casual vacancy in accordance with the
provisions, so far as they may be applicable, of section 262, and all the
provisions of that section shall apply accordingly:
Provided that the
director who was removed from office shall not be reappointed as a director by
the board of directors.
(7) Nothing in this
section shall be taken—
(a) as depriving a person removed thereunder of
any compensation or damages payable to him in respect of the termination of his
appointment as director or of any appointment terminating with that as director
; or
(b) as derogating from any power to remove a
director which may exist apart from this section".
It
is also necessary for me to refer to the contents of the notice of requisition
dated February 8, 1992, and the notice of the extraordinary general body
meeting dated March 28, 1992 :
From
M.
Sekaran,
Managing
Director,
Venkateswara
Solvent Extraction (Pvt.) Ltd.,
Pudukottai
Road, Annavasal, Pudukkottai Dist.,
Phone:
47 Extn./55 per./48 R.H.
Dated February 8, 1992.
To
Venkateswara
Solvent Extraction (Pvt.) Ltd.,
Pudukottai
Road,
Annavasal,
Pudukkottai
Dist.
Dear
Sirs,
Sub:
Extraordinary general meeting—Request to convene the extraordinary general meeting
under section 169 of the Companies Act, 1956.
I
am having 49.2 per cent, shareholding in our company and I request to convene
the extraordinary general meeting immediately to fill the vacancy in our board
and elect proper managing director for our company.
Thanking
you,
Yours faithfully,
(Sd.) M. Sekaran.
C.
Ct. All directors,
The
Registrar of Companies,
Sastri
Bhavan,
Haddows
Road,
Madras.
Venkateswara Solvent Extraction
Pvt. Ltd.,
16, K.M. Pudukkottai Road,
Annavasal-622 101,
Dated March 28, 1992. From
M.
Sekaran,
No.
30, Agraharam,
Varaganneri,
Trichy-620
008.
To
All
shareholders,
Venkateswara
Solvent Extraction P. Ltd.,
Pudukkottai
Road,
Annavasal.
An
extraordinary general meeting of the shareholders of the company was requisitioned
by the undersigned as per the provisions of section 169 of the Companies Act,
1956, by a requisition dated February 8, 1992.
Although
the said requisition was deposited with the company on February 8, 1992, the
board of directors of the company have not called for a meeting of the
shareholders in the manner contemplated under the said section.
Hence,
the undersigned requisitionist is issuing this notice to convene the
extraordinary general meeting of the members of the company on Thursday the
23rd April, 1992 at 4 p.m. at No. 1, South St., Annavasal, Pudukkottai, to
consider and transact the following business.
1. To elect a director to fill the vacancy on the
board due to death of A.A.M. Ismail by passing the following resolution as
ordinary resolution:
"Resolved
that Mr. K. Palaniandi Pillai be and is hereby elected as director of the
company liable to retire by rotation".
2. To elect a director to fill the vacancy on the
board due to death of Mr. P.R. Muthiah by passing the following resolution as ordinary
resolution:
"Resolved
that Mr. K. Kandaswami Pillai be and is hereby elected as director of the
company liable to retire by rotation".
3. To elect a director to fill the vacancy on the
board due to the resignation of Mr. N.M.A. Jamal Mohideen by passing the
following resolution as ordinary resolution:
"Resolved
that Mr. K. Natesan Pillai be and is hereby elected as director of the company
liable to retire by rotation".
4. To remove Mr. K. Dorairaj from the office of the
company by passing the following resolution as a special resolution:
"Resolved
that Mr. M. Dorairaj, who is appointed as managing director by the board on
December 20, 1991, be and is hereby removed as the managing director".
Immediately
after conclusion of the above meeting, a meeting of the board of directors will
be held at the same place.
Date
: 28-3-1992. (Sd.)...................................................
Note :
1. A member entitled to attend and vote at the meeting
is entitled to appoint a proxy. The proxy need not be a member of the company.
2. The proxy should be lodged at the registered office of the company
not later than 48 hours of the time of commencement of the meeting.
3. The explanatory
statement in regard to business under items 1 to 3 is annexed.
(Sd.)........................
Requisitionist.
Explanatory statement as
required under section 173 of the Companies Act, 1956.
Items (1) to (3) of the
agenda:
The directors referred to under
items (1) to (3) were on the board of the company as first directors. Over the
years Mr. P.R. Muthiah and Mr. A.A. M. Ismail died while they were holding
office of director. Mr. N.M.A. Jamal Mohideen resigned from the board. However,
the said vacancies on the board were not filled up. Hence this meeting is
requisitioned to consider the following names who have been proposed to the
office of director by one of the shareholders, i.e, appointment of (a)Mr. K.P.
Palaniandi Pillai, age 65, in place of vacancy under item (1); (b) Mr.
K.Kandaswami Pillai, age 52, in the place of vacancy under item (2); (c) Mr. K.
Natesan Pillai, age 47, in the place of vacancy under item (3). Each of them
who have consented to be director are businessmen and traders in rice and
allied products, which are raw materials for the company. Hence it is felt that
their association with the company would be of immense benefit to the company.
Each of the above resolutions is recommended for approval by the members.
The above directors are
related to M. Sekaran, director of the company. Item 4:
The appointment of Mr. M.
Dorairaj was made as managing director at the board meeting held on December
20, 1991, when the company petition was pending. This meeting was allegedly
convened pursuant to order of the hon'ble court at Madras on December 5, 1991
in C.A.No. 2356 of 1991 in C. P. No. 126 of 1989 restraining Mr. M. Sekaran,
managing director and director. However, the hon'ble court was pleased to
modify its order on December 20, 1991, whereby Mr. M. Sekaran was allowed to
function as a director.
Thereafter, the hon'ble
court heard the arguments on both sides and dismissed the said application on
January 30, 1992. Consequently, the injunction order was also vacated.
It
is noticed that Mr. M. Dorairaj is in active collusion with V. Varadha-rajan,
the first petitioner in C.P.No. 126 of 1989. He also parted with confidential
information relating to the company to the first petitioner. He has thus
created a situation as above. Therefore, Mr. M. Dorairaj has not acted in the
best interests of the company. Hence, it is proposed to remove him from the
office of managing director by passing the special resolution placed on the
agenda under this item.
(Sd...........................)
Requisitionist.
Place : Trichy
Date
: 28-3-1992.
It
is clear from the requisition dated February 8, 1992, sent by Mr. Sekaran
(second respondent) that the extraordinary general meeting is to be called for
the consideration of the following matters :
(1) To
fill vacancies in the board of directors of the company.
(2) To
elect a proper managing director for the company.
It
is also the claim of the second respondent that he has got the numerical
strength to requisition the extraordinary general meeting.
Most
of the legal controversies between the parties which arise for consideration in
this case have been settled by the highest court of the land in the case of LIC
of India v. Escorts Ltd. [1986] 59 Comp Cas 548.
A
shareholder of a company possessing the numerical strength as required by Act
has the right to requisition an extraordinary general meeting. Such a
shareholder cannot be restrained by injunction from calling the meeting and he
is not bound to disclose the reasons for the resolutions proposed at the
meeting. Nor are the reasons for the resolutions subject to judicial review.
Though section 169 uses the expression "such number of members of the
company" in the plural, yet the requirements of the provisions would be
satisfied even if one member holding the 'requisite number of shares or voting
rights makes the requisition. It is also well settled that words in the plural
include the singular.
As
already stated by me the requisition dated February 8,1992, clearly mentions
the purpose for which the extraordinary general meeting is to be called.
Therefore it has to be held that the requisition dated February 8, 1992, made
by the second respondent is in strict conformity with the statutory
requirements of section 169 of the Act.
The notice of the meeting
by the requisitionists issued on March 28, 1992, to all shareholders has been
issued because the company did not call the extraordinary general meeting
within 21 days from February 8, 1992 (date of deposit of the requisition) and
therefore the second respondent himself called the extraordinary general
meeting under the notice dated March 28, 1992, and the said meeting was
convened on April 23, 1992, at 4. p.m. at No. 1, South Street, Annavasal,
Pudukkottai. It is significant to notice that the aforesaid notice dated March
28, 1992, clearly sets out the business proposed to be transacted at the
extraordinary general meeting convened on April 23, 1992. Hence, the notice
dated March 28, 1992, has been issued in accordance with sub-section (6) of
section 169. The meeting was convened on April 23, 1992, which is well within
the period of three months from February 8, 1992, that is the date of deposit
of requisition.
The apex court in LIC of
India v. Escorts Ltd. [1986] 59 Comp Cas 548 had laid down the following legal
proposition while construing the scope of section 173(2) of the Act (at page
636):
"Thus we see that
every shareholder of a company has the right, subject to statutorily prescribed
procedural and numerical requirements, to call an extraordinary general meeting
in accordance with the provisions of the Companies Act. He cannot be restrained
from calling a meeting and he is not bound to disclose the reasons for the
resolutions proposed to be moved at the meeting. Nor are the reasons for the
resolutions subject to judicial review. It is true that under section 173(2) of
the Companies Act, there shall be annexed to the notice of the meeting a
statement setting out all material facts concerning each item of business to be
transacted at the meeting including, in particular, the nature of the concern
or the interest, if any, therein, of every director, the managing agent, if
any, the secretaries and treasurers, if any, and the manager, if any. This is a
duty cast on the management to disclose, in an explanatory note, all material
facts relating to the resolution coming up before the general meeting to enable
the shareholders to form a judgment on the business before them.-It does not
require the shareholders calling a meeting to disclose the reasons for the
resolutions which they propose to move at the meeting. The Life Insurance
Corporation of India, as a shareholder of Escorts Ltd., has the same right as
every shareholder to call an extraordinary general meeting of the company for
the purpose of moving a resolution to remove some directors and appoint others
in their place. The Life Insurance Corporation of India cannot be restrained
from doing so nor is it bound to disclose its reasons for moving the
resolutions".
Thus
it is clear that the obligation to annexe an explanatory statement to the
notice of the meeting is only on the company when it calls for a meeting to
transact special business. When a requisitionist calls for an extraordinary
general meeting under section 169, there is no obligation on the requisitionist
to annex an explanatory statement to the notice of the meeting. There is in my
view no warrant for imposing such an obligation on the requisitionists.
Therefore, I am of the view that there is no merit in the contention of Mr.
A.K. Mylsamy, learned counsel for the petitioner, that the requisition notice
dated February 8, 1992, and the notice of the meeting dated March 28, 1992, are
bad and that they contravene the provisions of the Companies Act.
Hence
points Nos. 1 and 2 are answered against the applicant in Application No. 602
of 1992.
Then
comes point No. 3 in regard to the satisfaction of the requirements of section
284 of the Act.
Section
284 of the Act deals with the removal of directors. This section does not deal
with the power of the board of directors to revoke the appointment of managing
director. The board of directors in the meeting of the board appoint a managing
director. When the authority given to the managing director is sought to be
revoked by the directors, the provisions of section 284 would not come into
play. It has been held in the case of Major General Shanta Shamsher Jung
Bahadur Rana v. Kamani Brothers P. Ltd. [1959] 29 Comp Cas 501 (Bom) that
section 284 does not affect the power of the board of directors to revoke the
appointment of the managing or other director made by the board. There is no
controversy in the present case that the business proposed to be transacted in
the extraordinary general meeting merely related to the removal of Mr. Dorairaj
as the managing director and the filling up of the vacancies of three directors
due to death and resignation of some directors. Therefore, there is no scope
for invoking section 284 when Mr. Dorairaj is not disturbed from his office as
a director and the business proposed to be transacted related only to the
removal of Mr. Dorairaj as managing director. Hence, I answer point No. 3 in
the negative.
Further
I, may add that very strangely Mr. Dorairaj, whose appointment as managing
director is one of the subject-matters of the agenda of the extraordinary
general meeting, has not chosen to raise his little finger on the above plea.
It is the individual and personal right of Mr. Dorairaj to continue as managing
director and it is for him to come and approach this court and seek appropriate
redressal if there is a threat to disturb his continuance as managing director
of the company. The said Dorairaj is either in deep slumber or adopting an
attitude of supine indifference. His cause, if any, cannot be espoused or
projected by the applicant who is neither a director nor the managing director.
However,
I am unable to accept the argument of Mr. M. Subramaniam, learned counsel
appearing for some of the respondents, that the present applicant cannot maintain
the application because the main petition itself is not maintainable because
the present applicant holds less than the required share strength as on date
even though on the date of filing of the main company petition there was
satisfaction of the required strength by the present applicant and four others.
In view of my decision in L. R.M. K. Narayanan v. Pudhuthottam Estates Ltd.
[1992] 74 Comp Cas 30 (Mad), this contention of Mr. M. Subramaniam does not
deserve acceptance. In my aforesaid judgment it has been held by me as follows
(head-note):
"Once
a petition under sections 397 and 398 of the Companies Act, 1956, is validly
presented, it is open to a shareholder to ask for substitution and prosecute
the proceedings even though such a shareholder by himself could not have
presented a petition under section 397 for want of the required share
qualification. The court has, in such a case, only to consider whether the
petition was a valid petition at the time of its presentation. The requirement
as to the share qualification is relevant and material only at the time of
institution of proceedings and once there is a valid petition and a shareholder
seeks to substitute himself in order to merely continue such a valid petition,
such a shareholder need not hold 10 per cent, of the share capital.
It
is not incumbent upon the court to dismiss a petition because a proceeding
under section 397 or 398 of the Act is a representative proceeding. Even if the
original petitioner does not want to continue the proceedings, the court cannot
be compelled to dismiss the petition. Even then, it is open to the court to
consider the merits of the case without dismissing the petition. Section 399(3)
of the Act permits an individual member to make an application 'on behalf and
for the benefit of all' members of a company entitled to move the court. He
acts clearly in a representative capacity. Rule 9 of the Companies (Court)
Rules, 1959, declaring inherent powers of the court gives the court authority
to transpose the other party as applicant in the interest of justice".
Point
No. 5: As already observed by me, a shareholder has the statutory right subject
to the fulfilment of the provisions of section 169 to call an extraordinary
general meeting. No injunction can be issued restraining him from calling a
meeting. I have already found that the requisition as well as the notice of
meeting are valid. The Supreme Court in LIC's case [1986] 59 Comp Cas 548 has
also ruled that no injunction can be granted restraining a shareholder from convening
an extraordinary general meeting and the said view is clear from the following
ratio found at pages 549, 550 and 551, which is as follows:
"A
shareholder has an undoubted interest in a company, an interest which is
represented by his shareholding. Share is movable property, with all the
attributes of such property. The rights of a shareholder are: (i) to elect
directors and thus to participate in the management through them; (ii) to vote
on resolutions at the meeting of the company ; (iii) to enjoy the profits of
the company in the shape of dividends ; (iv) to apply to the court for relief
in the case of oppression ; (v) to apply to the court for relief in the case of
mismanagement ; (vi) to apply to the court for winding up of the company and
(vii) to share in the surplus on winding up".
"The
only effective way the members of a company in a general meeting can exercise
their control over the directorate in a democratic manner is to alter the
articles of association so as to restrict the powers of the directorate and
appoint other directors in their place. The holders of the majority of the
stock of a corporation have the power to appoint, by election, directors of
their choice and the power to regulate them by a resolution for their removal.
An injunction cannot be granted to restrain the holding of a general meeting to
remove a director and appoint another".
"Every
shareholder of a company has the right, subject to statutorily prescribed
procedural and numerical requirements, to call an extraordinary general meeting
in accordance with the provisions of the Companies Act. He cannot be restrained
from calling a meeting and he is not bound to disclose the reasons for the
resolutions proposed to be moved at the meeting. Section 173(2) of the
Companies Act, 1956, does not require the shareholder requisitioning a meeting
to disclose the reasons for the resolutions which he proposes to move at the
meeting".
Thus,
all the points are answered accordingly as above and Company Application No.
602 of 1992 is dismissed. No costs.
DELHI HIGH COURT
[2002] 35 SCL 546 (delhi)
HIGH
COURT OF DELHI
v.
Jaspal Singh, J.
I.A. No. 7191 of 1995
in Suit No. 1580 of 1995
July 18, 1995
Section 169
of the Companies Act, 1956 - Meetings - Extraordinary General Meetings - Board
of directors of company decided to convene an Extraordinary General Meeting of
shareholders to consider certain amendments/deletions of articles of
association of company - Plaintiffs, chairman and managing director of company
filed a suit and sought an injunction restraining company from transacting said
business - There was no proposal either to take away holdings of plaintiffs or
to remove them from chair they occupied - What was proposed was to effect
certain changes considered necessary for smooth and proper functioning of
management - Plaintiffs, in fact, were a party to the decision to convene
Extraordinary General Meeting - Whether it would finally be for shareholders to
decide in meeting whether to opt for proposals or not and no injunction could
be granted to restrain holding of a meeting, when such a meeting was the only
way in which shareholders could decide the matter - Held, yes - Whether,
therefore, no injunction could be granted against holding of aforesaid meeting
- Held, yes
The plaintiffs
were the chairman and the managing director of the K.G.K. Ltd. and the
defendants were the managing director and director of K.P. Ltd. As the company
K.G.K. started incurring heavy losses, the K.G.K. group brought in the Kalyani
Group and the Kirloskars and a tripartite agreement was entered in January,
1994. As per this agreement, the composition of the board of directors was to
be : three from Khosla group, three from the Kalyani, Kirloskar group and the
directors representing the financial institutions. On 14-2-1995, the plaintiffs
agreed to offer the shares held by their group to the defendants after correct
valuation of the shares by 31-3-1995. A valuer was appointed but the report was
received much after 31-3-1995. This issue remained unresolved as the plaintiffs
suggested the appointment of yet another valuer. On 27-3-1995, the board of
directors decided to convene an extraordinary general body meeting on 9-5-1995
to amend a few articles and delete some articles of the articles of association
of that company which related to appointment, removal and powers of the
directors and quorums for board meetings. On 9-5-1995, the meeting was
adjourned to 19-7-1995. On 10-7-1995, the plaintiffs filed a suit and sought an
injunction restraining the defendants from transacting the business relating to
amendments/deletions of articles in that meeting.
It was argued
on behalf of the plaintiffs that the memorandum of understanding dated
14-2-1995, entered into with defendant Nos. 1 and 2 and the subsequent letters
submitted by the plaintiffs on the same day at the meeting of the board of
directors did not constitute a concluded contract and it being merely an
arrangement which never came out of the negotiating table, it could not be
used as a springboard to manoeuvre for the amendment of the articles of
association in question and that in any case since time was the essence of the
contract, even if it was a contract, and the time schedule having not been
adhered to, the move to amend the articles of association at the peril of the
plaintiffs should not be allowed to fructify.
It was further
contended that as the meeting was earlier scheduled for 9-5-1995, and had been
adjourned for 19-7-1995, a notice of the adjourned meeting was required to be
given in terms of the regulations contained in Table A in the First Schedule to
the Companies Act, 1956.
Lastly, it was
urged that the plaintiffs having worked for the company right from its very
inception and having been assured of their present position in the articles of
association as well as in the tripartite agreement referred to above and their
equitable expectations having been accepted by the company as well as by the shareholders,
the same could not be frustrated by resorting to the amendment/deletion of the
articles in question.
Prima facie,
the High Court agreed with the plaintiffs that the memorandum of understanding
entered into by the plaintiffs with defendant Nos. 1 and 2 on 14-2-1995, was
not a concluded contract. The price was yet to be settled. That was to be
negotiated. If that be so, the memorandum of understanding in question did not
prima facie appear to have resulted in a concluded contract. However, the High
Court was not inclined to agree with the plaintiffs that since the valuation
could not be fixed by the date fixed in the memorandum of undertaking,
therefore, the contract, if it was really one, became unenforceable. The reason
was that the plaintiffs themselves did not hesitate to extend the period and to
ask for another valuer. In any case, neither the memorandum of understanding,
whether it was taken to be a concluded contract or not, nor the question as to
whether time was the essence of the contract, really affected the merits of the
controversy. No body was seeking to take away the holdings of the plaintiffs.
There was no proposal for that. Nobody wanted them to be removed from the
chairs they happened to occupy. There was no proposal even for that. What was
proposed to be done was to bring in certain changes thought necessary for the
smooth and proper functioning of the management. The changes sought thus did
not prima facie affect the legitimate expectations of the plaintiffs. After
all, as stated by Peter Drucker, business has only two basic
functions—marketing and innovation. And
prima facie, it was innovation which seemed in this case to be the
guiding force. In any case, the matter was being finally left to the wisdom of
the shareholders it was for them to either adopt or reject the proposal.
It was true
that after 9-5-1995, no fresh notice was issued though issuance of such a
notice seemed to be envisaged by the regulations contained in Table A in the
First Schedule to the Companies Act, 1956. However, the articles of association
of the company would go to show that Table A did not apply.
During
arguments, it was not the case of the plaintiffs that the board of directors in
their meeting of 27-3-1995, could not decide to convene the extraordinary
general body meeting. In fact they were a party to that decision. By that
decision the Board decided to resort to a wholly democratic process. The
challenge to the right of the members to alter the articles was limited to the
three contentions referred to above. They had left the Court unpersuaded. As
already noticed above, the holdings of the plaintiffs would remain unaffected.
They would continue to hold the same positions in the company as they were
holding at present. What was being sought was the deletion of two articles and
amendment in the other two including one relating to quorum. The defendants
said that all this had been necessitated to protect the interest of the
shareholders holding majority of the shares and to ensure smooth functioning of
the management. It would finally be for the shareholders to decide in the
meeting whether to opt for the proposals or not. And surely an injunction
could not be granted to restrain the holding of a meeting, when such meeting
was the only way in which the shareholders could decide the matter.
Consequently, the application was to be dismissed.
Hare v. Nicoll
[1966] 1 All ER 285, British Holdings Plc. v. Quadrex [1989] 3 All ER 492, May
& Butcher v. The King [1934] 2 KB 7 and Courtley Fair Beirn Ltd. v. Tolaini
Bros. [1975] 1 WLR 297.
Arun
Jaitley, Anil B. Dewan, Rajiv Dutta, Ms. Vipin Nair and Navin Chawla
for the Petitioner. G.L. Sanghi, U.A. Rana, Rajiv Tyagi, Mukul
Rohatgi and Vipin Sanghi for the Respondent.
1. Winston Churchill once
remarked that some see private enterprise as a predatory target to be shot,
others as a cow to be milked, but few are those who see it as a sturdy horse
pulling the wagon, but then what is to be said when what it evolves is
friction, non-responsiveness and hostility? This suit presents such a
spectacle.
2. Let me first introduce
the main characters. Mr. K.G. Khosla and Mr. Deepak Khosla are the plaintiffs.
The first is the chairman and the second the managing director of K.G. Khosla
Compressors Ltd. (‘the company’). There are three defendants. The first is Mr.
Rahul C. Kirloskar while the second is Mr. Sanjay C. Kirloskar. While the
first happens to be the managing director, the second is the director of
Kirloskar Pneumatic Company Ltd. The third defendant is K.G. Khosla Compressors
Ltd.
3. The plaintiffs named
above instituted a suit for declaration and injunction on 10-7-1995, and along
with it was moved an application under order 39, rules 1 and 2 read with
section 151, of the Code of Civil Procedure. This order has its seeds in that
application.
4. It so happened that on
27-3-1995, the board of directors decided to convene an extraordinary general
meeting of the shareholders of the company. The date fixed was 9-5-1995, and a
notice to that effect was issued on 12-4-1995. However, on 9-5-1995, the
meeting was adjourned for 19-7-1995. The plaintiffs want an interim injunction
restraining the defendants from transacting in that meeting the special
business para 1 which is stated as follows :
“1. To
consider and, if thought fit, to pass the following resolution with or without
modification as a special resolution:
Resolved that
pursuant to section 31 and other applicable provisions, if any, of the
Companies Act, 1956, the articles of association of the company, be and are
hereby altered, in the following manner:
(a) the existing article No.
108 be deleted and the following article be substituted in place thereof;
‘The quorum
for a meeting of the board shall be determined in accordance with the
provisions of section 287 of the Act and at least one director representing
Kirloskar Pneumatic Co. Ltd. or Kalyani Steels Limited and one of the nominee
directors appointed by financial institutions or banks shall necessarily be
present.’
(b) Article No. 120 be deleted.
(c) The existing article No.
122 be deleted and the following article be substituted in place thereof.
‘Subject to
the provisions of the Act and in particular to the prohibitions and
restrictions contained in section 292 thereof, the board may, from time to
time, entrust to and confer upon a managing director and whole-time director
for the time being such of the powers exercisable under these present by the
board as it may think fit and may confer such powers for such time and to be
exercised, for such objects and purposes, and upon such terms and conditions,
and with restrictions as it thinks fit, and the board may confer such powers,
either collaterally with, or to the exclusion of, and in substitution for all
or any of the powers of the board in that behalf, and may, from time to time,
revoke, withdraw, alter or vary all or any of such powers.’
(d) Article No. 123 be deleted.”
5. To have a clearer
picture let me reproduce articles 108, 120, 122 and 123 as they exist at
present. They are as under :
“108. The
quorum for a meeting of the board shall be determined in accordance with the
provisions of section 287 of the Act and at least one director representing
Khosla group, one director representing Kirloskar Pneumatic Co. Ltd. or Kalyani
Steels Limited and one of the nominee directors appointed by financial
institutions or banks shall necessarily be present.
120. Subject
to the provisions of section 255 of the Act, managing director or joint
managing director shall not, while he continues to hold that office, be subject
to retirement by rotation, and he shall not be reckoned as director for the
purpose of determining the retirement by rotation of directors or in fixing the
number of directors to retire, but (subject to the provision of any contract
between him and the company) he shall be subject to the same provisions as to
resignation and removal as the other directors, and he shall, ipso facto and immediately, cease to be a managing
director if he ceases to hold the office of director from any cause provided
that if at any time the number of directors (including the managing directors
and the nominee directors) as are not subject to retirement by rotation shall
exceed one-third of the total number of directors for the time being, then the
managing director or any one or more of them, shall be liable to retirement by
rotation in accordance with article 85 to the intent that the number of
directors not liable to retirement by rotation shall not exceed one-third of
the total number of directors for the time being.
122. Subject
to the provisions of the Act and in particular to the prohibitions and
restrictions contained in section 292 thereof and subject to article 123
thereof, the board may from time to time entrust to and confer upon a managing
director for the time being such of the powers exercisable under these present
by the board as it may think fit and may confer such powers for such time and
to be exercised for such objects and purposes, and upon such terms and
conditions, and with restrictions as it thinks fit, and the Board may confer
such powers, either collaterally with, or to the exclusion of, and in
substitution for all or any of the powers of the board in that behalf; and may,
from time to time, revoke, withdraw, alter or vary all or any of such powers.
123.
Notwithstanding anything to the contrary in article No. 122 and other powers
conferred by these articles, it is hereby expressly declared that the managing
director and the joint managing director shall always subject to the provisions
of the Act, have the following powers jointly and severally, that is to say :
(1) To purchase or otherwise acquire for the company any property, rights
or privileges which the company is authorised to acquire at such price and
generally on such terms and conditions as they think fit.
(2) At their discretion to pay for any property rights or privileges
acquired by or services rendered to the company, either wholly or partly in cash
or in shares, bonds, debentures or other securities of the company and any such
shares may be issued either as fully paid up or with such amount credited as
may be agreed upon, and such bonds, debentures or other securities may be
either specially charged upon all or any part of the property or the company
and its uncalled capital or not so charged.
(3) To secure fulfilment of any
contract or agreement entered into by the company by mortgage or charge of all
or any of the property of the company and its uncalled capital for the time
being or in such other manner as they may think fit.
(4) To appoint, at their discretion, remove or suspend such manager,
secretaries, officers, clerks, agents and servants, for permanent, temporary or
special services, as they may from time to time think fit, and to determining
their powers and fix their salaries or emoluments and to require security in
such instance and for such amounts as they think fit.
(5) To make and give receipts,
releases and other discharges for money payable to the company and for the
claims and demands of the company.
(6) From time to time provide for
the management of the affairs of company abroad in such manner as they think
fit and in particular to appoint any person to be attorneys or agents of the
company with such powers (including power to sub-delegate) and upon such terms
as may be thought fit.
(7) Subject to the provisions of
the Act invest and deal with any of the moneys of the company not immediately
required for the purposes thereof upon such securities (not being shares in the
company) in such manner as they may think fit, and from time to time to vary or
realise such investments.
(8) To execute in the name of and
on behalf of the company in favour of any director or other persons who may
incur or be about to incur any personal liability for the benefit of the
company such mortgage of the company’s property (present and future) as they
think fit and any such mortgage may contain a power of sale and such other
powers, covenants and provisions as shall be agreed upon.
(9) From time to time to make,
vary and repeal bye-laws or the regulations of the business of the company, its
officers and servants.
(10)To enter into all such negotiations and contracts and rescind and
vary all such contracts and execute and do all such acts, deeds and things in
the name and on behalf of the company as they may consider expedient or in
relation to any of the matters aforesaid, or otherwise for the purposes of the
company.
(11) To give to any person employed by the company a commission on the profit of any particular business transaction, or a share in the general profit of the company, and such commission or share of profit shall be treated as a part of the working expenses of the company.
(12)To give award or allow any bonus, pension, gratuity or compensation
to any employee of the company or his widow, children or dependents, that may
appear to the directors just or proper, whether such employee, his widow,
children or dependents have or have not legal claims upon the company.
(13)Before
declaring any dividend to set aside such portion of the profits of the company
as they may think fit to form a fund to provide for the pension, gratuity, or
compensations or create a provident fund or benefit fund in such manner as the
directors may deem fit subject to the provisions of section 205(2A) of the Act.
(14)Subject to the provisions of section 292 of the Act and provisions
contained in article 122 hereof to sub-delegate all or any of the powers,
authorities and discretion for the time being vested in them subject, however,
to the ultimate control and authority being retained by them.
(15)To borrow, or raise
or secure the payment of money in such manner as the company shall think fit, and
in particular by the issue of debentures or debenture-stock, perpetual or
otherwise charged upon all or any of the company’s properties (both present and
future) including its uncalled capital and to purchase, redeem or pay off such
securities.
(16)Subject to the
provisions of section 293A of the Act, to establish, maintain, support or
subscribe to any charitable, scientific, national or public or useful political
or any other institution, objects or purposes or for any exhibition.
(17) To institute, prosecute,
compound, defend, compromise, withdraw or abandon any legal proceedings by or
against the company or its officers or otherwise concerning the affairs of the
company and to act on behalf of the company in all matters relating to
insolvencies or liquidations and to apply for and obtain letters of
administration with or without will be annexed to the estate of persons with
whom the company have dealings.
(18) To realise compound
and allow time for the payment or satisfaction of any debts to or by the company
and any claims or demands by or against the company and to refer to arbitration
and observe and perform the awards.
(19) To draw, sign,
accept, endorse and negotiate all cheques, promissory-notes, drafts,
pay-orders, bills of exchange, bills of lading and other documents of title and
securities (including Government and other promissory notes) contracts,
transfer deeds and other instruments as shall be necessary for carrying on the
business of the company.”
6. Why do the plaintiffs
seek this relief? Before the answer gets revealed a brief resume of the
background is called for.
7. As far back as
in the year 1945 plaintiff No. 1 formed a partnership in the name of K.G.
Khosla and Company. In the year 1955 it was converted into K.G. Khosla &
Company (P.) Ltd. The year 1975 saw the amalga-mation of K.G. Khosla &
Company (P.) Ltd. with K.G. Khosla Compressors (P.) Ltd. and in the year 1976
it was converted into a public limited company. In the year 1991 the company
started facing rough weather resulting in huge losses and as business without
profit is not business any more than a pickle is a candy a revival plan of the
company was evolved which culminated in an agreement with the Kalyani Group.
This was some time in May, 1993. The Kalyani Group then brought in the
Kirloskars. This gave birth to the tripartite agreement of 21-1-1994. As per
clause 4 of the said agreement the composition of the board of directors was to
be as follows:
1.
Three directors representing the Khosla group, one of whom was to be the
chairman and the other the managing director.
2.
Three directors representing KBC/KSL jointly.
3.
Directors representing the financial institutions/banks.
8. As a
consequence of that agreement some amendments were made in the articles of
association one of them being article 108 which has already been reproduced by
me above.
9. On 14-2-1995,
events took yet another turn. On that date the plaintiffs agreed to offer the
shares held by their group in the company to defendant Nos. 1 and 2 subject to
their correct valuation. 31-3-1995, was fixed as the last date for such
valuation. The valuation report was to be prepared by a mutually acceptable
valuer and in consultation with the ICICI. On the same day at the board meeting
the plaintiffs wrote separate letters that in view of the ongoing negotiations
they shall not exercise any powers vested in them as chairman and managing
director of the company. Admittedly, a valuer did make a report but much after
31-3-1995, and the matter is still hanging fire since there was suggestion for
appointment of yet another valuer. That suggestion had come from none other
than the plaintiffs themselves. On 27-3-1995, as already noticed above, the
board of directors decided to call an extraordinary general body meeting of the
shareholders of the company to further amend articles 108 and 120 and to delete
articles 122 and 123.
10. With the
background having come to the fore, it is time now to come to grips with the
contentions raised.
11. It was argued on
behalf of the plaintiffs that the memorandum of understanding dated 14-2-1995,
entered into with defendant Nos. 1 and 2 and the subsequent letters submitted
by the plaintiffs on the same day at the meeting of the board of directors did
not constitute a concluded contract and it being merely an arrangement which
never came out of the negotiating table, it could not be used as a springboard
to manoeuvre for the amendment of the articles of association in question and
that in any case since time was the essence of the contract, even if it was a
contract, and the time schedule having not been adhered to, the move to amend
the articles of association at the peril of the plaintiff should not be allowed
to fructify. In support, my attention was drawn to Hare v. Nicoll [1966] 1 All
ER 285 and British Holdings Plc. v. Quadrex [1989] 3 All ER 492.
12. It was further
contended that as the meeting was earlier scheduled for 9-5-1995, and had been
adjourned for 19-7-1995, a notice of the adjourned meeting was required to be
given in terms of the regulations contained in Table A in the First Schedule to
the Companies Act, 1956.
13. Lastly, it was
urged that the plaintiffs having worked for the company right from its very
inception and having been assured of their present position in the articles of
association as well as in the tripartite agreement referred to above and their
equitable expectations having been accepted by the company as well as by the
shareholders, the same could not be frustrated by resorting to the
amendment/deletion of the articles in question.
14. Prima facie, I do
tend to agree with the learned counsel for the plaintiffs that the memorandum
of understanding entered into by the plaintiffs with defendant Nos. 1 and 2 on
14-2-1995, was not a concluded contract. Lord Dunedin tells us in May &
Butcher v. The King [1934] 2 KB 7 that to be a good contract there must be a
concluded bargain and a concluded contract is one which settles everything that
is necessary to be settled and leaves nothing to be settled by agreement between
the parties. The principle which one gathers from Courtley Fair Beirn Ltd. v.
Tolaini Bros. [1975] 1 WLR 297 is that where there is a fundamental matter left
undecided and to be the subject of negotiations, there is no contract. In the
case before me, the price was yet to be settled. That was to be negotiated. If
that be so, the memorandum of understanding in question does not prima facie
appear to have resulted in a concluded contract. However, as at present
advised, I am not inclined to agree with the learned counsel for the plaintiff
that since the valuation could not be fixed by the date fixed in the memorandum
of undertaking, therefore, the contract, if it was really one, became
unenforceable. The reason is that the plaintiffs themselves did not hesitate to
extend the period and to ask for another valuer. It is this which distinguishes
the present case from the two judgments relied upon by the learned counsel for
the plaintiffs. What further distinguishes this case is that the value was not
to be fixed on the basis of what was being quoted as the price in the open
market but on different considerations. In any case, neither the memorandum of
understanding, whether it is taken to be a concluded contract or not, nor the
question as to whether time was the essence of the contract really affects the
merits of the controversy. Nobody is seeking to take away the holdings of the
plaintiffs. There is no proposal for that. Nobody wants them to be removed from
the chairs they happen to occupy. There is no proposal even for that. What is
proposed to be done is to bring in certain changes thought necessary for the
smooth and proper functioning of the management. The changes sought, thus, do
not, prima facie, affect the legitimate expectations of the plaintiffs. After all,
as stated by Peter Drucker, business has only two basic functions—marketing and
innovation. And, prima facie, it is innovation which seems in this case to be
the guiding force. In any case the matter is being finally left to the wisdom
of the shareholders. It is for them to either adopt or reject the proposal.
15. It is true that
after 9-5-1995, no fresh notice was issued though issuance of such a notice
seems to be envisaged by the regulations contained in Table A in the First
Schedule. However, the articles of association of the company would go to show
that Table A does not apply. This much for the objection regarding notice.
16. Besides saying
that I find no force in the contentions raised on behalf of the plaintiffs I
feel the need to say a few more words.
17. During arguments, it was not the case of the
plaintiffs that the board of directors in their meeting of 23-3-1995, could not
decide to convene the extraordinary general body meeting. In fact they were a
party to that decision. By that decision the board decided to resort to a
wholly democratic process. The challenge to the right of the members to alter
the articles was limited to the three contentions referred to above. They have
left me unpersuaded. As already noticed by me above, the holdings of the
plaintiffs would remain unaffected. They would continue to hold the same
positions in the company as they are holding at present. What is being sought
is the deletion of two articles and amendment in the other two including one
relating to quorum. The defendants say that all this has been necessitated to
protect the interest of the shareholders holding majority of the shares and to
ensure smooth functioning of the management. It would finally be for the
shareholders to decide in the meeting whether to opt for the proposals or not.
And surely an injunction cannot be granted to restrain the holding of a
meeting, when such a meeting is the only way in which the shareholders can
decide the matter. Consequently, the application is dismissed.
DELHI HIGH COURT
Companies
Act
[2003]
42 scl 85 (delhi)
Malvika Apparels
v.
Union of India
Manmohan
Sarin, J.
C.W.
No. 5167 of 2002
C.M.
No. 8803 of 2002
August
27, 2002
Section 169, read with section 186, of the
Companies Act, 1956 - Meetings and proceedings - Extraordinary general meeting
- Petitioner sent a requisition under section 169 requiring certain issues to
be listed in agenda of extraordinary general meeting - Same were not listed in
agenda by AEPC on ground that they fell within domain of Central Government,
which had formulated garment policy - Whether respondent was justified in not
including issues as desired by petitioner - Held, yes - Whether, however,
petitioner could avail of alternative remedy under section 186 - Held, yes
Facts
The petitioner sent a requisition under
section 169 requiring certain issues to be listed in the agenda of the
extraordinary general meeting. The items were not listed by AEPC. The
petitioner filed writ petition for quashing of the notice issued by the
respondent on the ground that it did not conform to section 169 and did not
cover the agenda for which the extraordinary general body meeting was called.
The respondent raised preliminary objection that the petitioner would avail of the
alternative remedy under section 186. On the question of justification for
declining the issues, which were sought to be raised in the agenda, the
respondent submitted that these fell strictly within the domain of the Central
Government, which had formulated the garment policy under the Import
Export Regulations and that AEPC would not have the jurisdiction to either
consider or pass a resolution, which is contrary to the provisions of the
garment policy. However, if the members had any suggestions, the same could be
considered by the Executive Committee on the administrative side and a
representation made to the Government for suitable amendments.
On writ petition :
Held
The petitioner had an alternate remedy under
section 186. The provisions of section 186 permit ‘any member’ and there is no
bar. Secondly simply because the member is a requisitionist under section 169,
he does not cease to be a member. The provisions of section 186 will still be
available. The respondent had adequately explained and justified the
non-inclusion of the issues as desired by the petitioner. The issues, which
were sought to be raised were those, which would impinge upon the statutory
provisions of the garment policy and any such change or deviation in the policy
as desired could be considered on the administrative side by the Executive
Committee and representation made to the Government in that regard.
Writ petition was, accordingly, dismissed.
A. Maitri for the Petitioner. G.L. Rawal and Kuljit Rawal for the
Respondent.
Judgment
Manmohan Sarin, J. - The petitioner has filed this writ petition
for quashing of the notice dated August 2, 2002, issued by respondent No. 2 on
the ground that it does not conform to section 169 of the Companies Act, 1956,
and does not cover the agenda for which the extraordinary general body meeting
was called.
The grievance of the petitioner is that the
petitioners had sent a requisition under section 169 of the Companies Act (‘the
Act’), requiring certain issues, which are listed in para 27. The same is
reproduced as under :
(i) Issue pertaining to the BG/EMC refunds pending
since several years be settled immediately :
“Resolved that the outstanding BG/EMC cases
pending with the AEPC and the Textile Ministry be cleared within one month. The
BG/EMC collected is in violation of the Garment Export Entitlement Policy and
the same must be refunded in full to the garment exporter failing which an
alternative scheme on the lines of Samadhan be prepared wherein 100 per cent
relief may be given where the performance is 50 per cent and where the
performance is below 50 per cent a pro rata relief too be given.”
2. Issues pertaining the registration-cum-membership fees which have been
increased 2-3 folds :
“Resolved
that the registration-cum-membership fee reduced for the year, 2002, and
onwards as follows. Registered member existing fees Rs. 6,000 proposed to be
reduced to Rs. 2,500 and for Member Export existing fees which is Rs. 7,000 be
reduced to Rs. 2,500 as it was previously.”
3. Issues pertaining the Quota transfer Fee of 5 paise per garment to be
withdrawn with immediate effect :
“Resolved
that the quota transfer fee at p. 05 paise for piece imposed as per circular
No. 02/2A dated January 1, 2002, be withdrawn immediately.”
4. Single membership to be introduced :
“Resolved
that since all then rules and regulations are applicable to all the members
both registered Exporter and Member Exporter therefore there should be only one
type of membership and such members will be called a ‘Member Exporter’. Those
exporters turnover exceeds Rs......lakhs shall automatically be deemed to have
become ‘Member Exporter’ without having to apply and all these members should
have equal rights in all respect.”
5. Issues pertaining to flagging of Exports by Apparel Export Promotion
Council :
“Resolved
that the system of Flagging be stopped with immediate effect since the object
of the Council is for Promotion of Exports and this system of flagging goes
against its principal objectives.”
Learned counsel for the petitioner submits
that the action of the Apparel Export Promotion Council, i.e., AEPC in not
listing these items in the agenda of the extraordinary general meeting
scheduled for August 29, 2002, was arbitrary and illegal. When this petition
had first come up for admission before the Bench on August 20, 2002, learned
counsel for the parties were required to address the court on whether the
petitioner could not avail of the alternative efficacious remedy under section
186 of the Companies Act.
I have heard learned counsel for the parties.
Mr. A. Maitri, counsel for the petitioner, submits that section 186 of the
Companies Act would not operate as a bar firstly because the petitioners being
requisitionists under section 169, they would not be covered under the
provisions of section 186 of the Companies Act. Secondly he submits that it is
only when it is impracticable to hold a meeting that section 186 can be
invoked. The Company Law Board then assumes the position of the board of
directors. He submits that once the meeting has been requisitioned under
section 169, the provisions of section 186 of the Companies Act will not be
available and there would be a bar under section 169(6). Counsel submits that
the respondents are evading the discussion on the issues, which are vital and
burning issues. The voice of a sizeable number of the exporters is sought to be
scuttled in a high-handed manner.
Mr. G.L. Rawal, learned senior counsel for
respondent No. 2 submits that the petitioner has the available remedy under
section 186 of the Companies Act. The provisions of section 186 permit “any
member” and there is no bar. Secondly simply because the member is a
requisitionist under section 169, he does not cease to be a member. The
provisions of section 186 will still be available. There is merit in this
submission.
On the question of the justification for
declining the issues, which were sought to be raised in the agenda, Mr. Rawal
submits that it is a handful of persons, who are bent upon frustrating the
working of the AEPC. He has taken me through the five issues, which have been
reproduced earlier. He submits that as far as issue relating to the refund of
bank guarantee, earnest money deposit is concerned, the Executive Committee of
AEPC has already made a representation and has passed a resolution for sending
the same to the Ministry of Textiles for an early disposal of the pending
refund cases of bank guarantee and EMD. Counsel states that AEPC shall
vigorously pursue the same on the administrative side. As regards issue No. 2,
relating to registration of membership, this falls within the domain of AEPC.
He submits that this item has already been included in the agenda of
extraordinary general meeting. Issue No. 3 relating to the quota transfer fee,
has been accepted and the said quota fee stands withdrawn. As regards issue
Nos. 4 and 5, he submits that these fall strictly within the domain of the
Central Government, which has formulated the garment policy under the Import
Export Regulations. He submits that AEPC would not have the jurisdiction to
either consider or pass a resolution, which is contrary to the provisions of
the garment policy. However, if the members have any suggestions, the same can
be considered by the Executive Committee on the administrative side and a
representation made to the Government for suitable amendments. Similar is the
position with regard to the system of flagging required to be stopped. This is
being done as a part of the garment policy formulated by the Government. The
respondents in my view have adequately explained and justified the
non-inclusion of the issues as desired by the petitioner.
Learned counsel for the respondent further
submitted that in any case the annual general meeting is scheduled to be held
any time between September and December this year and it would be open for the
members to send any requisition to be considered in accordance with law for the
annual general meeting and such issues as are within the ambit, functioning and
power of AEPC can be discussed.
In view of the foregoing, I find that the
petitioner has an alternate remedy and consequently the issues, which are
sought to be raised are really those, which would impinge upon the statutory
provisions of the garment policy and there is considerable merit in the
argument of learned counsel for the respondent that any such change or
deviation in the policy as desired can be considered on the administrative side
by the Executive Committee and representation made to the Government in that
regard.
Writ petition is accordingly dismissed.
[1973] 43 COMP.
CAS. 275 (CAL.)
HIGH COURT of CALCUTTA
Bharat Commerce & Industries
Ltd.
v.
Registrar of Companies
S.K. MUKHERJEA AND S.C. GHOSH, JJ.
Appeal No. 310 of 1971, C.P. No. 222 and C.A. No. 178
of 1970
S.B.
Mukherjee for the appellant.
Ashim
Ghosh for the Registrar of Joint Stock Companies.
Prabir
Sen for the employees’ union.
Ghose, J.—This appeal is directed against the
judgment and order dated November 16, 1971, passed by the court of first
instance (see [1973] 43 Comp. Cas. 162), refusing to confirm a special
resolution passed by the petitioner-company at an extraordinary general meeting
of the members of the petitioner-company held on May 30, 1970, at No. 10, Ring
Road, Lajpat Nagar IV, New Delhi-24, resolving to remove the registered office
of the company from No. 10, Camac Street, Calcutta, to the said No. 10, Ring
Road, New Delhi, under section 17 of the Companies Act, 1956.
The
petitioner, Bharat Commerce & Industries Ltd., hereinafter referred to as
the company, was originally incorporated under the name of Bharat Airways Ltd.
on or about August 11, 1945. Upon the nationalisation of the scheduled passenger
traffic by air, the name of the company was changed to Bharat Commerce &
Industries Ltd. with effect from January 4, 1956. The present registered office
of the company is situated at No. 10, Camac Street, Calcutta, within the
original jurisdiction of this court.
The
authorised share capital of the company is Rs. 5,00,00,000 divided into
25,00,000 equity shares of Rs. 10 each and 2,50,000 preference shares of Rs.
100 each. The issued and subscribed share capital of the company is Rs.
1,50,00,000 divided into 10,00,000 equity shares of Rs. 10 each, 30,000 9%
redeemable cumulative preference shares of Rs. 100 each and 20,000 9.3% second
redeemable cumulative preference shares of Rs. 100 each. All the aforesaid
shares are fully paid up.
The
objects of the company will appear from its memorandum of association. The
company now carries on, inter alia, the business of manufacturing yarn and
textile goods. After the nationalisation of the scheduled passenger flight by
air, the company diversified its activities and established mills for
manufacturing yarn and textile goods at Nagda in the State of Madhya Pradesh,
Thana in the State of Maharashtra, Nanjangud in the State of Mysore and and
Rajpura in the State of Punjab.
The
distance between different mills or factories belonging to the company and the
registered office at Calcutta and the route inter se the said places are longer
and circuitous than the distance between the said mills and factories and the
route between the said places and Delhi.
Due
to various disturbances at the registered office of the company in recent years
it is stated in the petition that the management of the business and the
affairs of the company situated at different places became impossible to carry
on from Calcutta. In fact, the business of the company at its registered office
has come to a standstill. For months together the registered office of the
company has been lying closed and the company cannot do any work including
registration of transfer of shares or holding of the general meeting of the
shareholders there. Filing of annual returns, preparation of accounts and
auditing the same cannot be done at the said registered office. It is clear,
therefore, that works for complying with even the mandatory provisions of the
statute cannot be done at the registered office of the company at No. 10, Camac
Street, Calcutta.
In
the premises, the directors and shareholders of the company contemplated and in
fact decided to remove the registered office of the company from No. 10, Camac
Street, Calcutta, to No. 10, Ring Road, New Delhi, in order to carry on the
business of the company more efficiently and economically. The company issued
notice for holding of an extraordinary general meeting of its members to
consider and to resolve, if thought fit, to remove the registered office of the
company from No. 10, Camac Street, Calcutta, to No. 10, Ring Road, New Delhi.
The said meeting was held at No. 10, Ring Road, New Delhi, at 10-30 a.m. on May
30, 1970. 21 shareholders of the company were present in person and 68 of them
were present by proxy. At the said meeting it was unanimously resolved that,
subject to confirmation by this court, “the provisions of clause 2 in the
memorandum of association of the company be and are hereby altered by deleting therefrom
the word ‘ Bengal’ and by substituting the words ‘ The Union Territory of
Delhi” It was further resolved that, subject to the aforesaid resolution
becoming effective, “the registered office of the company be removed from ‘
Industry House’, No. 10, Camac Street, Calcutta-17, to No. 10, Ring Road,
Lajpat Nagar IV, New Delhi-24, or such other place in the Union Territory at
Delhi as may be determined by the board of directors of the company”.
The
company has not issued any debenture and in fact has no creditor save and
except the usual trade creditors in the course of its business. No creditor or
shareholder of the company has opposed this application. The court of first
instance granted leave to Birla Brothers and its allied concerns’ employees’ union,
of which the employees of this company are also members, to intervene in the
proceedings.
For
the appellant Mr. S.B. Mukherjee submits that the shareholders of the company
after due deliberation unanimously resolved to transfer the registered office
from Calcutta to New Delhi. No shareholder nor any creditor of the company
opposed the transfer. The State of West Bengal was served with a notice of this
application but did not choose to oppose the same. There are 18 employees of
the company at its registered office. Out of them, 15 employees support the
company’s decision to transfer the registered office from Calcutta to New
Delhi. One of the employees is untraceable and one has already resigned. Only
one peon is opposing the said transfer. The employees’ union, according to Mr.
Mukherjee, has no locus standi to oppose the application. In fact, Mr.
Mukherjee contends that the employees’ interest cannot be considered in this
application. Mr. Mukherjee relied on the case of Mayor, Aldermen and Burgesses
of the Borough of Bradford v. Pickles , A.
Salomon & Co. Ltd. v. Aron Salomon , Fred
F. Edwards v. People of the State of California , Rank
Film Distributors of India v. Registrar of Joint Stock Companies and State of
West Bengal,
In re Mackinnon Mackenzie & Co. (P.) Ltd. and In
re Rivers Steam Navigation Co. Ltd Mr.
Mukherjee contends that the workers of a company are not persons interested in
the alteration of the memorandum of a company by removing its registered office
from one State to another under section 17 of the Companies Act Mr. Mukherjee
relied on In re Seksaria Cotton Mills Ltd., In re
Edward Textiles, In
the matter of Standard General Assurance Co. Ltd. and In re Weslburn Sugar Refineries Ltd.
Mr.
Ashim Ghosh, appearing on behalf of the Registrar of Joint Stock Companies,
relied on articles 75 and 76 of the articles of association of the company and
submitted that no extraordinary general meeting can be called except upon the
requisition of the requisite number of members. That meeting has to be called
at the office, i.e., the registered office of the company. Mr. Ghosh relied on
article 92 of the articles of association of the company. Mr. Ghosh submitted
that by reason of the premises the meeting held at No. 10, Ring Road, New
Delhi, was bad and the resolution passed therein was also bad and no effect can
be given to the said resolution.
Mr.
Prabir Sen, appearing on behalf of the employees’ union, submitted that section
17 of the Companies Act confers power upon the court to control the decision of
the domestic forum of the company in regard to some of its internal management
and affairs as mentioned in the said section. According to Mr. Sen, employees
are persons within the meaning of sub-section (4) of the said section whose
interests are likely to be prejudiced by the proposed transfer if carried into
effect and thus the court of first instance was right in granting leave to the
union to intervene. Mr, Sen further contended that the question of bona fides
of the company in removing the registered office can be and in fact has to be gone
into in such an application. The facts of closure of the registered office and
nonpayment of the salaries of the employees have been suppressed in the
petition, which, according to Mr. Sen, shows the mala fides on the part of the
company. Further, there was no genuine ground, according to Mr. Sen, for
transferring the registered office of the company. The proposed transfer, if
effected, will certainly prejudicially affect the interest of workers. Mr. Sen
relied on cases, Rank Film Distributors of India Ltd. v. Registrar of Companies
,
In re Westburn Sugar Refineries Ltd., In
re Jewish Colonial Bank Ltd., In
re Indian Aluminium Co. Ltd., In
re Indian Iron & Steel Co. Ltd.,
Orient Paper Mills Ltd. v. State and In re Orissa Chemicals & Distilleries
Private Ltd.
Mr. Sen relied on the
provisions of the Companies Act indicated in sections 94 and 323 thereof and
emphasised on the difference between the provisions of the said sections and
section 17 of the said Act. The former sections did not require the sanction of
the court whereas section 17 required the sanction of the court as condition
precedent. Mr. Sen further contended that proceedings are pending before the
conciliation officer in regard to the disputes between the company and its
employees and thus the transfer should not be sanctioned in the instant case.
Section 17 of the Act
empowers a company to alter the provisions contained in its memorandum by a
special resolution in order to remove its registered office from one State to
another; the said section also empowers a company in the like manner to change
any of its objects clauses contained in its memorandum for the reasons
mentioned in clauses (a) to (g) of sub-section (1) of section 17 of the Act. The
section enjoins upon the court to be satisfied before confirming the alteration
that notice has been given to the debenture holders of the company and to every
person or class of persons “whose interests would be affected by the alteration
and to see that the debt or claim of a creditor who objects to the alteration
is discharged or determined or secured to the satisfaction of the court”.
Sub-section (6) to the said section imposes upon the court in exercising its
discretion under the said section, the obligation to have regard to the rights
and interests oŁ the members of the company and every class of them including
adjournment of the proceedings in order to enable the parties to arrive at
arrangements for the purchase of the interests of the dissentient members of
the company without reducing the share capital of the company. The court has to
give notice, under subsection (4) to the section, of the petition for
confirmation of the alteration to the Registrar of Companies in order to enable
him to appear before the court and state his suggestion in regard to
confirmation of the alteration. Sub-section (4) to the said section was
introduced by way of amendment in 1965 by Act LXV of 1965 to empower the
Registrar to appear before the court and point out any irregularity in an
alteration proposed by a company to its memorandum.
Under the English law
confirmation by court is not necessary in order to alter the memorandum by a
company. The members of the company can do so by means of a special resolution
and that comes into effect at once. If 15 per cent. or more of the members of
the company object to the alteration they may apply to the court for nullifying
the effect of the special resolution. But in our country the alteration
proposed by a company by a special resolution of its members to the memorandum
of the company cannot take effect until scrutinised and confirmed by the court.
Under the section the court has discretionary power to confirm the alteration
wholly or in part and/or on such terms and conditions as it may think fit.
As noted earlier, only
three of the employees of the company did not agree to the proposed transfer of
the registered office. Mr. Samaren Sen, leading Mr. S.B. Mukherjee for the
company, stated before us that the company would not retrench any of its
employees because of the transfer of the registered office of the company from
Calcutta to New Delhi. That statement with the consent of Mr. Sen we directed
to be recorded.
In view of the aforesaid
statement which has been recorded, we do not think that there is any substance
any more in the contention that the company’s proposed act is mala fide and
that the company is seeking to transfer the registered office in order to
stifle the proceedings between the employees of the company and the company
pending before the conciliation officer. We do not, however, express any view
as to whether the question of bona fides of a company in transferring its
registered office from one State to another can be germane in an application
for confirmation of the alteration of the memorandum by removing its registered
office from one State to another. In the instant application it is not
necessary and indeed irrelevant for us to express any opinion on the said
question. The learned judge in the instant case granted leave to the union
mentioned above to intervene in the proceedings and upheld the contention of
the union and refused to confirm the proposed alteration. In Rank Film
Distributors’ case it
was held by a Division Bench of this court that the State had no legal right to
the issue and service of notice under section 17(3A) and that the loss of
revenue to or employment to the citizens of a State are not relevant factors
for consideration in an application for sanction to alter the memorandum of a
company by removing its registered office from one State to another. The case
of the Westburn Sugar Refineries was considered by the Division Bench in that
case and the observations of Lord Macnaghten as explained by Lord Radcliffe in
regard to the meaning of the words “general public” by limiting the words “to
persons who may in the future have dealing with the company and may be minded
to invest in its securities” was approved of. It should be noted in this
connection that the case of Poole v. National Bank of China Ltd. and
the case of In re Westburn Sugar Refineries Ltd. were
cases concerning reduction of share capital of companies and not removal of
registered office. In fact, in England, as it is apparent, no registered office
of a company can be removed from one State to another. In the case of Mayor,
Aldermen and Burgesses of the Borough of Bradford v. Pickles it
was laid down that if a person can do an act lawfully his motive behind doing
of the act would be immaterial. In fact, even if the motive was mala fide or
malicious to injure another until and unless the action was illegal the motive
could not be called into question.
In the instant case it
appears to us that the resolution was not illegal nor ultra vires nor injurious
to any of the members or creditors of the company nor even to its employees who
chose to oppose the application for confirmation of the alteration, in view of
the statement made by Mr. Sen in this court in regard to them. In the instant
case, it is submitted by Mr. Prabir Sen that the fact of closure of the
registered office of the company in Calcutta was suppressed from the
shareholders in the notice convening the extraordinary general meeting
including the explanatory statement to the said notice. In our opinion, the
omission of the said fact to be stated in the notice or the explanatory
statement thereto did not in any way vitiate the said notice or the meeting or
the resolution. In fact, if the said grounds were stated in the notice or the
explanatory statement the same would have been stronger grounds for the members
to decide for the removal of the registered office from Calcutta to New Delhi.
It is well-settled that the court in construing a notice for a meeting of a
company only tries to protect the interest of the absentee members. In our
opinion, the omission to state the aforesaid facts in the said notice or the
explanatory statement thereto did not mislead any of the absentee members. In
fact, none of the members as noted earlier came to oppose the application for
sanction. Mr. Prabir Sen then contended that the company had no right to
transfer its employees from Calcutta to Delhi and, if sanction is given by the
court to the proposed alteration, that would empower the company to transfer
its employees from Calcutta to Delhi. In the instant application we are not
called upon to decide as to whether the company can transfer any of its
employees from Calcutta to any other place. Indeed we are unable to do so.
Those questions would be governed by the provisions of the Industrial Disputes Act which we cannot
take notice of in the instant application.
Mr.
Ashim Ghosh’s contention that an extraordinary general meeting can be called
and held only on the requisition of the requisite number of members mentioned
in article 76 cannot be accepted. Article 75 of the company empowers the board
of the company to call general meeting. But, then all general meetings except
the annual general meetings of a company are extraordinary general meetings.
Hence, the meeting in the instant case to consider the proposed resolution for
alteration of the memorandum was rightly called, in our opinion, by the board
under article 75 of the company. Thus the said meeting need not have been held
only at the registered office of the company and on the said ground the meeting
was not bad nor the resolution passed at the said meeting could or can be said
to be bad or void. All the aforesaid contentions of Mr. Ghosh must fail.
In
view of the aforesaid we do not think it necessary to deal with the other cases
cited at the Bar.
For
the reasons stated above we are of the opinion that this appeal must succeed.
The appeal is allowed. There shall be order in terms of prayer (a) of the
petition. In the facts and circumstances of this case we, however, direct that
each party shall pay and bear his or its costs of this appeal.
[1986] 59 COMP. CAS. 548 (SC)
SUPREME COURT OF INDIA
Life Insurance Corporation of India
v.
Escorts Ltd.
CIVIL
APPEALS NOS. 4598 OF 1984 AND 497 TO 499 OF 1985.
K. Parasaran, M.K. Banerji,
V.C. Kotwal, Shardal S. Shroff, Mrs. Pallavi S. Shroff, Cyril S. Shroff, Amit
Desai, Sasi Prabhu, Ms. Prema Baxi and Suresh A. Shroff, the Appellant.
F.S. Nariman, Soli J.
Sorabjee, K.E. Venugopal, Anil B. Divan, O.P. Malhotra, R.F. Nariman, A.
Chinoy, B.H. Antia, J.B. Dadachanji, Ravinder Narain, S.C. Mathur, Rajive
Sawhney, Harish Salve, T.M. Ansari, Mrs. A.K. Verma, S.K. Mishra and Jool
Pores, A.N. Ganguli, S.C. Maheshwari and H.S. Parihar, Mahendra Shah, and A.
Subba Rao, for the Respondent.
Chinnappa Reddy, J.—Problems of high finance and broad fiscal policy, which
truly are not and cannot be the province of the court for the very simple
reason that we lack the necessary expertise and, which, in any case, are none
of our business, are sought to be transformed into questions involving broad
legal principles in order to make them the concern of the court. Similarly,
what may be called the "political" processes of "corporate
democracy" are sought to be subjected to investigation by us by invoking the
principle of the rule of law, with emphasis on the rule against arbitrary State
action. An expose of the facts of the present case will reveal how much legal
ingenuity may achieve by way of persuading courts, ingenuously, to treat the
variegated problems of the world of finance, as litigable
public-right-questions. Courts of justice are well-tuned to distress signals
against arbitrary action. So, corporate giants do not hesitate to rush to us
with cries for justice. The court room becomes their battle ground and
corporate battles are fought under the attractive banners of justice, fair play
and the public interest. We do not deny the right of corporate giants to seek
our aid as well as any Lilliputian farm labourer or pavement dweller though we
certainly would prefer to devote more of our time and attention to the latter.
We recognise that out of the dust of the battles of giants occasionally emerge
some new principles, worth the while. That is how the law has been progressing
until recently. But not so now. Public interest litigation and public-assisted
litigation are today taking over many unexplored fields and the dumb are
finding their voice.
In the case before us, as
if to befit the might of the financial giants involved, innumerable documents
were filed in the High Court, a truly mountainous record was built up running
to several thousand pages and more have been added in this court. Indeed, and
there was no way out, we also had the advantage of listening to learned and
long drawn-out, intelligent and often ingenious arguments advanced and
dutifully heard by us. In the name of justice, we paid due homage to the causes
of the high and mighty by devoting precious time to them, reduced, as we were,
at times to the position of helpless spectators. Such is the nature of our
judicial process that we do this with the knowledge that more worthy causes of
lesser men who have been long waiting in the queue have been blocked thereby
and the queue has consequently lengthened. Perhaps the time is ripe for
imposing a time limit on the length of submissions and a page-limit on the
length of judgments. The time is probably ripe for insistence on brief written
submissions backed by short and time-bound oral submissions. The time is
certainly ripe for brief and modest arguments and concise and chaste judgments.
In this very case, we heard arguments for 28 days and our judgment runs to 181
pages and both could have been much shortened. We hope that we are not hoping
in vain that the vicious circle will soon break and that this will be the last
of such mammoth cases. We are doing our best to disentangle the system from a
situation into which it has been forced over the years by the existing
procedures. There is now a public realisation of the growing weight of the
judicial burden. The co-operation of the bar too is forthcoming though in slow
measure. Drastic solutions are necessary. We will find them and we do hope to
achieve results sooner than expected. So much for sanctimonious sermonising and
now back to our case.
We do not for a moment
doubt that this is a case which requires our scrutiny, more particularly so
because of a most singular and remarkable feature of the case, namely, the
absence of the principal dramatis personae from the stage. Mr. Swraj Paul, the
hero of the drama, did not appear before the High Court and did not appear
before us ; nor did his broker and his power of attorney holder, Raja Ram
Bhasin & Co. Though the investments made and in question run into several
crores of rupees, they have acted as if they care a tuppence for them.
Obviously, Mr. Swraj Paul, a foreign national, does not want to submit himself
to the jurisdiction of Indian courts and his broker, Raja Ram Bhasin & Co.,
has nothing to lose by keeping away from the court and perhaps everything to
gain by standing by the side of his principal. These may be excellant reasons
for them for not choosing to appear before us, but their non-appearance and
abstemious silence in court have certainly complicated the case and embarrassed
the Government of India, the Reserve Bank of India and the Life Insurance
Corporation of India to whose lot it fell to defend the case since it was their
policies, decisions and actions that were assailed. We must, however, express
our strong condemnation of the conduct and tactics employed by Swraj Paul and
Raja Ram Bhasin which we consider deplorable. The Punjab National Bank, the
designated bank of Mr. Swraj Paul's companies, did appear before us but their
appearance was of no assistance to the court. They had put themselves in such a
hapless situation. It was apparent to us from the beginning that if there was
much front-line battle strategy, there was considerably more back stage
"diplomatic" manoeuvring, as may be expected when financial giants
clash, though we are afraid neither giant was greatly concerned for justice or
the public interest. For both of them, the court room was just another arena
for their war, except that one of the giants carefully kept himself at the back
behind a screen as it were. One was reminded of the Mahabharata war where
Arjuna kept Shikhandi in front of him while fighting Bhishma, not that neither
of the warriors in this case can be compared with Bhishma or Arjuna nor can the
Government of India and Reserve Bank of India be downgraded as Sikhandies. But
the case does raise some questions which do concern the public interest and we
are greatly concerned for the public interest and the administration of
administrative justice in the public interest. It is from that angle alone that
we propose to examine the several questions arising in the case.
The present state of Indian
economy which has to operate under the existing world economic system is such
that India needs foreign exchange and, lots of it, to meet the demands of its
developmental activities. It has become necessary to earn, conserve and build
up a reservoir of foreign exchange. So Parliament and the executive government
have been taking steps, from time to time, to regulate, to conserve and improve
the foreign exchange resources of the country and the proper utilisation
thereof in the interests of the economic development of the country. The
Foreign Exchange Regulation Act, 1973, was enacted for that purpose.
"Foreign
exchange" is defined by section 2(h) of the Act to mean foreign currency and
includes—
"(i) all deposits, credits and balances payable
in any foreign currency and any drafts, traveller's cheques, letters of credit
and bills of exchange, expressed or drawn in Indian currency but payable in any
foreign currency;
(ii) any instrument payable, at the option of the drawee or holder
thereof or any other party thereto, either in Indian currency or in foreign
currency or partly in one and partly in the other."
"Authorised
dealer" is defined by section 2(b) to mean a person for the time being
authorised under section 6 to deal in foreign exchange.
"Owner" is
defined by section 2(o), in relation to any security, as including—
"any person who has
power to sell or transfer the security, or who has the custody thereof or who
receives, whether on his own behalf or on behalf of any other person, dividends
or interest thereon, and who has any interest therein, and in a case where any
security is held on any trust or dividends or interest thereon are paid into a
trust fund, also includes any trustee or any person entitled to enforce the
performance of the trust or to revoke or vary, with or without the consent of
any other person, the trust or any terms thereof, or to control the investment
of the trust moneys."
Section 3 provides for the
establishment of a Directorate of Enforcement consisting of a Director of
Enforcement and other officers.
Section 6(1) enables the
Reserve Bank on an application made to it, to authorise any person to deal in
foreign exchange. Section 6(2) prescribes what may be authorised and section
6(4) and section 6(5) prescribe the duties of the authorised dealer.
Section 8(1) provides that,
except with the previous general or special permission of the Reserve Bank, no
person other than the authorised dealer shall deal in foreign exchange. Section
8(2) provides that except with the previous general or special permission of
the Reserve Bank, no person shall enter into any transaction which provides for
the conversion of Indian currency into foreign currency or foreign currency
into Indian currency at rates of exchange other than those authorised by the
Reserve Bank.
Section 13(1) prescribes
that subject to such exemption as may be specified, no person shall, except
with the general or special permission of the Reserve Bank, bring or send into
India any gold or silver or any foreign exchange or any Indian currency.
Section 13(2) provides that no person shall, except with the general or special
permission of the Reserve Bank or with the written permission of a person
authorised by the Reserve
Bank take or send out of India any gold, jewellery or precious stones or Indian
currency or foreign exchange other than foreign exchange obtained by him from
an authorised dealer or from a money-changer.
Section
19(1)(b) provides that no person shall, except with the general or special
permission of the Reserve Bank of India, transfer any security or create or
transfer any interest in the security, to or in favour of a person resident
outside India.
Section
19(4) and (5), which are relevant for our purpose, are as follows:
"(4)
Notwithstanding anything contained in any other law, no person shall, except
with the permission of the Reserve Bank,—
(a) enter any transfer of securities in any register
or book in which securities are registered or inscribed if he has any ground
for suspecting that the transfer involves any contravention of the provisions
of this sec tion, or
(b) enter in any such register or book, in
respect of any security, whether in connection with the issue or transfer of
the security or other wise, an address outside India except by way of
substitution for any such address in the same country or for the purpose of any
transaction for which permission has been granted under this section with
knowledge that it involves entry of the said address, or
(c) transfer
any share from a register outside India to a register in India.
(5) Notwithstanding
anything contained in any other law, no transfer of any share of a company
registered in India made by a person resident outside India or by a national of
a foreign State to another person whether resident in India or outside India
shall be valid unless such transfer is confirmed by the Reserve Bank on an
application made to it in this behalf by the transferor or the
transferee."
Section
29(1), which is also relevant for the purposes of this case, is as follows :
"29(1)
Without prejudice to the provisions of section 28 and section 47 and
notwithstanding anything contained in any other provision of this Act or the
provisions of the Companies Act, 1956, a person resident outside India (whether
a citizen of India or not) or a person who is not a citizen of India but is
resident in India, or a company (other than a banking company) which is not incorporated
under any law in force in India or in which the non-resident interest is more
than forty per cent, or any branch of such company, shall not, except with the
general or special permission of the Reserve Bank—
(a) carry on in India, or establish in India a
branch, office or other place of business for carrying on any activity of a
trading, commercial or industrial nature, other than an activity, for the
carrying on of which permission of the Reserve Bank has been obtained under
section 28 ; or
(b) acquire the whole or any part of any
undertaking in India of any person or company carrying on any trade, commerce
or industry or purchase the shares in India in any such company."
Section
29(2) makes provision for applying for permission to continue after the
commencement of the Act any activity of the nature mentioned in clause (a) of
section 29(1) which was being carried on at the commencement of the Act, while
section 29(4) makes similar provision for applying for permission to continue
to hold after the commencement of the Act shares of a company referred to in
section 29(1)(b) which were held by a person at the commencement of the Act.
Section
30 prescribes that no national of a foreign State shall, without the previous
permission of the Reserve Bank—
(i) take
up any employment in India, or
(ii) practise
any profession or carry on any occupation, trade or business in India.
Section
31 prohibits any person, who is not a citizen of India or a company not
incorporated in India or in which the non-resident interest is more than 40 per
cent., from acquiring or holding or transferring or disposing of by sale,
mortgage, lease, gift, settlement or otherwise any immovable property situate
in India, except with the previous general or special permission of the Reserve
Bank.
Section
47 deals with contracts in evasion of the Act. Section 47(1) prohibits any
person from entering into a contract or agreement which would directly or
indirectly evade or avoid in any way the operation of any provision of the Act
or of any rule, direction or order made thereunder. Section 47(2) provides that
any provision of the Act requiring that a thing shall not be done without the
permission of the Central Government or the Reserve Bank of India, shall not
render invalid any agreement to do that thing, if it is a term of the agreement
that that thing shall not be done unless permission is granted. Where such a
term is not explicit, it is to be implied in every contract. Section 47(3)
further provides that, subject to certain specified conditions, legal
proceedings may be instituted to recover any sum which would be due, apart from
and despite the provisions of the Act or any term of the contract requiring the
permission of the Central Government or the Reserve Bank of India for the doing
of a thing.
Section
50 prescribes the levy of a penalty if any person contravenes any of the
provisions of the Act except certain enumerated provisions and the adjudication is to be made by the Director of Enforcement
or an Officer not below the rank of an Assistant Director of Enforcement,
specially empowered in that behalf. Section 51 provides for an enquiry and the
power to adjudicate. Section 52 provides for an appeal to the Appellate Board
and section 54 for a further appeal to the High Court on questions of law.
Section 56 provides for prosecutions, for contraventions of the provisions of
the Act and the rules, and directions or orders made thereunder. Section 57
makes the failure to pay the penalty imposed by the adjudicating officer or the
Appellate Board or the High Court or the failure to comply with any directions
issued by those authorities, an offence punishable with imprisonment. Section
59 prescribes a presumption of mensrea in prosecutions under the Act and throws
upon the accused the burden of proving that he had no culpable mental state
with respect to the act charged in the prosecution. Section 61 provides for
cognizance of offences. Section 61(2)(ii) obliges the court not to take
cognizance of any offence punishable under section 56 or 57 except upon a
complaint made in writing by (a) the Director of Enforcement; or (b) any
officer authorised in writing in this behalf by the Director of Enforcement or
the Central Government; or (c) any officer of the Reserve Bank authorised by
the Reserve Bank by a general or special order. The proviso to this provision
enjoins that no complaint shall be made for the contravention of any of the
provisions of the Act, rule, direction or order made thereunder which prohibits
the doing of an act without permission, unless the person accused of the
offence has been given an opportunity of showing that he had such permission.
Section 63 empowers the adjudicating officer adjudging any contravention under
section 51 and any court trying a contravention under section 56, if he or it
thinks it fit to direct the confiscation of any currency, security or any other
money or property in respect of which the contravention has taken place.
Section 67 treats the
restrictions imposed by sections 13, 18(1)(a) and 19(1)(a) as restrictions
under section 11 of the Customs Act and makes all the provisions of the Customs
Act applicable accordingly.
Section 71(1) lays the
burden of proving that he had the requisite permission for prosecuting or for proceeding
against for contravening any of the provisions of the Act or rule or direction
or order made there under which prohibits him from doing an act without
permission.
Section 73(3) enables the
Reserve Bank of India to "give directions in regard to the making of
payments and the doing of other acts by bankers, authorised dealers,
money-changers, stock brokers, persons referred to in sub-section (1) of
section 32 or other persons, who are authorised by the Reserve Bank to do
anything in pursuance of this Act in the course of their business, as appear to
it to be necessary or expedient for the purpose of securing compliance with the
provisions of this Act and of any rules, directions or orders made
thereunder."
Section 75 enables the
Central Government to give and the Reserve Bank to comply with general or
special directions as the former may think fit.
Section 76 requires the
Central Government or the Reserve Bank, while giving or granting any permission
or licence under the Act, to have regard to all or any of the following
factors, namely,
(i) conservation
of the foreign exchange resources of the country;
(ii) all
foreign exchange accruing to the country is properly accounted for;
(iii) the foreign exchange resources of the
country are utilised as best to subserve the common good; and
(iv) such
other relevant factors as the circumstances of the case may require.
Section 79 invests the
Central Government with the power generally to make rules and in particular for
various specified purposes.
In exercise of the powers
conferred by section 79 of the FERA, rules called "the Non-Resident
(External) Account Rules, 1970" have been made. Rule 3 enables, subject to
the provisions of the rules, any person resident outside India to open and
maintain in India an account with an authorised dealer, to be called, a
Non-Resident (External) Account. Rule 4(1) prescribes that no amount other than
the amounts mentioned therein shall be credited to a Non-Resident (External)
Account. One such is "any amount remitted by the acccount-holder from
outside India through normal banking channels as an amount which may be
credited to a Non-Resident (External) Account". Rule 4(4) provides that
amounts accruing by way of a dividend or interest on shares, securities or
deposits held in India, shall not be credited to Non-Resident (External)
Account unless certain conditions are fulfilled. One of the conditions is that
the account-holder is the registered holder of such shares, securities or
deposits. Another condition is that the account-holder has deposited the
certificates relating to the shares with an authorised dealer along with an
undertaking in writing to the effect that he will not dispose of any of the
shares except with the previous approval of the Reserve Bank. Rule 5 further
prescribes that no such amount as is referred to in rule 4(1) shall be credited
to a Non-Resident (External) Account unless the Reserve Bank having regard to the
desirability of permitting remittance of funds held in India by non-residents,
either by general or special order, gives permission in this behalf. Rule 6
provides that a person resident outside India who wishes to open a Non-Resident
(External) Account shall make an application in this behalf to an authorised
dealer. The authorised dealer, unless there is a general or special order of
the Reserve Bank so directing, shall refer every such application to the
Reserve Bank together with the particulars.
The Exchange Control Manual
s published by the Reserve Bank of India, incorporates various statutory and
administrative instructions, advisory opinions, comments, notes, explanations,
etc., issued from time to time. Paragraph 24.1(i) states :
"...Investment in
India by non-residents of Indian nationality or origin is subject to a
different set of rules in order to give them wider investment opportunities.
Ordinarily, investment is allowed freely if the investment proposed to be made
is not of an undesirable nature, but subject to the condition that no
repatriation of capital invested and income earned thereon will be allowed. The
non-resident investor is also required to give an undertaking agreeing to forgo
the benefits of repatriation. Investment with repatriation benefits is allowed
only in restricted fields subject to certain conditions. The schemes under
which such investments are permitted are explained in this Chapter. "
Paragrah 24.1(ii), however,
states:
"Foreign investment in
India is also subject to regulation through the various provisions in the
Foreign Exchange Regulation Act, 1973, viz., section 19, governing issue and
transfer of securities in favour of nonresidents, section 29 g0verning
establishment of a place of business by nonresidents for carrying on trading,
commercial or industrial activity or acquiring such an undertaking or shares in
such companies in India and section 31 governing acquisition, disposal, etc.,
of immovable property in India. But once foreign investment is permitted by Government
under its foreign investment and industrial policy, requisite permissions under
the relative sections of the Foreign Exchange Regulation Act, 1973, are more or
less automatically issued."
Paragraph 24A.1 provides:
"In terms of section
29(1)(b) of the Foreign Exchange Regulation Act, 1973, no person resident
outside India whether an individual, firm or company (not being a banking
company) incorporated outside India can acquire shares of any company carrying
on trading, commercial, or industrial activity in India without prior
permission of Reserve Bank. Also, under section 19(1)(b) and 19(1)(d) of the
Act, the transfer and issue of any security (which includes shares) in favour
of or to a person resident outside India require prior permission of Reserve
Bank. When permission has been granted fortransfer or issue of shares to
non-resident investor under section 19(1)(b) or section 19(1)(d), it is
automatically deemed to be permission under section 29(1)(b) for purchase of
shares by him. Non-resident Indians are, however, permitted to invest freely in
securities of Central and State Governments, Units of Unit Trust of India and
National Savings/ Plan Certificates of Government of India (see paragraph
24B.2). All other investments require specific permission of Reserve
Bank."
Paragraph 28A.4(i) states :
"Authorised dealers
may freely open Non-Resident (External) Accounts in the names of individuals of
Indian nationality or origin, resident outside India, provided funds for the
purpose are transferred to India in an approved manner from country of
residence of the prospective account holder or from any other foreign country
if the country of residence of the account holder and the country from which
remittance is received are both in external group."
Paragraph 28A.4(iii),
however, prescribes that firms, companies and other corporate bodies as well as
institutions and organisations resident abroad are not eligible to open
Non-Resident (External) Accounts in India. Paragraph 28A.8(ii) states that
Under section 29(1)(b) of the Foreign Exchange Regulation Act, 1973, persons
resident outside India require prior permission of Reserve Bank for purchase of
shares in Indian companies. Investment of Non-Resident (External) Account funds
in shares of Indian companies is not, therefore, permitted without prior
approval of the Reserve Bank.
With a view to earn foreign
exchange by attracting non-resident individuals of Indian nationality or origin
to invest in shares of Indian companies, the Government of India decided to provide
incentives to such individuals and formulated a "portfolio investment
scheme" for investment by non-residents of Indian nationality or origin.
This scheme, announced by the Government on February 27, 1982, was incorporated
in Circular No. 9, dated April 14, 1982, of the Reserve Bank of India issued
under section 73(3) of the Foreign Exchange Regulation Act. Paragraph 2 of the
Circular explains that in order to provide further incentives and facilitate
investment by non-residents of Indian nationality or origin in shares of Indian
companies, existing facilities had been liberalised and procedural formalities
had been simplified as explained in the subsequent paragraphs of the circular.
Paragraph 3 deals with investment without repatriation benefits while paragraph
4 deals with investment with repatriation benefits. Paragraph 4(a) provides
that under the liberalised policy, non-residents of Indian nationality or
origin will be permitted to make portfolio investment in shares quoted on stock
exchanges in India with full benefits of repatriation of capital invested and
income earned thereon provided that (a) the shares are purchased through a
stock exchange, (b) the purchase of shares in any one company by each
non-resident investor does not exceed Rs. 1 lakh in face value or one per cent,
of the paid up equity capital of the company, whichever is lower, and (c)
payment for such investments is made either by fresh remittances from abroad or
out of the funds held in the investor's Non-resident (External) Account/FCNR
account with a bank in India. It further provides that the Reserve Bank will
grant permission to designated banks authorised to deal in any foreign exchange
for purchasing shares through a stock exchange on behalf of their non-resident
customers of Indian nationality /origin, subject, inter alia, to the limits and
conditions mentioned. Paragraph 5 deals with another significant relaxation in
the existing policy and provides" the entire gamut of the facilities of
direct and portfolio investments as outlined in paragraphs 3 and 4 above will
now be extended to overseas companies, partnership firms, trusts, societies and
other corporate bodies owned predominantly by non-resident individuals of
Indian nationality /origin. The criterion for determining such predominant
ownership is that at least 60% of the ownership of these entities should be
with non-residents of Indian nationality/origin. It would be necessary for such
entities to submit a certificate in this regard in the prescribed form OAC from
Overseas Auditor/Chartered Accountant/Certified Public Accountant, along with
their applications for investment in shares, to the Reserve Bank either through
the designated banks authorised to deal in foreign exchange or the Indian
companies offering new issues, as the case may be.
Applications from those
entities for permission to designated banks for investments with repatriation
benefits are required to submit form RPC to the Controller, Exchange Control
Department, Reserve Bank of India, Central Office (Foreign Investment
Division), Bombay. Paragraph 7 stresses the importance of encouraging
investments in India by non-residents of Indian nationality/origin and overseas
companies, etc., predominantly owned by them and requires authorised dealers to
render prompt and efficient service by centralising their work in a few
selected branches in places where stock exchange facilities are readily
available. Paragraph 8 enables non-resident investors to appoint residents in
India (other than the authorised dealers) to be their agents with appropriate
power of attorney to arrange purchase/sale of shares/ securities. Such agents
would include recognised stock exchange brokers. It is, however, made clear
that" permission for investment in shares on behalf of such investors will,
however, be granted to the designated banks authorised to deal in foreign
exchange since these banks would be responsible for compliance with the
relevant exchange control requirements. Proper co-ordination and understanding
between the designated bank and the investor's agents would be necessary for
handling the investment procedures efficiently". Paragraph 11 prescribes,
among other matters, the duty of designated banks "to maintain separately
a proper record of the investments made in shares with repatriation benefits
and without repatriation benefits on account of each investor, showing the
relevant particulars including the numbers of share certificates and
distinctive numbers of shares. Likewise, the designated branches of authorised
dealers should keep a systematic and up-to-date investor-wise record of the
shares purchased by them through stock exchange on repatriation basis on behalf
of their overseas customers of Indian nationality/origin so that they are able
to ensure that the purchase of shares in any one company by each non-resident
investor does not exceed Rs. 1 lakh in face value or 1 per cent, of the paid-up
equity capital of the company, whichever is lower."
Circular No. 9 was followed
by Circular No. 10, dated April 22, 1982, from the Reserve Bank to all
authorised dealers in foreign exchange. The purpose of the circular was to
ensure that the overseas companies, partnership firms, societies, other
corporate bodies and overseas trusts to whom the benefits of the investment
scheme formulated by Circular No. 9 were extended are owned to the extent of at
least 60 per cent, by non-residents of Indian nationality/origin or in which at
least 60 per cent, of the beneficial interest (in the case of trusts) is
irrevocably held by such persons. "In order to ensure that the ownership
interest in the overseas company/ firm/society or the irrevocable beneficial
interest in the trust held by persons of Indian nationality/origin is not less
than 60 per cent., authorised dealers are required to obtain, along with the
account opening form, a certificate from an Overseas Auditor/Chartered
Accountant/Certified Public Accountant in Form OAC enclosed with A. D. (M.A.
series) Circular No. 9 of 1982." "The account holder is further
required to submit such a certificate to the authorised dealer on an annual
basis so as to ensure that the ownership/beneficial interest of the above
persons continues to be at or above the level of 60 per cent."
By Circular No. 15, dated
August 28, 1982, the Reserve Bank partially relaxed Circular No. 9, dated April
14, 1982, by removing the monetary limit of Rs. 1 lakh on portfolio investment
in shares on repatriation basis. However, the limit of one per cent, of the
paid-up capital of the company was retained.
By Circular No. 27, dated
December 10, 1982, it was prescribed :
"Where permission is
granted by the Reserve Bank for purchase/sale of shares/debentures on stock
exchange in India by non-residents of Indian nationality/origin, the
transactions should be effected at the ruling market price as may be determined
on the floor of the stock exchange by normal bid and offer method only."
On May 16, 1983, the
Reserve Bank clarified and modified the "Nonresidents of Indian
Nationality/Origin Portfolio Investment Scheme" in the following manner :
Referring to Circular No. 9 which extended portfolio scheme to overseas
companies, partnership firms, societies and other corporate bodies which were
owned to the extent of at least 60 per cent, by non-residents of Indian
nationality/origin and to overseas trusts in which at least 60 per cent, of the
beneficial interest was irrevocably held by such persons, Circular No. 12,
dated May 16, 1983, imposed an overall ceiling of (i) 5 per cent, of the total
paid-up equity capital of the company concerned, and (ii) 5 per cent, of the
total paid-up value of each series of the convertitle debentures issue, as the
case may be. For the purpose of determining and monitoring the 5 per cent,
ceiling, the cut-off date was prescribed as May 2, 1983, the date on which the
policy was announced in Parliament. It was made clear that purchase of equity
shares and convertible debentures in excess of 5 per cent would require prior
and specific approval of the Reserve Bank. The procedure for making
applications for permission was prescribed and it was further provided that
where investment in excess of the 5 per cent, ceiling is to be made on behalf
of the nonresident investor who has not submitted any application to the
Reserve Bank earlier in the prescribed form, the initial application for such
investments should be made in the appropriate form giving details of the equity
shares/convertible debentures to be purchased. Paragraph 3 of Circular No. 12
prescribed the procedure for monitoring the ceiling of 5 per cent. Authorised
dealers through their link offices were required to submit to the Reserve Bank
a consolidated statement of the total purchases and sales (company wise) of
equity shares/convertible debentures made by their designated branches. The
daily statements were to be serially numbered and submitted to the Controller
positively on the following working day. It was further provided" all
purchases and sale transactions for which a firm commitment has been made to
acquire or transfer equity shares/convertible debentures in the form of the
broker's contract notes issued by recognised stock exchange brokers should be
included in the daily statement irrespective of whether the actual deliveries
have been effected or not. "It was further provided that with a view to
effectively monitor the 5 per cent, ceiling, the Reserve Bank would, as soon as
the aggregate reached the limit of 4 per cent., notify the fact to the link
offices of the authorised dealers in Bombay. Thereafter, the link offices were
required to give the total number and value of equity shares/convertible
debentures proposed to be purchased through the stock exchange during the next
15 days. Clearance for the purchase of equity shares/convertible debentures
would be granted by the Reserve Bank after taking into account the purchases
proposed to be made under the portfolio investment scheme by all the authorised
dealers from whom intimations have been received.
On September 19, 1983,
another circular (18) was issued by the Reserve Bank of India advising all
authorised dealers in foreign exchange that the facilities made available to
the overseas companies, etc., by Circular No. 9 dated April 14, 1982, were also
available where such overseas bodies were owned even indirectly to the extent
of at least 60 per cent, by such nonresidents of Indian nationality/origin.
What was necessary was that the ultimate ownership of beneficial interest in
the overseas bodies to the extent of at least 60 per cent, must be in the hands
of one or more nonresident individuals of Indian nationality/origin.
The net result of all the
circulars was that non-resident individuals of Indian nationality/origin as
well as overseas companies, partnership firms, societies, trusts and other
corporate bodies which were owned by or in which the beneficial interest vested
in non-resident individuals of Indian nationality/origin to the extent of not
less than 60 per cent, were entitled to invest, on a repatriation basis, in the
shares of Indian companies to the extent of one per cent, of the paid-up equity
capital of such Indian company provided that the aggregate of such portfolio
investment did not exceed the ceiling of 5 per cent. It was immaterial whether
the investment was made directly or indirectly. What was essential was that 60
per cent, of the ownership or the beneficial interest should be in the hands of
non-resident individuals of Indian nationality/origin. Curiously enough though
a limit of one per cent, was imposed on the acquisition of shares by each
investor, there was no restriction on the acquisition of shares to the extent
of one per cent, separately by each individual member of the same family or by
each individual company of the same family (group) of companies. In the absence
of any such restriction, any non-resident determined to destabilise an Indian
company could do so by forming a combination of different individuals and
companies each of whom could separately obtain permission to purchase one per
cent, of the shares of an Indian company. The authority authorised to grant
permission could not, for example, refuse to grant permission to B who has
applied for permission in his own right on the mere ground that permission has
been granted to his father; A. Similarly, permission could not be refused to
company, C, in which D, a non-resident Indian, owns 20 per cent, of the shares
and E, another non-resident Indian, owns 40 per cent, of the shares on the
ground that company, L, in which D owns 60 per cent, of the shares has already
been granted permission. Would it make any difference if D owns 60 per cent, of
the shares in both companies, C and L ? One can well imagine half a dozen
overseas companies in which a dozen non-resident individuals of Indian origin
hold shares in varying proportions but holding in the aggregate more than 60
per cent, of the shares of the overseas companies applying for permission to
purchase shares in an Indian company. Could permission be refused to them ? Is
the Reserve Bank to concern itself with the individual identity of the
shareholders of the overseas companies or the nationality or origin of the
shareholders ? Is the Reserve Bank to concern itself only with the colour of
the skin, as it were, and not with the personality of the shareholder of
overseas company ? We will revert to this question later. Obviously, the one
per cent, rule was introduced to prevent large scale acquisition of shares of
Indian companies by non-residents and their possible destabilisation. Also,
obviously, the rule was a futile exercise as it was incapable of yielding the
desired result. Quite obviously, therefore, a better solution had to be found
and it was found by the " aggregate of 5 per cent. " rule. This would
automatically limit the total outside holdings and effectively prevent
destabilisation. Of course, it would still be necessary to satisfy the
requirements of the Foreign Exchange Regulation Act, more particularly the
requirement of section 29 of the Act providing for the general or special
permission of the Reserve Bank to purchase the shares in India of the company.
Though the ultimate authority under the scheme is the Reserve Bank, an
important feature of the Scheme is that the monitoring of the remittances and
the investments has to be done by the designated bank, which is the authorised
dealer.
Two of the principal questions
argued before us were whether the permission contemplated by section 29 was
previous permission or whether the permission could be granted ex post facto
and whether the purchase of the shares by the foreign investor of Indian
nationality/origin in this case involved any contravention of the FERA or the
Non-Residents' Investment Scheme. To appreciate how the questions arise, it is
necessary to state here a few facts.
Desiring to take advantage
of the Non-resident Portfolio Investment Scheme and to invest in the shares of
Escorts Ltd., an Indian company, thirteen overseas companies, twelve out of
whose shares were owned 100 per cent, and the thirteenth out of whose shares
was owned 98 per cent, by Caparo Group Ltd., designated the Punjab National
Bank as their banker (authorised dealer) and M/s. Raja Ram Bhasin & Co. as
their brokers for the purpose of such investment. It must be mentioned here
that 61.6 per cent, of shares of Caparo Group Ltd. are held by the Swraj Paul
Family Trust, one hundred per cent, of whose beneficiaries are one Swraj Paul
and the members of his family, all non-resident individuals of Indian origin.
Their designated banker, the Punjab National Bank, E.C.E. House Branch, by
their letter dated March 4, 1983, but despatched on March 9, 1983, and by
another letter dated March 12, 1983, addressed the Controller, Reserve Bank of
India, Exchange Control Department, and requested the Reserve Bank to accord
their approval for opening Non-resident External Accounts in the name of each
of thirteen companies, three named in the first letter and ten named in the
second letter, for the purpose of "conducting investment operations in
India" through the agency of Raja Ram Bhasin and Co., Investment Advisor,
Member of the Delhi Stock & Share Department, Delhi. These letters were
received by the addressee on March 14 and 18. It was mentioned in the letters
that the proposed accounts would be "effected" by remittances from
abroad through normal banking channels and debits and credits would be allowed
only in terms of the scheme contained in the scheme for investment by
non-residents. The first letter was in respect of (1) Caparo Tea Co. Ltd., U.
K., (2) Empire Plantation and Investment Ltd., U.K., and (3) Assam Frontier Tea
Holding PLC, U.K., while the second letter was in regard to (1) Caparo
Investments Ltd., (2) Caparo Properties Ltd., (3) Steel Sales Ltd., (4)
Atlantic Merchants Ltd., (5) Buchanam Ltd., (6) Seymour Shipping Ltd., (7)
Caparo Group Ltd., (8) Natural Gas Tube Ltd., (9) Single Holdings Ltd. and (10)
Deborne Hotel Turkey Ltd. Forms RPC signed by each of the companies and forms
OAC signed by the auditors of the companies accompanied the two letters. Each
form RPC mentioned that the company was incorporated in England and that 61.6
per cent, of the shares was owned by non-residents of Indian
nationality/origin. In each form OAC, the auditor certified that the percentage
of holding of the company by persons of Indian nationality and/or origin was
61.6 per cent, and that the name of the shareholder was "Swraj Paul Family
Trust through their interest in the holding company." The auditors
certified that the ownership interest of persons of Indian origin in the
company was 61.6 per cent, of the total ownership of interest as on the date of
certificate and that the entire beneficial interest in the family trust was
held irrevocably by persons of Indian origin. On April 23, 1983, Punjab
National Bank addressed the Controller, Reserve Bank, Exchange Control
Department, inviting their attention to their former letters dated March 4 and
12, 1983, which were accompanied by the RPC and OAC forms relating to the 13
companies and advising the Reserve Bank that the investment operations were
being conducted through the company, Raja Ram Bhasin and Co., Share and Stock
Investment Advisers, Member of Delhi Stock Exchange Association Ltd. The
Reserve Bank was also advised that four remittances had been received from
Caparo Group Ltd., the holding company, on March 9, 1983, April 12, 1983, April
13, 1983, and March 23, 1983, of amounts equivalent to Rs. 1,35,36,000, Rs.
2,36,59,000, Rs. 76,35,000 and Rs. 1,31,38,681.13. The Punjab National Bank
also mentioned in the letter that although all necessary formalities prescribed
by the Reserve Bank's Circular dated April 22, 1982, had been complied with,
approval had not yet been accorded to their clients. It was requested that the
approval might be communicated to their client by cable.
We would like to mention at
this juncture that the letters dated March 4, March 12, and April 23, 1983, as
well as all other subsequent letters written by the Punjab National Bank, E. C.
E. House Branch, to the Reserve Bank are totally silent about a remittance of
Ł1,30,000 equivalent to Rs. 19,63,000 made by Mr. Swraj Paul to the Punjab National
Bank, Parliament Street Branch, on January 28, 1983, for the purpose of opening
an NRE account in the name of Mr. Swraj Paul. The remittance was said to have
been made pursuant to the discussion of Mr. Swraj Paul with the chairman of the
Punjab National Bank. We have no information as to what those instructions
were. We are told that the cable and the letter relating to the remittance were
handed over to the judges across the bar when the writ petition was being
argued in the High Court. We may further mention here that on January 26, 1983,
three of the Caparo companies, namely, Assam Frontier Tea Holding Public Ltd.
Co., Caparo Tea Co. Ltd. and Empire Plantations and Investment Ltd., addressed
three identical letters to Raja Ram Bhasin & Co. instructing the broker to
purchase equity shares of Delhi Cloth Mills Ltd. at the best market price on a
repatriation basis. Each letter mentioned that a letter addressed to the Punjab
National Bank, Parliament Street, authorising payment of an advance of Rs. 20
lakhs was enclosed. Delivery of shares could be given as and when they were
received from the market. It was also mentioned that the bank would pay the
full purchase value of the shares delivered and the advance of Rs. 20 lakhs
would be adjusted on the final delivery of the shares. Curiously enough, these
letters were tendered by the company, Escorts Ltd. Letters to the Punjab
National Bank said to accompany the letters were not placed before us and the
counsel for the Punjab National Bank denies that any such letter was ever
received by the Punjab National Bank. Be that as it may, we have the
circumstance that a remittance of Ł1,30,000 was undoubtedly made to the
Parliament Street Branch of the Punjab National Bank, unbeknown or at any rate
said to be unknown to the ECE House Branch of the Punjab National Bank. The
record produced before us does not indicate what was done with the amount of
Ł1,30,000 nor does it indicate that the Reserve Bank was ever informed of this
remittance by the Punjab National Bank. The money appears to have come in and
disappeared like a will-o'-the-wisp. The learned counsel for the Punjab
National Bank frankly confessed before us that the ECE House Branch of the
Punjab National Bank which was monitoring NRE accounts and the purchase of shares
by the Caparo Group of companies was not aware of the remittances received by
the Parliament Street Branch. In other words, the right hand did not know what
the left hand was doing. It is surprising that in a matter concerning valuable
foreign exchange, the Punjab National Bank, a nationalised bank and an
authorised dealer under the Foreign Exchange Regulation Act, should have acted
in such an irresponsible manner. Whatever else requires a probe by the Reserve
Bank of India, the disappearance or the expending of the amount of Ł1,30,000
without the knowledge of the Reserve Bank is a matter which requires thorough
investigation. No one should be allowed to break the law with impunity, and if
he has so done, get away with it in this bizarre way.
The statements filed by
Raja Ram Bhasin & Co. show that prior to March 9, 1983, the date of the
first remittance as disclosed by the Punjab National Bank to the Reserve Bank,
Raja Ram Bhasin & Co. had purchased shares of Escorts Ltd., worth Rs.
33,40,865, from Mangla & Co. We have already mentioned that according to
the correspondence which passed between the Punjab National Bank and the
Reserve Bank, the remittances were made on March 9, 1983, March 24, 1983, April
12, 1983, April 15, 1983, April 28, 1983, and April 28, 1984. In the
correspondence, there is no mention of any remittance having been made prior to
March 9, 1983. We may also notice here that the letter dated March 4, 1983,
from the Punjab National Bank seeking permission for investment in shares by three
of the Caparo Group of companies was actually despatched on 9th and received by
the Reserve Bank on March 14, 1983 only, while the letter dated March 12, 1983,
seeking permission on behalf of the remaining Caparo Group of companies was
received by the Reserve Bank on March 18, 1983. The statements of purchases of
shares made by Raja Ram Bhasin & Co. show that even by March 14, 1983,
shares of Escorts Ltd. worth Rs. 3,85,920 had been purchased from Bharat
Bhushan & Co. and shares worth Rs. 45,81,677 had been purchased from Mangla
& Co. Based on the circumstance that shares appeared to have been purchased
even before remittances were received, a seemingly serious complaint has been
made that rupee funds must have been freely used to purchase shares for the Caparo
Group under the Non-Resident Investment Scheme. We do not think that there is
any genuine basis for the complaint. Payments, under the Stock Exchange Rules,
may be made within two weeks after the purchases contracted for. In the present
case, the remittances from abroad started coming in less than two weeks after
the first purchase and there would have been no difficulty in making payments
out of foreign remittances.
The Reserve Bank of India,
having been approached for permission to purchase shares on behalf of the
thirteen Caparo Group of companies by the letters of March 4 and 12, 1983,
wrote to the Punjab National Bank on April 29, 1983, seeking information
regarding "the exact percentage of holding of (i) Mr. Swraj Paul and other
non-resident individuals of Indian origin, (ii) family trusts, and (iii) others
separately in respect of each of the thirteen companies." Information was
also sought as to whether any shares of Indian companies had already been
purchased by or on behalf of their Indian clients. It is not clear why the
Reserve Bank wanted information as to "the exact percentage of
holdings", etc., since the relevant information had already been furnished
in the RPC and OAC forms sent along with the letters dated March 4, 1983, and
March 12, 1983. Theletter dated April 29,1983, is also important for the reason that the
Reserve Bank merely wanted to know whether any shares of Indian companies had
already been purchased but did not give any indication that it wovld be
objectionable to do so with out prior permission of the Reserve Bank.
Thereafter, the Punjab National Bank wrote
three letters to the Reserve Bank on May 6, 1983, May 19, 1983, and May 25,
1983, the purport of which was that the Swraj Paul Family Trust held 61.6% of
the share capital of Caparo Group Ltd. which in turn held 100 per cent of the
share capital of eleven of the companies and 98% of the share capital of the
twelfth company. The names of the beneficiaries of the trust were given as Shri
Swraj Paul, Mrs. Aruna Paul, Mr. Amber Paul, Mr. Akash Paul, Miss Anjali Paul
and Mr. Angad Paul. In all the three letters it was pointed out that the
necessary RPC and OAC forms had already been submitted. The request for
expedition of approval was reiterated. The Reserve Bank of India was also
informed that their non-resident clients had advised them that details of
shares of Indian companies purchased by or on it heir behalf would be supplied
as soon as the purchases were complete. On May 25, 1983, the Reserve Bank of
India wrote to the Punjab National Bank, in answer to the letter dated April
23, 1983, and without reference to any of the later letters, asking for
clarification as to how, without obtaining the Reserve Bank's permission for
purchase of shares on behalf of thirteen overseas companies, the purchase
consideration of the shares of Indian companies was paid to Indian sellers out
of the Non-Resident (External) Account of the overseas purchasers. Information
was once again sought regarding the exact percentage of share holding of (i)
Mr. Swraj Paul, (ii) other non-resident individuals of Indian
nationality/origin (if any), and (iii) Family Trust of such persons in Caparo
Group Ltd. in U. K. separately. On May 28, 1983, the Punjab National Bank sent
a telegram to the Reserve Bank and followed it up with a letter dated May 30,
1983, to the effect that the beneficial interest of Mr. Swraj Paul and his
family trust in Caparo Group Ltd. was 61.6% as already clearly mentioned in
forms RPC and certificates OAC delivered to the Reserve Bank in February, 1983.
The other non-residents of Indian origin who were members of the; family trust
were Mrs. Aruna Paul, Mr. Akash Paul, Mr. Amber Paul, Mr. Angad Paul and Miss
Anjali Paul, all members of Mr. Swraj Paul's family. It was further pointed out
in the letter that as required by the scheme which mentioned that the Reserve
Bank will grant permission on application being made in the prescribed manner,
the thirteen companies had submitted their applications complying with all the
formalities. The letter of April 23, 1983, was also referred to and it was
mentioned that all particulars were given therein. The Punjab National Bank
further expressed its view that they were not required under the provisions of
the scheme to await the clearance of the Reserve Bank before purchasing shares
of Indian companies, once proper applications had been submitted. The Reserve
Bank was informed that the remittances from Caparo Group Ltd. were made in
favour of Raja Ram Bhasin and Co., their designated brokers and power of
attorney holders. So, the operations were executed by the Punjab National Bank
through NRE account on various dates up to April 23, 1983, and thereafter.
Payments were made, according to the bye-laws and regulations of Delhi Stock
Exchange. On May 31, 1983, a further telegram was sent by the Punjab National
Bank to the Reserve Bank informing them that they had been advised by the agent
brokers that up till April 28, 1983, they had purchased 80,000 equity shares of
Delhi Cloth and General Mills Co. Ltd. and 75,000 equity shares of Escorts Ltd.
on behalf of each one of the thirteen overseas companies predominantly owned by
non-residents of Indian origin.
On June 1, 1983, the
Assistant Controller, Reserve Bank of India, wrote to the Government of India
informing them about the receipt of applications from the Punjab National Bank
on behalf of the thirteen overseas companies, eleven of which were wholly owned
by Caparo Group Ltd. which in turn was owned by the family trust of Mr. Swraj
Paul to the extent of 61.6%. In the twelfth company, Caparo Properties Ltd.,
Caparo Group Ltd. had a holding of 98 per cent. Caparo Group Ltd. was owned to
the extent of 61.6% by the family trust of Mr. Swraj Paul, the other members of
the family trust being Mrs. Aruna Paul, Mr. Akash Paul, Mr. Amber Paul, Mr.
Angad Paul and Miss Anjali Paul. The Reserve Bank pointed out that it was to be
noticed that even the Caparo Group Ltd. was not directly owned by non-resident
individuals of Indian origin but only indirectly to the extent of 61.6% through
the family trust whose beneficiaries were persons of Indian origin. The Reserve
Bank appeared to be of the view that the investment facilities under the scheme
were intended to be extended to overseas companies, family trusts, etc., owned
predominantly by non-residents of Indian nationality/origin at least to the
extent of 60% and that it was not the intention to open these investment
facilities to overseas companies which were not directly owned by nonresident
individuals of Indian nationality/origin but owned by them indirectly via some
other trust or company. It was observed that if investment facilities were to
be extended to overseas companies indirectly owned by non-residents of Indian
nationality/origin, it would be very difficult to enforce the scheme and the
conditions of the FERA. The Reserve Bank also informed the Government that
their Legal Department supported their view that none of the thirteen overseas
companies was eligible to invest in shares of Indian companies under the existing
policy. They, therefore, proposed to reject the applications of all the
thirteen overseas companies. They requested the Government of India to confirm
by telex. To this the Government of India replied by telex on June 8, 1983, in
these words:
"Reference D. O. No.
EC. Co. FID(II)294/344-82/83, dated nil June, 1983, regarding application from
thirteen overseas companies for purchasing shares of Indian companies through
the stock exchange with repatriation rights under the portfolio investment scheme.
It is reported that some purchases have already been made in terms of the above
proposal by the Punjab National Bank. Although it does appear that prior to May
2, 1983, under the portfolio investment scheme, authorised dealers could
without R B I's prior approval purchase shares through stock exchange on behalf
of their non-resident clients, the circumstances in which some such purchases
were already made before the concerned companies got the necessary approval
from the R.B.I, do not seem to be clear. The RBI is requested to enquire
further into the matter and submit a detailed report to the Government covering
all aspects of the matter including the details of such purchases, the
financial status and the activities of the applicant companies and their dates
of incorporation and also the general legal issues as to whether such purchases
on the stock exchange by overseas non-resident Indian Companies, etc, prior to
May 2, 1983, are valid without the prior specific approval of the RBI. Your
report should reach as quickly as possible in order to enable the Government to
take decision." The importance of May 2, 1983, so frequently mentioned in
the telex message is apparently because May 2,1983, was fixed as the cut-off
date for the introduction of the ceiling of 5 per cent, in shares of Indian
companies by foreign investors of Indian origin by the Circular No. 12, dated
May 16, 1983, issued by the Reserve Bank of India.
In the meanwhile, on May
31, 1983, Punjab National Bank wrote to Escorts Ltd. informing them that the
thirteen overseas companies had been making investments in shares of Escorts
Ltd. in terms of the scheme for investment by overseas corporate bodies
predominantly owned by nonresidents of Indian nationality/origin to an extent
of at least 60 per cent, and that the thirteen overseas companies had
designated them as their banker and M/s. Raja Ram Bhasin & Co. had been
designated as the brokers for the purpose of investment. The brokers had
advised the bank that up to April 28, 1983, 75,000 equity shares of Escorts
Ltd. had been purchased by them for each of the thirteen overseas companies.
Out of the shares so purchased, 35,560 shares purchased by each of twelve the
companies had been lodged by the brokers with Escorts Ltd. in the names of H.C.
Bhasin and Mr. Bharat Bhushan for the purpose of transfer of the shares in the
books of the company. 35,667 shares purchased for the 13th company were also
lodged for the purpose of transfer in the name of Mr. H.C. Bhasin and Mr.
Bharat Bhushan. Escorts Ltd. replied on June 1, 1983, and requested the Punjab
National Bank to furnish information whether the non-resident companies had
executed and handed over applications to be filed with the Reserve Bank of
India for prior permission to purchase the shares of the company through them
as the designated bank and whether any permission had been granted by the
Reserve Bank of India to Punjab National Bank to purchase shares on behalf of
the thirteen companies mentioned in the letter. Escorts Ltd. did not refer in
this letter to the circumstance that H.C. Bhasin and Bharat Bhushan had lodged
the shares with them for transfer in their own names instead of the names of
any of the overseas companies. Escorts Ltd. obviously did not think it strange
that the brokers lodged the shares in their own names instead of their
principals, for the simple reason that bye-law 242 of the Stock Exchange
Regulations permit the brokers to do so if they are unable to complete the
formalities before the closing of the books. They now seek to make a point of
it. It is obviously without substance. In fact in their letter to Punjab
National Bank, Escorts Ltd. did not even think it worthwhile mentioning that
when they wrote to the brokers on May 27, 1983, requesting information whether
they were the beneficial owners of the shares and whether the shares had been
purchased on behalf of non-residents of Indian origin with the requisite
permission of the Reserve Bank of India, they had been curtly refused the
information by Mr. H.C. Bhasin and Mr. Bharat Bhushan who had also questioned
their authority to ask for such information and even threatened legal action if
the transfer was not registered. We are unable to fathom the reason behind the
attitude of the brokers. We can but make a guess. It was probable they were
still awaiting the permission of the Reserve Bank of India. That they had
purchased the shares for overseas investors was no secret since they had
already so informed the Punjab National Bank. They seem to have thought that
they were with in their rights under the Stock Exchange Regulations in asking
the shares to be transferred in their names. It was suggested by the learned
counsel for Escorts Ltd. that the brokers were loath to disclose the names of
their principals as they had utilised rupee funds and wanted to cover up that
fact. The suggestion appears to be farfetched as the funds remitted till then
from abroad were more than ample to cover the purchase of the shares until then
lodged. We must, however, notice that the record does not disclose how Bharat
Bhushan came into the picture, who authorised him to purchase the shares on
behalf of Caparo Group and who directed him to deposit the shares in his own
name ? He was not the stock broker designated to purchase shares on behalf of
the overseas companies. If so, one wonders what authority he had to enter into
transactions on behalf of overseas companies ! This is also a matter which may
require investigation by the Reserve Bank. As already mentioned, the Punjab
National Bank wrote to Escorts Ltd. on May 31, 1983, about purchase of shares
by each of the thirteen companies and the lodging of the shares with the
company in the names of H.C. Bhasin and Mr. Bharat Bhushan for the purposes of
transfer of shares in the books of the company. We have also referred to the
reply of Escorts Ltd. to Punjab National Bank on June 1, 1983. Punjab National
Bank immediately wrote to Escorts Ltd. on June 2, 1983, that they had already
informed the company that the purchase of shares for the thirteen companies had
been handled by the designated brokers M/s. Raja Ram Bhasin & Co. and
wanted to know the purpose for which Escorts Ltd. was seeking information from
them. They however, stated that they were designated as bankers of the thirteen
companies and that they had acted in terms of the procedure laid down by the
scheme. Without much further ado, i.e., without making any further enquiry
either from M/s. Raja Ram Bhasin or from the Punjab National Bank or without
seeking any information or guidance from the Reserve Bank of India, Escorts
Ltd. proceeded to consider the question of registering the transfer of shares.
A committee was constituted by Escorts Ltd. to scruitinize the transfer of the
shares. After taking expert legal opinion, the committee submitted a report to
the board of directors of Escorts Ltd. recommending against the registration of
the transfer of shares. The primary ground on which the recommendation was
based and with which we are now concerned is ground No. 5 which stated, "
that the company is prohibited by the provisions of section 19 of FERA from
registering transfer of shares in its books when it has reasons to suspect that
there has been a violation of the provisions of section 19 of FERA."
The committee reported that
it had reasonable ground to believe that the requisite permission of the
Reserve Bank of India has not been obtained for the purchase of the shares in
question. It was also mentioned in the report of the committee that they took
serious notice of "attempts made to intimidate and coerce the company to
register the shares and to pre-empt the free and proper exercise of the board's
discretion in accordance with the articles of association of the company and
the provisions of law." However, the report did not mention what the attempts
were that were made "to intimidate and coerce the company to register the
shares and to pre-empt the free and proper exercise of the board's
discretion."
On June 9, 1983, the Board
of Directors of Escorts Ltd. considered the committee's report and passed a
resolution refusing to register the transfer of shares. The resolution was in
the following terms :
"The board considered
the report of the share scrutiny and transfer committee of directors. The board
further considered exhaustively all aspects of the matter, all the materials
which were gathered and placed before the board and legal opinions and records
of legal advice which had been secured by the company on the points in issue.
The board further considered whether—having regard to the provisions of the
FERA and the FERA regulations and other relevant laws including the company
law, the Stamp Act, the Public Securities Act and other regulations relating to
the stock exchange and transfer of shares—requirements of law have been
complied with. The board further considered the various statements reported in
the press and made by the non-resident concerned, as also by his associates in
Delhi which are contradictions to the policy of the Government underlying the
liberalized scheme for ' portfolio investment' by eligible non-residents. The
board further considered whether the purchases of the shares in question would
qualify as ' portfolio investment' as envisaged under the RBI scheme. The board
further considered whether it is in the interest of the company and its
shareholders to approve of the proposed transfers and whether it is desirable
in the aforesaid interests to accept the proposed transferees as shareholders.
Upon full discussion of the share scrutiny and transfer committee's report, the
board in acceptance thereof adopted the* same. Further, after a full
examination of the issues, legal as well as factual and the circumstances and
further on account of the reasons contained in the share scrutiny and transfer
committee's report and in the light of the said committee's recommendations and
further on account of the view of the board of directors that it would not be
in the interest of the company or the general body of shareholders to register
the transfer of the shares in question and on account of the board's view that
the transferees in question could not be approved for purposes of admitting
them as members in view of the facts and circumstances taken note of by the
board of directors, the board decided to refuse registration of the shares
under consideration.
Accordingly it was:
Resolved that the transfer
of 2,88,390 equity shares of Rs. 10 each fully paid-up lodged by Mr. Harish
Chander Bhasin and 1,73,947 equity shares of Rs. 10 each fully paid-up lodged
by Mr. Bharat Bhushan as per distinctive Nos. appearing in the lists marked
annexures "A" and "B", respectively, placed before the
directors and initialled by the chairman for the purpose of identification be
and is hereby refused.
Further resolved that Mr.
Charanjit Singh, vice-president and secretary of the company be and is hereby
authorised to give and send notices of the refusal to the: transferors under
section 111(2) of the Companies Act, 1956, and take such other steps as may be
necessary and appropriate in the matter of the above resolution.
The resolution was passed
with all the 13 directors (out of total 15 directors of the compaay) present
and voting for the resolution excepting Mr. D. N. Davar, who did not take part
in the discussion and voting on the resolution. There was no dissenting vote."
In respect of another block
of shares lodged with Escorts Ltd. on August 19, 22, 1983, for registration in
the names of the thirteen foreign non-resident companies, a similar report was
submitted by the committee on September 29, 1983, and a similar resolution was
passed by the board of directors on the same day.
Escorts Ltd., although they
had already refused to register the transfer of shares, none the less, wrote to
the Punjab National Bank for information on various points as they desired to
make a representation to the Reserve Bank of India in the enquiry being
conducted by the Reserve Bank under the directions of the Government. The
company wanted to know whether the remittances were received from M/s. Caparo
Group Ltd. only and from none of the other twelve foreign companies. The
company also wanted to know why 4,62,337 shares only had been lodged with them
for transfer although it had been stated that 9.75 lakhs shares had been
purchased by the thirteen non-resident companies. The company further wanted to
know whether instructions to purchase the shares were given to the brokers by
the Punjab National Bank and whether the nonresident companies indicated the
maximum price at which the shares might be bought. The company further desired
to know to whom the share scrips should be returned as they had decided to
refuse registration of the transfer of shares. The Punjab National Bank, we may
state here, refused to receive the share scrips and suggested to Escorts Ltd.
that they should return the scrips to those who had lodged them with the
company.
More important still is the
fact that Escorts Ltd., having already rejected the registration of the
transfer of shares, wrote to the Reserve Bank on June 14, 1983, June 20, 1983,
and July 23, 1983, purporting to give information regarding various
illegalities committed in the matter of purchase of shares of their company by
the thirteen foreign companies, Caparo Group Ltd., etc. It was stated that the
information was being furnished to the Reserve Bank because it was understood
that the Reserve Bank was holding an enquiry in the matter of the purchase of
shares in Indian companies by the Caparo Group companies. One remarkable
feature about the letters is that for some reason best known to themselves,
Escorts Ltd. did not disclose to the Reserve Bank the circumstance that they
had already refused to register the transfer of shares. In the first letter, it
was stated that their information revealed that Caparo Group Ltd. was the
holding company and the remaining twelve companies were its subsidiaries and
that a majority of them were in no financial position to make such large
investments. The Reserve Bank was particularly requested to consider whether it
was ever intended that an overseas company could circumvent the stipulated
ceiling of one per
cent, by channelling investment through a dozen subsidiaries. It was pointed out that a colourable device of that nature
would defeat the very purpose of the ceiling. The Reserve Bank was also
requested to take serious notice of the fact that while the scheme permitted
repatriation benefits to investments up to the maximum of one per cent, in an
Indian company, shares to the tune of over 7 per cent, had been acquired in the
names of thirteen companies though funds were remitted only by one company. It
was also mentioned that the stock brokers and not the bank purchased the shares
and that the stock brokers unauthorisedly lodged for registration in their own
names, the shares purchased on behalf of nonresidents. The Reserve Bank was
requested to enquire into the dates and rates of the purchases of the shares,
whether the shares were purchased on the floor of the stock exchange, whether
the delivery of shares was taken, whether the bank had a day-to-day record of
the transactions and so on. The Reserve Bank was also requested to seize the
scrips and the books of account in the possession of the stock exchange. The
next letter dated June 20, 1983, drew attention to the circumstances that
though 9,75,000 shares were purported to have been purchased before April 28,
1983, only 4,62,337 shares had been lodged by May 13, 1983, and, therefore, it
appeared that there were forward transactions and the purchases were not in
accordance with the scheme. In their third letter dated July 23, 1983, Escorts
Ltd. asserted that a large amount of money to the tune of about Rs. 2.61 crores
was remitted from overseas to the Punjab National Bank and was utilised to
purchase shares in additien to the shares purchased in the names of thirteen
companies. The provisions of the Foreign Exchange Regulation Act were violated
and the ceilings of one per cent. and 5 per cent, imposed under the scheme were
also circumvented. Rupee funds to the tune of Rs. 4 crores appeared to have
been unauthorisedly diverted for the purchase of the shares for and on behalf
of the thirteen non-resident companies in the two Indian companies, that is,
Escorts Ltd. and Delhi Cloth and General Mills Ltd. Though the purchases made
on behalf of the thirteen non-resident companies were said to have been
purchased before April 28, 1983, only 4,62,337 shares were lodged with the
company for registration of transfer, leaving a shortfall of 5,12,663 shares.
The non-lodgment of these shares raised a doubt whether those shares had been
purchased in accordance with the scheme. It was pointed out that the share
transfer deeds lodged with Escorts Ltd. bore the date April 28, 1983, and
disclosed consideration of Rs. 65 per share although the highest rate at which
sales of Escorts shares were transacted at the stock exchange up to April 28,
1983, was Rs. 55 only per share. This fact demonstrated that an incorrect
statement had been made that the shares had been purchased prior to April 28,
1983. Further, the share transfer deeds lodged with the companies in regard to
the 9,75,000 shares of Escorts Ltd. and 10,30,000 shares of Delhi Cloth Mills
Ltd. said to have been purchased on behalf of non-resident Indian companies
showed that a total amount of Rs. 6,33,75,000 of non-resident funds was spent
for purchasing the shares of Escorts Ltd. and a sum of Rs. 9,88, 69,020 of
non-resident funds was spent on purchasing shares of Delhi Cloth Mills Ltd.,
making a grand total of Rs. 16,22,44,020. As against this, a sum of Rs. 13
crores only had been remitted from abroad for the purchase of shares. Out of
the Rs. 13 crores, a sum of rupees one crore had been frozen by the Reserve
Bank making only a balance of Rs. 12 crores of non-resident funds available for
purchase of shares. There was thus a shortfall of Rs. 2.61 crores which was
unaccounted. It was also brought to the notice of the Reserve Bank that the
brokers had lodged the shares for registration of the transfers in their names
only and not in the names of the foreign companies. When asked by the company
to disclose the names of the principals, the brokers had refused to do so. The
company, therefore, suggested various steps that should be taken by the Reserve
Bank to detect the several illegalities committed and to prevent the
circumvention of the one per cent, limit imposed by the scheme for acquisition
of shares by any single nonresident individual or company.
To none of these letters
did the Reserve Bank deign a reply or even the courtesy of an acknowledgment.
Though the Reserve Bank did not choose to write or make any further enquiry
from Escorts Ltd., there is no doubt that the Reserve Bank did enquire in its
own way into the allegations made by Escorts Ltd. against the Caparo Group of
companies. It was not as if the Reserve Bank wantonly refused to worry itself
in regard to the allegations against the Caparo Group of companies. The Punjab
National Bank was the designated bank of the Caparo Group of companies and it
was an authorised dealer under the Foreign Exchange Regulation Act, owing a
serious responsibility to the Reserve Bank under the Foreign Exchange
Regulation Act and the portfolio investment scheme. It was, therefore, to the
Punjab National Bank that the Reserve Bank turned for elucidation in the
matter.
On June 11, 1983,
the Reserve Bank wrote to the Punjab National Bank advising them that mere
submission of an application under section 29(1)(b) of the Foreign Exchange
Regulation Act was not sufficient to enable the non-resident Indian companies
to purchase shares without the general or special permission of the Reserve
Bank. The Reserve Bank's permission had to be obtained before buying any shares
of Indian companies. The contention of the Punjab National Bank that submission
of an application was sufficient to enable a non-resident company to purchase
shares was not accepted as correct and the bank was told that they had
committed a serious irregularity in purchasing shares. The Punjab National Bank
wasalso asked to explain as to how they had allowed the non-resident external
account of Caparo Group Ltd. to be debited in contravention of the provisions
of paragraph 28B.9 of the Exchange Control Manual. The Punjab National Bank was
informed that the applications of all the companies for approval of opening of
non-resident accounts were pending with them and that until specific permission
for purchase of shares was granted, no payment should be made out of the
accounts for purchasing shares on behalf of any of the thirteen companies. On
the same date, another letter was written by the Reserve Bank of India to the
Punjab National Bank asking for particulars of the thirteen companies on whose
behalf shares were purchased by them and the dates of remittances so far
received from the thirteen companies. On June 17, 1983, and June 23, 1983, the
Punjab National Bank sent their reply to the Reserve Bank by telex and by
letter. They stated in the telex message that consequent on the letter of the
Reserve Bank, they had withheld payment of a sum of Rs. 1,07,22,610 in favour
of the brokers and that they had advised the remitter about the same. It was
stated that the brokers had written to them asking for payment stating that it
would amount to default if payment was not made. It was reiterated that the
payment pertained to shares purchased prior to May 2, 1983, under the portfolio
investment scheme. By their letter dated June 23, 1983, they informed the
Reserve Bank that up to December, 1982, and from January 1,1983, to February
28, 1983, no shares on behalf of the thirteen non-resident companies were
purchased. Between March 1, 1983, and May 2, 1983, 80,000 shares of Delhi Cloth
and General Mills Co. Ltd. and 75,000 shares of Escorts Ltd. were purchased for
each of the thirteen companies. After May 2, 1983, no share was purchased. All
remittances were received through their London branch for the credit of M/s.
Raja Ram Bhasin and Co. for purchase of shares on behalf of the thirteen
companies. On March 9, 1983, March 24, April 12, April 15, April 28, and April
28, 1983, remittances of Rs. 1,35,36,000, Rs. 1,31,38,681, Rs. 2,36,59,900, Rs.
76,35,000, Rs. 1,56,76,000 and Rs. 1,56,80,000 were received and transferred to
the account of Raja Ram Bhasin and Co. from the account of Caparo Group Ltd. A
balance of Rs. 38,682 in the non-resident external account of Caparo Group Ltd.
was allocated pro rata to the thirteen accounts on June 2, 1983, in terms of
the letter of their broker, M/s. Raja Ram Bhasin and Co. The broker derived his
authority in terms of the investors' letters which were annexed to the letter
of the bank. The Punjab National Bank also stated that the broker had confirmed
by their letter dated June 22, 1983, a copy of which was enclosed, that apart
from the shares mentioned, they had not purchased any other shares for the
thirteen companies. Along with their letter, the Punjab National Bank also sent
to the Reserve Bank, copies of the certificates of incorporation, the memoranda
of articles of association and the balance-sheets of the thirteen companies.
One of the letters enclosed with the letter of the Punjab National Bank was a
letter from the Caparo Group Ltd. to the Punjab National Bank confirming that
they had appointed M/s. Raja Ram Bhasin and Co. as. their designated brokers
and that the bank was authorised to act upon the instructions of the, aforesaid
brokers, entirely at the risk and responsibility of Caparo Group Ltd. On June
24,1983, the Punjab National Bank again wrote to the Reserve Bank in reply to
their letter of June 11,1983, wherein they stated that they were under the
impression that the clause ".........RBI will grant permission to
designated banks.............." meant that permission would auto matically
be granted on the submission of applications in the prescribed form by the
non-resident external investors, accompanied by auditors' certificates of the
eligibility. As a matter of abundant caution, they had intimated the
non-resident external investors and their brokers that the transactions were
being put through entirely at their risk and responsibility. Details of the
remittances received and transferred to the account of Raja Ram Bhasin and Co.
were once again given and the request for permission was reiterated.
On July 6, 1983, the
Controller, Foreign Exchange, Reserve Bank, wrote to the Government of India informing
them that the relevant documents had been called for and examined and the
report which was desired by the Government's telex dated June 8, 1983, was
being submitted along with the letter. It was stated that they had taken the
legal opinion of "an eminent jurist and senior counsel", Mr. H.M.
Seervai, which was to the effect that the circular did not grant general
permission to non-residents or their designated banks and that overseas bodies where they were
not directly owned by non-resident individuals were not eligible to invest
under the liberalised scheme. It was, therefore, stated that none of the
thirteen overseas companies was eligible to invest in shares in Indian
companies under the scheme. The question of further action in the matter of failure
of the Punjab National Bank to follow the relevant exchange control regulations
would be taken up separately after a final decision was taken on the
applications, that is, the applications of the overseas companies for
permission to purchase shares. The report of the Reserve Bank which was sent
along with their letter was not produced before the High Court, nor has it been
placed before us. The Government of India, on August 11, 1983, replied to the
Reserve Bank's letter of July 6, 1983, communicating to the latter the opinion
given by the Attorney General and asked the Reserve Bank to dispose of the
applications made by the Punjab National Bank in the light of the opinion of
the Attorney-General. The Government of India also mentioned that they agreed with
the opinion of the Attorney General who had given primary importance of the
intention behind the Government policy which was spelt out in the report of the
working group. By another letter dated September 17,1983, the Government of
India clarified the position and it was pointed out that the portfolio
investment scheme by companies and overseas bodies owned by nonresidents of
Indian nationality/origin was introduced as part of a package of measures to
facilitate remittances and investments by non-residents of Indian
nationality/origin in India in the overall context of the difficulties of our
balance of payments. It was pointed out that in formulating the scheme, there
were three paramount considerations:
(a) as much flexibility as possible
should be available to non-resi dents for bringing foreign exchange into India
and the concern should be the purpose of investments rather than legal entity
of the non-resident in vestor of Indian origin;
(b) it was to be ensured that the
benefits of the scheme should not be available to non-resident persons or
overseas bodies other than those of Indian nationality/origin; and
(c) the investment of funds under the
scheme should not lead to take over of existing companies through operations in
the stock market.
It
was in the context of the first two considerations that it was insisted that
the overseas companies, etc., should be owned by non-residents of Indian
nationality/origin to the extent of at least 60% and it was in the context of
the third consideration that a ceiling of one per cent of paid-up capital for
each investor was imposed. Further to the same considerations, in May, 1983, a
ceiling of 5 per cent on aggregate investment was also imposed. The Government of India pointed out that the
question of direct or indirect ownership should be considered in the context of
these considerations. It was pointed out:
"In many countries
there is no bar on the number of companies an individual can predominantly own
directly or indirectly. A person of Indian origin could, if he wished, set up a
number of companies directly owned by him and invest through each of these
companies up to one per cent of the paid-up capital of a company in India
within the framework of our portfolio investment scheme. This situation is no
different in its economic implications than if the same amount of investment
was made by the same person in the same companies in India by the same number
of companies, which were indirectly (and not directly) owned by him. As such,
having regard to the objectives of the scheme and the intention of the
Government, the fact whether a company is predominantly directly owned or
predominantly indirectly owned is not a material consideration.
Taking the above
consideration into account, and in order to remove any doubt regarding the
eligibility of companies, it is clarified that overseas bodies, whether owned
directly or indirectly, are eligible to invest under the scheme so long as it
is clear that the ultimate ownership to the extent of at least 60 per cent is
in the hands of non-residents of Indian nationality/origin. Each such applicant
company is eligible to make investment subject to the existing ceiling of one
per cent irrespective of whether the ultimate ownership is in the hands of one
or more individuals.
Since this clarification
merely reflects the original intention of the Government, the investments made
by the applicants before May 2, 1983, but pending for approval should not be
subject to five per cent ceiling. Pending applications may be disposed of accordingly."
This letter was apparently
delivered personally to Dr. Manmohan Singh, Governor of the Reserve Bank of
India, and he made the following endorsement on the letter;
"I have discussed this
case with FS and FM. This matter has been approved by CCPA. As such we should
faithfully carry out consequential action. I have discussed with FS, FM and
Principal Secretary to PM the issue of a press note regarding clarification by
the Government regarding the NRI scheme. It has been agreed that the press note
will be issued at 6.30 p.m. by RBI in Delhi itself."
We are told that the
letters FS stand for Finance Secretary, FM for Finance Minister and CCPA for
Cabinet Committee on Political Affairs.
As mentioned in the note of
Dr. Manmohan Singh, a press release was issued by the Reserve Bank the same day
to the effect that the Government, having regard to the objectives of the
scheme for investment by non-residents of Indian nationality/origin had
clarified that their original intention was that the facilities of direct and
portfolio investments in shares/debentures of Indian companies and deposits
with public limited companies should be available to the overseas companies,
partnership firms, trusts, societies and other bodies in which the
ownership/beneficial interest was indirectly but ultimately held to the extent
of at least 60 per cent by non-resident individuals of Indian nationality or
origin. It was further stated in the press release that the Government had also
clarified that each overseas body was eligible to invest up to one per cent of
the equity capital under the portfolio investment scheme irrespective of
whether the ultimate ownership/beneficial interest in such body was in the
hands of one or more non-resident individuals of Indian nationality/origin
subject to an overall ceiling of 5 per cent of the total paid up equity capital
if the investment was made after May 2, 1983. The overseas bodies desiring to
make investment under the scheme were required to submit their applications to
the Controller, Reserve Bank of India, Exchange Control Department, Bombay. The
overseas bodies were required to maintain accounts with banks authorised to
deal in foreign exchange in India under the Non-Resident (External) Account
Scheme.
On September 19, 1983, the
Reserve Bank also issued Circular No. 18 under section 73(3) of the Foreign
Exchange Regulation Act. We have already referred to the Circular earlier. On
the same day (September 19, 1983), the Reserve Bank, by a telex message,
conveyed to the Punjab National Bank their permission to release the money
remitted by the Caparo group of companies from abroad for making payment
against shares of DCM Ltd. and Escorts Ltd. purchased on behalf of the 13
Caparo group of companies provided the shares in question were purchased up to
and inclusive of May 2, 1983. It was also mentioned that the purchase of shares
shall be deemed to have taken place up to and inclusive of May 2, 1983, if firm
purchase commitments as evidenced by brokers' contract notes had been entered
into and the shares had been/ would be taken delivery of pursuant to such firm
commitments at the price mentioned in the relative brokers' contract notes. The
letter granting permission for purchase of shares was stated to follow. A
letter did follow on the same day by which the 13 group of companies were given
the approval of the Reserve Bank "to make investments in and hold shares
of Delhi Cloth and General Mills Ltd. and Escorts Ltd. to the extent of one per
cent, of the paid up capital of the respective companies subject, where the
purchase has been made after May 2, 1983, to an overall ceiling of 5 per cent,
of paid up equity capital of each of the investee companies." Purchases
made up to and inclusive of May 2, 1983, were not subject to to the 5 per cent,
ceiling. Information was requested as to the number and face value of the
shares purchased up to May 2, 1983, as also details of shares, if any,
purchased after May 2, 1983. Permission was also accorded for purchase of
shares/debentures of other Indian companies on behalf of the 13 non-rosident
companies, through stock exchanges in India at the ruling market price subject
to the condition that the shares/debentures would be purchased out of fresh
remittances received from abroad and/or out of the funds held in the applicant
companies' Non-Resident (External) Account to be opened with the banker.
Purchases of equity shares with repatriation benefits could be purchased up to
one per cent of the total paid-up equity capital of the company, subject to the
overall ceiling of 5 per cent. Another condition was that the shares acquired
under the permission should be retained by the non-resident investor company
for a minimum period of one year from the date of their registration with the
Indian company. The permission was to be valid for a period of three years from
the date of the letter.
In the meanwhile, Escorts
Ltd. wrote several frantic letters to the Reserve Bank of India and the
Government of India on July 23, 1983, September 5, 1983, September 16, 1983,
and September 17, 1983, reiterating the allegations in regard to the purchase
of shares by the 13 nonresident companies. Although the Reserve Bank granted
the requisite permission to the non-resident companies on September 19, 1983,
the Reserve Bank of India, on October 22, 1983, perhaps in view of the
persistence with which Escorts Ltd. continued making allegations against the
non-resident companies and perhaps with a view to further satisfy itself, wrote
to the Punjab National Bank asking them for a report on the issues raised in
the letters of Escorts Ltd. dated September 5, 17, 1983, the DCM's letters
dated August 11, 24, 1983, and the letters of their advocates. Copies of the
letters were forwarded to the Punjab National Bank who in turn asked the
brokers, Raja Ram Bhasin& Co., to submit a report to them about the various
issues raised in the Reserve Bank's letter. Raja Ram Bhasin & Co. replied
on December 12, 1983, and expressed their surprise that these questions were
being raised after the Reserve Bank had granted its permission on September 19,
1983. However, they explained that no illegality had been committed by them or
their clients, the Caparo Group of companies, with regard to the purchase of
shares before May 2, 1983. The queries raised by the companies did not dispute
the dates of purchases made by them up to April 28, 1983. The queries were
misleading and were merely an attempt to create confusion. The Reserve Bank had
satisfied itself and declared the eligibility of the companies to invest. All
contracts for the sale or purchase of shares were made subject to the rules,
bye-laws and regulations of the stock exchange and delivery could be made and
accepted pursuant to the contracts earlier entered into. It was not essential
that the transfer deeds must bear the date stamp of the Registrar of Companies
as the date of the contract. Deliveries could be taken even after April 28,
1983. The dates stated in the transfer deeds were the dates of execution of the
deeds of transfer by the transferee and had no relevance to the date of
purchase or the date of delivery. The sale consideration shown in the transfer
deed was for the purpose of computation of the stamp duty which had to be paid
at the rate prevalent on the dates stated on the transfer deeds and not as on
the actual date of purchase. No shares were purchased in benami names. The
queries for which answers were now sought, were already before the Reserve Bank
of India and considered by them before permission was granted.
Raja Ram Bhasin & Co.
wrote a further letter on December 27, 1983, with regard to the query whether
shares were purchased from rupee loan raised in India from the Reserve Bank. It
was stated that the remittance of about Rs. 1.07 crores was withheld by the
Punjab National Bank without disclosing any reason. Shares had already been
purchased and, consequently, the brokers had to take delivery from the seller
broker and monies had to be paid to them. Otherwise the brokers would be
declared as defaulters for non-payment. In the premises, the brokers had to
take deliveries and arrange payments. Reserve Bank's permission was not
necessary for this purpose.
Thereafter, the Punjab
National Bank wrote to the Reserve Bank answering the queries raised by them
and reiterating that they had acted in accordance with the instructions and
guidelines contained in the Reserve Bank's letter dated September 19,1983. All
the other points raised by Escorts Ltd. and DCM Ltd. required answers from the
brokers. So they wrote to the brokers and the brokers replied to them stating
that no illegality had been committed. The comments of the brokers were
summarised and it was then added that a sum of Rs. 1,05,30,000 was released to
the brokers in accordance with the directions of the RBI, as conveyed by their
telex message and letter dated September 19, 1983.
Subsequent to the grant of
permission by the Reserve Bank, another attempt was made to have the transfer
of shares registered. The request was turned down once again by Escorts Ltd.
who by their letter dated October 13, 1983, stated that apart from the question
of obtaining the permission of the Reserve Bank, the decision of the board of
directors to refuse to register the transfer of shares was based on other grounds
also which continued to be valid. We may mention here that before the High
Court, all the other grounds mentioned by the board of directors were abandoned
except the ground relating to want of permission of the Reserve Bank. Before
the High Court, a resolution passed by the directors by circulation was filed
and it was to this effect:
"Resolved that it is
not the board's intention to get adjudicated in some other proceeding the
grounds of rejection contained in para 7 of the share scrutiny and transfer committee
of directors report dated June 8, 1983, or in paras 6, 7 and 8 of the report
dated August 29, 1983, and the board hereby resolve not to rely on the said
grounds in any proceeding."
The High Court also
recorded the concession in the following words : (at pp. 408-412 of 57 Comp
Cas):
"In the rejoinder
affidavit filed by petitioner No. 2, it was specifically pleaded that the petitioners do
not want adjudication on the other grounds of refusal of registration of
shares, and, as such, failure to obtain prior permission under section 29 of
the FERA remained the sole ground for rejection. The respondents urge that since the other grounds of refusal to
register the shares are not now pressed and are not required to be adjudicated
in this writ petition, the court should refuse to go into this question. That
would amount to piece-meal adjudication on the validity of the purchase and
refusal to register, which is not permissible even in the case of a suit, which
principle, according to the learned Attorney-General, also applies to writ
petitions mutatis mutandis.
Whether there is a live
issue for adjudication and whether the petitioners have locus standi cannot be
viewed in isolation or in the abstract, divorced from the facts and
circumstances of the case.
In our view, in raising
this contention, certain relevant factors are being overlooked. The Union of
India, the RBI and the PNB and the other respondents dispute the correctness of
the decision taken by the petitioners not to register the transfer of shares purchased
by respondents Nos. 4 to 17. Respondent No. 19 has preferred an appeal under
section 111 of the Companies Act before the Company Law Board and the same is
still pending. Respondents Nos. 20 and 21, the stock-brokers, continue to
insist upon reconsideration of the decision taken by the board of directors in
regard to registration of the shares. D. N. Davar, on behalf of the financial
institutions, has put in a written note on January 6, 1984, signed by him
demanding the board of directors to reconsider its decision. Further, the
petitioner-company has to pay dividend on these shares accruing from time to
time to the holders of these shares. The dividend on these shares amounting to
Rs. 7,50,000 per annum is obviously payable to those in whose names the shares
stand registered in the books of the company. If the dividend is not paid
within the stipulated time, the petitioner-company and its directors would be
exposed to penalties under the Companies Act. The question of payment of
dividend would recur year after year. In fact, when the question of payment of
interim dividend arose, while the respondent-companies claim to be entitled to
the payment of the dividend because they have purchased the shares, the
petitioners object to payment because the registration of transfer of shares
purchased without prior permission could not be effected and the dividend
cannot be paid to persons whose shares are not registered. When petitioner No.
2 addressed a letter dated December 2, 1983, to D. N. Davar, Executive Director,
IFCI, inviting his comments on the decision to withhold the interim dividend
with respect to shares purchased by the respondent-companies, he replied
through his letter dated December 17, 1983, inter alia, as follows:
'Since the payment of
dividend in question, as referred to in your letter under reply, pertains to
interim dividend as resolved by the board of directors on July 20, 1983, there
does not appear to be a legal bar in withholding the same according to the
second opinion. However, in view of the conflicting legal opinions on the
issue, we are referring the matter to the Ministry of Law, Department of
Company Affairs, for their clarification. On hearing from them, we shall revert
to you on the subject.'
Thus, the matter was under
reference to the Government of India and the question whether registration of
transfer of shares should be effected or not and who would be entitled to
receive dividend on these shares was alive issue even on December 17,1983, and
was not decided even by the time the writ petition was filed. None of the
respondents has taken back the shares lodged with the petitioner-company for
registration of transfer. Upon the sale of the shares and lodging of
applications for their transfer with the petitioner-company, it had to take a
decision. The company has rejected the request for registration on grounds
which, according to the well considered opinion of their legal advisers, are
valid and justified. The RBI as well as the other respondents and their legal
advisers seem to hold a different view. Of course, as discussed above, that
legal opinion has not been placed before the court; nor is the court entitled
to require them to disclose
it. It must be recorded that the petitioners' learned counsel, Mr. Nariman,
fairly conceded that it was an error on the part of the petitioners to have
referred in petitioner No. 2's affidavit to the legal advice tendered to the
respondents and requested that it may be treated as withdrawn. It was not
pressed at the hearing of the writ petition. Be that as it may, the fact
remains that the respondents held a different
view on this legal issue and have pressed the same before this court. The
question whether prior permission is necessary or not is thus not concluded by
the rejection of transfer of the shares purchased by respondents Nos. 4 to 16.
It would arise from time to time as and when such purchases are made in future.
The petitioner company itself would have to consider the same whenever such
shares are presented for registration. Even the solicitors of respondent No. 18
in their letter dated February 27, 1984, addressed to the petitioners'
solicitors stated:
'...the controversy
regarding transfer of shares has been raging throughout the length and breadth
of the country and various forums including the shareholders' associations,
chambers of commerce and other public bodies have been making observations and
suggestions on such issues... '
They also specifically said
in that letter that they would refer to that letter at the hearing of the writ
petition. This legal issue would arise for decision whenever the action of the
petitioners not to register the shares is questioned by any of the transferors
or transferees of the shares. If the respondents could still insist upon the
registration of the shares and claim that permission granted to the
respondent-companies by respondent No. 2 subsequent to the purchase of shares
is valid, which claim is strongly supported by the stand taken by respondents
Nos. 1 and 2, the petitioners are certainly entitled to seek a declaration in
this behalf. Whether such a declaratory relief in this behalf could be granted
or not will be considered in due course, but certainly it cannot be said that
the petitioners have no cause of action for seeking a declaration. Notwithstanding
the decision taken by the board of directors, the company continues to be under
pressure to transfer the shares. If the stand taken by the petitioners is
incorrect, then they would be bound under the statute as well as under the
directions of the RBI, to register the transfer of shares in the books of the
company even now. While forwarding a copy of the letter dated September 27,
1983, addressed by the PNB to respondent No. 4-com-pany. Haresh Bhasin
(respondent No. 20) by his letter dated October 8,1983, addressed to the
petitioner-company, and sent by registered post A.D., had requested that the
decision of the board of directors dated August 29, 1983, refusing to register
the shares be reviewed. In reply, the petitioner-company conveyed through its letter
dated October 13, 1983, that notwithstanding the impugned Circular and the
letter of the RBI, the refusal to register continued to hold good for various
other reasons. In that letter, the petitioner-company also disputed the claim
that the 13 non-resident companies had purchased the shares prior to May 2,
1983. The petitioner-company thus maintained that the permission granted
subsequently is not valid and that the refusal to register the shares for other
reasons still holds good. Of course, at the hearing of the writ petition,
having regard to the decision of the Supreme Court in Bajaj Auto Ltd. v. N. K.
Firodia [1971] 41 Comp Cas 1 (SC), the learned counsel, Mr. Nariman, conceded that the other grounds
for not registering the shares were not being pressed in support of the refusal
of registration. It was, therefore, argued for
the respondents that this letter would indicate that even the petitioners at
that stage accepted that the permission granted under exhibit "B" and
exhibit "C" validated the purchase and no longer stood in the way of
registration of the shares. We are unable to agree with this contention ;
firstly, because if under section 29 prior permission was required for a valid
purchase, any such statement made in the letter on behalf of the petitioner-company
cannot validate such transfer so as to entitle the purchaser to claim
registration of shares. Any registration of transfer by the petitioner-company
would still be in contravention of section 19 read with section 29 of the FERA;
secondly, the letter cannot be interpreted to mean that the stand taken by the
company and its board of directors unanimously that the purchase is invalid for
not obtaining prior permission was given up. Further, even if exhibit
"B" and exhibit "C" are construed as a grant of permission,
it would amount to granting permission subsequent to the purchase. When the
letter of the petitioner-company expressly states that "Notwithstanding
grant of permission by the RBI as referred by you", it could only mean the
grant of permission subsequent to the purchase, would not hold good and that
they were not prepared to transfer the shares on the basis of that permission.
The fact that they actually proceeded to challenge the very permission granted
by way of writ petition fully establishes that the company repudiated its
liability to transfer the shares on the strength of the impugned Circular and
letter. While so, it is the case of the petitioners that D. N. Davar, one of
the directors, armed with the authority to speak for all the financial
institutions including the LIC, continued to insist that the writ petition be
withdrawn. Apart from the other pressures exerted on the petitioner-company and
its managing director, already discussed above, at the meeting of the board of
directors of the petitioner-company held on January 6, 1984, D.N. Davar tabled
four pages of signed note, inter alia, insisting upon the board of directors to
recall the cheques lodged with the institutions towards repayment of loans and
to withdraw the writ petition filed in the court and not to take note of the
correspondence exchanged between the financial institutions and the management.
The board of directors, however, did not concur with his proposal; on the
contrary, it ratified the filing of the writ petition. Apart from petitioner
No. 2, each of the other nine directors filed an affidavit in this court
supporting the filing of the writ petition. It is also the allegation of the
petitioners that the financial institutions, finding that notwithstanding the
unanimous request made on their behalf by D. N. Davar at the meeting of the
board of directors, the company and its managing director were refusing to
withdraw the writ petition and effect the transfer of shares, with the ulterior
purpose of obtaining registration of shares, requisitioned an EGM of the
petitioner-company, so that they may secure a controlling majority in the board
of directors. The petitioners allege that this action of the LIC (respondent
No. 18) which by itself holds 30% of the shares and along with the other
financial institutions, collectively represented by Davar, holds 52% shares, is
mala fide and is calculated to secure the registration of the shares which were
purchased in contravention of the FERA. In the circumstances referred to above,
it cannot be said that the company and its managing director had no cause of
action to file this writ petition or that there was no longer any live issue to
be adjudicated. "
In view of the rejoinder
and the concession made before the High Court, in regard to the refusal of the
company to register the transfer of shares, the only ground which it is
necessary for us to consider is whether the permission granted by the Reserve
Bank was in order.
Escorts Ltd. having refused
permission to register the transfer of shares, one would have thought that it
was thereafter up to the purchasers or the sellers of the shares, if they were
so minded to proceed to take further appropriate action in the matter to have
the transfer of shares registered. However, it was not they that moved it, but
it was the Escorts Ltd. that filed the writ petition out of which the present
appeals arise. They explain that the pressure of circumstances was such that
they had no option except to go to court under article 226 of the Constitution.
It appears that on October 18, 1983, Escorts Ltd. met the representatives of
the financial institutions, the ICICI, the IFC, the IDBI and the UTI. It has to
be mentioned here that 30 per cent, of the shares of Escorts Ltd. are held by
the Life Insurance Corporation, 16 per cent, by the Unit Trust of India and 6
per cent, by the General Insurance Corporation and its subsidiaries. According
to Escorts Ltd., at this meeting, their representatives gave full particulars
of the various illegalities committed by the Caparo Group of companies in the
purchase of shares of Escorts Ltd., but they were repeatedly pressed by the
representatives of the institutions to get their board of directors to
reconsider their earlier refusal to register the transfer of shares. It was
said that Mr. Patel, the chairman of the Unit Trust of India even said that the
financial institutions who owned 52 per cent, of the shares were in a position
to remove the management at will. There were other meetings also with the
representatives of the financial institutions. Mr. Nanda, the chairman of
Escorts Ltd., was requested to meet Mr. Punja, chairman of IDBI, and a director
of Life Insurance Corporation who had just returned from abroad. At this
meeting also, it was said, Mr. Punja insisted that the transfer of shares
purchased by the thirteen Caparo companies should be registered. Again on
November 1, 1983, there was a meeting between the lawyers of Escorts and the
legal advisers of the financial institutions. There was a further meeting
between Mr. Nanda and Mr. Punja on November 9, 1983, when Mr. Nanda of Escorts
Ltd. requested Mr. Punja to expedite the proposal for merger of Goetze India
Ltd. with Escorts Ltd. and the proposal for prepayment of the outstanding loans
of Escorts Ltd. to the financial institutions at the inter-institutional
meeting to be held on the afternoon of 9th. Mr. Nanda was later informed by Mr.
Davar that the proposals of Escorts Ltd. had been discussed and accepted but
the formal clearance would have to await Mr. Punja's discussion with Mr. Nanda.
Thereafter, it was said, Mr. Nanda was informed by Mr. Punja that Escorts Ltd.
must register some shares purchased by the Caparo Group of companies. In
answer, Mr. Nanda informed Mr. Punja that the RBI itself was enquiring into the
purchase of shares by Caparo Group of companies and, therefore, Mr. Punja
should await the outcome of the investigation. On November 10, 1983, Mr. Sen
Gupta, the Controller of Capital Issues, telephoned to Mr. Nanda and insisted
that Escorts Ltd. should at least register some shares purchased by the Caparo
Group immediately. ,On November 12, 1983, Mr. Punja once more insisted that
some shares at least should be registered immediately. On November 16,1983, Mr.
Nanda met Mr. Nadkarni, the chairman of ICICI who informed him that Mr. Punja
was most upset at the refusal of Escorts Ltd. to register the transfer of
shares. Thereafter, in the first week of December, the Unit Trust of India
wrote a letter to Escorts Ltd. to induct their Dy. General Manager as a nominee
director on the board of directors of Escorts Ltd. On December 13, 1983, there
was a meeting between Mr. Nanda and the representatives of financial
institutions when once again there was renewed insistence that the transfer of
shares Should be registered. On December 20, 1983, Mr. Nanda telephoned and had
a discussion with Mr. Punja who, it was said, informed him that the question of
clearance of the proposal of Escorts Ltd. for merger, for pre-payment of loans
and issue of debentures were interlinked with the question of register of
transfer of shares purchased by the Caparo Group of companies. According to Mr.
Nanda, this conversation was contemporaneously recorded by him in a letter
addressed by him to Mr. Punja that very day.
While so, the Telegraph and
the Financial Express published a statement by Mr. Swraj Paul that the fight
was now between the Government and the management of Escorts Ltd. and that he
would consider himself defeated if the Government cleared the proposal of
Escorts for the issue of debentures without first settling the matter of
registration of transfer of the shares purchased by him. Mr. Swraj Paul was
also reported to have said that the Governor of Reserve Bank (Dr. Man Mohan
Singh, a highly respected civil servant of our country) was applying double
standards and was feeding wrong information to the Union Finance Minister. (If
the reported statement is correct, we can only characterise it as saucy, rude
and impudent coming as it does from a foreign national seeking the permission
of the Reserve Bank to invest in shares of Indian companies. Perhaps those are
the ways of the markets in which he operates. People afflicted with double
vision are ready to see double standards in others. We appreciate neither his
conduct nor his statements. Dr. Man Mohan Singh, we presume, could not and did
not think it proper to go to the press as readily as Mr. Swraj Paul and involve
himself in an unsavoury controversy). On December 24,1983, there was a report
of the speech of the Union Finance Minister (Mr. Pranab Mukherjee), at the
Platinum Jubilee Celebration of the Calcutta Stock Exchange in which he
referred to the dominant position held by the financial institutions in the
equity shares of some large private companies and added, "I have a very
effective instrument under my command to end the uncertainty." According
to Escorts Ltd., it was in this factual background, that they were compelled to
file the writ petition in the High Court of Bombay. One remarkable tactic of
Mr. Nanda of Escorts deserves special mention here. The writ petition was filed
on December 29, 1983, and some interim directions were also sought on the same
day. On that very day, Mr. Nanda also had a meeting with the representatives of
the financial institutions at the office of Mr. Punja at which Mr. Nanda was
asked to arrange for the induction of a representative of the UTI on the board
of Escorts and was further informed that the proposal for merger of Goetze Ltd.
may not be acceptable as it would reduce the holding of the financial
institutions from 52 per cent, to 49 per cent, but that the matter was still
under consideration. What is remarkable and what may even be considered dubious
conduct on the part of Mr. Nanda is his failure to inform the representatives
of the financial institutions about the filing of the writ petition that very
day.
Writ Petition No. 3063 of
1983, thus filed in the High Court of Bombay was perhaps both a protective and
a pre-emptive strike. The writ petition is at once remarkable for its length
and the number of prayers. The writ petition runs to as many as 172 pages and
innumerable documents running into several volumes are now placed before us.
There were originally thirteen prayers (a) to (m). To these prayers four more
prayers were added subsequently. Prayers (a), (b) and (c) seek declarations
that Circular No. 18, dated September 19, 1983, is illegal and void as contrary
to the provisions of the Foreign Exchange Regulation Act, as arbitrary and
issued for collateral purposes, as constituting an abuse of statutory authority
and as violative of articles 14, 19(1)(c) and 19(1)(g) of the Constitution.
Prayer (d) is for a declaration that the purchases of shares made by and/or on
behalf of the Caparo Group Ltd. are illegal and violative of the Foreign
Exchange Regulation Act, the circulars of the Reserve Bank issued from time to
time and the provisions of the Securities Contracts (Regulation) Act, 1956, and
the bye-laws of the Stock Exchange. Prayers (e), (f), (g), (h), (i) again
relate to Circular No. 18, dated September 19, 1983, and the letter dated
September 19, 1983. Prayer (j) is directed towards securing the relevant
documents. Prayer (k) is to restrain the first respondent (Union of India) from
pressurising the company to register the transfer of shares. Prayer (1) is for
ad-interim reliefs in terms of prayers (j) and (k). Prayer (m) is for costs of
the petition. It will be of interest to notice at this juncture that the
learned single judge before whom the writ petition came up for preliminary
hearing thought fit not to issue a rule nisi in regard to prayer (d). The
learned judge made a speaking order refusing to issue a rule nisi in regard to
prayer (d). There was no appeal against that order by Escorts Ltd. and the
order became final so far as prayer (d) was concerned. The entire cause of
action of the petitioner centres round the purchase of shares made by and on
behalf of Caparo Group Ltd. and if those purchases are left unquestioned, one
is left wondering what survives in the writ petition, particularly in view of
the fact that the board of directors of the company had already refused their
permission to register the transfer of shares. The prayers relating to Circular
No. 18, dated September 19, 1983, and the letter dated September 19, 1983, were
only in aid of prayer (d) which, as we see it, was the main prayer in the writ
petition. But we do not propose to dispose of the case on any such preliminary
ground. Apparently, when the learned single judge refused to issue a rule nisi
in regard to prayer (d), what he meant was that transactions of purchase of
shares would not be allowed to be separately and individually questioned as
that would involve adducing of evidence in regard to each of the transactions
and would be ordinarily outside the province of a court exercising jurisdiction
under article 226 of the Constitution. This becomes clear from what the learned
judge has himself stated. He has referred to the objection to prayer (d) in the
following words:
"It was also submitted
that prayer (d) should not be entertained and if the petitioners wanted to urge
the contentions beyond those restricted to exhibits ' B ' and ' C ', they
should be relegated to an ordinary action or to urge these contentions in the
pending appeal before the Company Law Board."
He has dealt with the
objection and concluded:
"As stated earlier, I
think what is sought for in prayer (d) must be regarded as ordinarily beyond
the function of the writ court but this should not be taken to imply that there
is no warrant in the various complaints made by Escorts and petitioner No. 2 in
connection with this aspect of the matter. Indeed it would be clear that what
had been stated by petitioner No. 2 in his letter dated September 19, 1983, was
substantial and serious but these allegations have not been gone into either by
the Government of India or the Reserve Bank of India."
Exhibit B, we may mention,
is the Circular dated September 19, 1983, and exhibit C is the permission
granted by the Reserve Bank.
Subsequent to the filing of
the writ petition, the Life Insurance Corporation of India (which later on was
impleaded as the 18th respondent in the writ petition) which along with other
financial institutions held as many as 52 per cent of the total number of
shares in the company, issued a requisition dated February 11, 1984 to the
company to hold an extraordinary general meeting for the purpose of removing
nine of the part-time directors of the company and for nominating nine others
in their place. Alleging that the action of the Life Insurance Corporation of
India was mala fide and part of a concerted action by the Union of India, the
Reserve Bank of India and the Caparo Group Ltd. to coerce the company to
register the transfer of shares and to withdraw the writ petition, the writ
petitioners sought to suitably amend the writ petition and to add prayers (ia),
(ib), (ic) and (id) to declare the requisition to hold the meeting arbitrary,
illegal, ultra vires, etc. The writ petition was amended. Paragraphs 149A(1),
to (44) were added as also prayers (ia), (ib), (ic) and (id).
The High Court, after an
elaborate enquiry, summarised their conclusions and granted reliefs in the
following manner:
"Rule nisi is made
absolute as under :
Section 29(1)(b) of FERA is
mandatory. No NRI investor is authorised to purchase shares in an Indian
company without prior permission of the RBI under section 29(1)(b) of the FERA;
any purchase of shares without such prior permission is illegal. Neither the
Union of India nor the RBI is empowered to order otherwise either by issuing
directions under section 75 or under section 73(3) of the FERA nor are they
empowered to grant permission after the shares are purchased so as to validate
such purchases or to permit holding of the shares purchased without obtaining
prior permission. The press release dated September 17, 1983 (exhibit 'A'), the
Circular dated September 19, 1983 (exhibit 'B'), and the letter dated September
19, 1983 (exhibit 'C'), cannot operate retrospectively so as to validate the
purchase of shares made by NRI companies which were ineligible on the date of
purchase; nor can they authorise purchase of shares without obtaining prior
permission of the RBI under section 29(1)(b) of the FERA. In so far as the
impugned press release, circular and the letter permit the respondent-companies
to hold the shares purchased without obtaining prior permission of the RBI,
they are ultra vires section 29(1) (b) of the FERA and the powers vested in the
Union of India under section
75 and the RBI under section 73(3) of the FERA. To that extent, they are void
and inoperative both prospectively and retrospectively. The impugned press
release and the Circular, however, amount to amending the portfolio investment
scheme with full repatriation benefits introduced under Circular No. 9, dated
April 14, 1982 (exhibit 'G'), and such amendment operates only prospectively. A
writ of mandamus shall issue restraining respondents Nos. 1 and 2 from issuing
any directions—
(a) to register transfer of shares purchased by
the respondent-com panies (which form the subject-matter of this writ petition)
pursuant to the letter dated September 19, 1983 (exhibit 'C'); and
(b) to further forbear from implementing the
said Circular dated September 19, 1983 (exhibit 'B'), and the said letter dated
September 19, 1983 (exhibit 'C'), with respect to the shares purchased by the
respondent- companies which form the subject-matter of this writ petition.
There
shall be a declaration that the action of respondent No. 18 in issuing the
impugned requisition notice is contrary to the provisions of section 284 of the
Companies Act and ultra vires the powers vested in the LIC under section 6 of
the LIC Act and contrary to the intendment of the provisions of the LIC Act.
The impugned requisition notice offends the principles of natural justice. The
action of the LIC in issuing the impugned requisition notice is an arbitrary
and mala fide action taken for collateral purpose; it is violative of article
14 of the Constitution of India. The Union of India and the RBI, respondents
Nos. 1 and 2, are in no way responsible for the action of the LIC in this
regard. The allegation of mala fides made against them and the Union Finance
Minister are unsubstantiated. The requisition notice and the resolutions passed
at the meeting held in pursuance of the said notice are quashed. A writ of
mandamus shall issue restraining the respondents from taking any steps or
action in pursuance of the resolutions passed in any meeting held pursuant to
that notice or any step or action on or under or in furtherance of the impugned
requisition notice."
From
what has been narrated above, one of the principal questions to be considered
is seen to be whether the Reserve Bank of India had the power or authority to
give ex post facto permission under section 29(1)(b) of the Foreign Exchange
Regulation Act for the purchase of shares in India by a company not
incorporated in India or whether such permission had necessarily to be
"previous" permission.
We
do not propose to refer to any dictionary to find out the meaning of the word
"permission", whether the word is comprehensive enough to include
subsequent permission. We will only refer to what Sir Shah Sulai man, Actg. C.J., said in Shakir Husain v.
Chandoo Lal, AIR 1931 All 567 (headnote):
"Ordinarily, the
difference between the approval and permission is that in the first, the act
holds good until disapproved, while in the other case, it does not become
effective until permission is obtained. But permission subsequently obtained
may all the same validate the previous act."
We have already extracted
section 29(1) and we notice that the expression used is "general or
special permission of the Reserve Bank of India" and that the expression
is not qualified by the word "previous" or "prior". While
we are conscious that the word "prior" or "previous" may be
implied if the contextual situation or the object and design of the legislation
demands it, we find no such compelling circumstances justifying reading any
such implication into section 29(1). On the other hand, the indications are all
to the contrary. We find, on a perusal of the several different sections of the
very Act, that Parliament has not been unmindful of the need to clearly express
its intention by using the expression " previous permission" whenever
it was thought that "previous permission" was necessary. In sections
27(1) and 30, we find that the expression "permission" is qualified
by the word "previous" and in sections 8(1), 8(2) and 31, the
expression "general or special permission" is qualified by the word
"previous ", whereas in sections 13(2), 19(1), 19(4), 20, 21(3), 24,
25, 28(1) and 29, the expressions "permission" and "general or
special permission" remain unqualified. The distinction made by Parliament
between permission simpliciter and previous permission in the several
provisions of the same Act cannot be ignored or strained to be explained away
by us. That is not the way to interpret statutes. The proper way is to give due
weight to the use as well as the omission to use the qualifying words in
different provisions of the Act. The significance of the use of the qualifying
word in one provision and its non-use in another provision may not be
disregarded. In our view, Parliament deliberately avoided the qualifying word
"previous" in section 29(1) so as to invest the Reserve Bank of India
with a certain degree of elasticity in the matter of granting permission to
non-resident companies to purchase shares in Indian companies. The object of
the Foreign Exchange Regulation Act, as already explained by us, undoubtedly,
is to earn, conserve, regulate and store foreign exchange. The entire scheme
and design of the Act is directed towards that end. Originally, the Foreign
Exchange Regulation Act, 1947, was enacted as a temporary measure, but it was
placed permanently on the statute book by the Amendment Act of 1957. The
Statement of Objects and Reasons of the 1957 Amendment Act expressly stated :
"India still continues
to be short of foreign exchange and it is necessary to ensure that our foreign
exchange resources are conserved in the national interest. "
In 1973, the old Act was
repealed and replaced by the Foreign Exchange Regulation Act, 1973, the long
title of which reads :
"An Act to consolidate
and amend the law regulating certain payments, dealings in foreign exchange and
securities, transactions indirectly affecting foreign exchange and the import
and export of currency and bullion, for the conservation of the foreign exchange resources of the
country and the proper utilisation thereof in the interests of the economic
development of the country."
We have already referred to
section 76 which emphasises that every permission or licence granted by the
Central Government or the Reserve Bank of India should be animated by a desire
to conserve the foreign exchange resources of the country. The Foreign Exchange
Regulation Act is, therefore, clearly a statute enacted in the national
economic interest. When construing statutes enacted in the national interest,
we have necessarily to take the broad factual situations contemplated by the
Act and interpret its provisions so as to advance and not to thwart the
particular national interest whose advancement is proposed by the legislation.
Traditional norms of statutory interpretation must yield to broader notions of
the national interest. If the legislation is viewed and construed from that
perspective, as indeed it is imperative that we do, we find no difficulty in
interpreting "permission" to mean "permission", previous or
subsequent, and we find no justification whatsoever for limiting the expression
"permission" to "previous permission" only. In our view,
what is necessary is that the permission of the Reserve Bank should be obtained
at some stage for the purchase of shares by non-resident companies.
An argument which was
strenuously pressed before us by Shri F.S. Nariman, learned Senior Advocate for
the company, was that the very scheme of the Act shows that the permission contemplated
by section 29(1) could only be previous permission, notwithstanding the
circumstance that the word "previous" does not qualify the expression
"general or special permission" in section 29(1) though it does in
several other provisions. According to Sri Nariman, the Act was designed not
merely to attract but also to regulate the inflow of foreign exchange. That was
why, he said, the provisions were very stringent. We have no hesitation in
agreeing with Mr. Nariman that while the inflow of foreign exchange is welcomed
by the Act, the inflow is also subject to stringent checks as otherwise in no
time the economy of the country will be swamped with foreign money and taken
over by giant multinationals. But that really does not affect the
interpretation of the expression "permission" in section 29(1). The
Reserve Bank of India is not bound to give ex post facto permission whenever it
is found that business has been started or shares have been purchased without
its previous permission. In such cases, wherever the Reserve Bank suspects an
oblique motive, we presume that the Reserve Bank will not only refuse
permission but will further resort to action under sections 50, 61 and 63, not
merely to punish the offender but also to confiscate the property involved. We
do not think that the scheme of the Act makes previous permission imperative
under section 29(1) though the failure to obtain prior permission may expose
the foreign investor to prosecution, penalty, conviction and confiscation if
permission is ultimately refused. Even if permission is granted, it may be made
conditional. The expression "special permission" is wide enough to
take within its stride a "conditional permission", the condition
being relevant to the purpose of the statute, in this case, the conservation
and regulation of foreign exchange. For example, ex post facto permission may
be granted subject to the condition that the person purchasing the shares will
not be entitled to repatriation benefits.
Shri Nariman then suggested
that even if we look at the provisions of section 29 by themselves, it would be
clear that the permission contemplated by section 29 could only be
"previous". He pointed out to us that while sections 29(2) and 29(4)
made due provision for applying for permission to continue to carry on any
activity of the nature mentioned in section 29(1)(a) and continue to hold
shares of a company of the character mentioned in section 29(1)(b) if such
activity was carried on and such shares were held on the date of the
commencement of the Act, no such provision was found for the application for
permission to carry on such activity or to hold such shares if such activity
was commenced or if such shares were acquired after the commencement of the Act
but without the previous permission of the Reserve Bank of India. It was
suggested that the very absence of any prescribed form for the grant of
permission for an activity started or shares acquired subsequent to the
commencement of the Act without previous permission of the Reserve Bank, were
clearly indicative of the imperative nature of the need for previous
permission. It was submitted that whatever argument was possible in regard to
the acquisition of shares, it was clear that no activity of the nature
mentioned in section 29(1)(a) could be commenced without the previous
permission of the Reserve Bank. Since the word "general or special
permission" of the Reserve Bank occurring in section 29(1) qualified both
clauses (a) and (b), the expression had to be given the same meaning with reference
to clause (b) as it had to be given with reference to clause (a) and that was
that previous permission was necessary. The argument is attractive and not
altogether without substance but it proceeds on the assumption, for which there
is no basis, that permission required for carrying on business under section
29(1)(a) must necessarily be previous permission. We do not think that
Parliament intended to lay down in absolute terms that the permission
contemplated by section 29(1) had necessarily to be previous permission. The
principal object of section 29 is to regulate and not altogether to ban the
carrying on in India of the activity contemplated by clause (a) and the
acquisition of an undertaking or shares in India of the character mentioned in
clause (b). The ultimate object is to attract and regulate the flow of foreign
exchange into India. If that much is obvious, it becomes evident that
Parliament did not intend to adopt too rigid an attitude in the matter and it
was, therefore, left to the Reserve Bank, than whom there could be no safer
authority in whom the power may be vested, to grant permission, previous or ex
post facto, conditional or unconditional. The Reserve Bank could be expected to
use the discretion wisely and in the best interests of the country and in
furtherance of declared Governmental fiscal policy in the matter of foreign
exchange.
It was contended on behalf
of Escorts Ltd. that section 13 of the Foreign Exchange Regulation Act which
enables the Central Government, by a notification in the Gazette, to order that
no person shall, except with the general or special permission of the Reserve
Bank, bring or send into India any gold or silver or any foreign exchange or
Indian currency, would be rendered ineffective if the expression "general
or special permission" occurring in section 13 could be construed to
include subsequent permission. So, it was urged, both in section 13 and
sections 19 and 29, the expression should be construed to exclude subsequent
permission. There is no force in this submission. Section 67 of the Foreign
Exchange Regulation Act provides that the restriction imposed by or under
section 13 is to be deemed to have been imposed under section 11 of the Customs
Act and further makes the provisions of the Customs Act applicable accordingly.
Section 11 of the Customs Act empowers the Central Government to prohibit
absolutely or, subject to conditions, the, import or export of goods of any
specified description. Reading together sections 13 and 67 of the Foreign
Exchange Regulation Act and section 11 of the Customs Act, it is seen that an
order under section 13 of the Foreign Exchange Regulation Act operates as a
prohibition and there can, therefore, be no question of the Reserve Bank
granting subsequent permission to validate the importation of the prohibited
goods and avoid the consequences prescribed by the Customs Act. It is,
therefore, not possible to accept the analogy of section 13 to interpret
sections 19 and 29.
Our attention was drawn to
the very serious nature of the consequences that follow the failure to obtain
the permission of the Reserve Bank, and the circumstance that even the burden
of proof that requisite permission had been obtained, was on the person
prosecuted or proceeded against for contravening a provision of the Act or rule
or direction or order made under the Act, thus ruling out mens rea as an
essential ingredient of an offence. It is true that the consequences of not
obtaining the requisite permission where permission is prescribed are serious
and even severe. It is also true that the burden of proof is on the person
proceeded against and that mensrea may consequently be interpreted as ruled
out. But that cannot lead to the inevitable conclusion that the permission
contemplated by section 29 is necessarily previous permission. Action under
section 50 or under section 56 is not obligatory and in the case of a
prosecution under section 56, the delinquent is further protected by the
requirement that the complaint has to be made by one or other of the officers
specified by section 61(2)(ii) only and even then only after giving an
opportunity to the person accused of the offence of showing that he had the
necessary permission. We presume that when called upon to show that he had the
necessary permission, the person accused of the offence could satisfy the
officer concerned that he had applied for permission as there was a reasonable
prospect of his obtaining the permission. We may further add here that ordinary
prudence would warn a foreign national who is a man of the world, particularly
of the commercial world, to seek and obtain permission before venturing to
invest his money in shares of Indian companies. If not, he would chance a
refusal of permission and risk other consequences. The chance and the risk, of
course, would not be there if everything was clean. Even if permission is
granted, it may be subject to a condition such as withholding of repatriation
benefits, which may not be palatable to him. That is another chance that he
takes when he seeks ex post facto permission. One of the submissions of Shri
Nariman was that Parliament took care to use the word "confirmation"
as distinguished from the word "permission" where it thought such
confirmation was sufficient, as in section 19(5). Parliament, according to Shri
Nariman, could well have made a provision for confirming transactions coming
into existence after the commencement of the Act, if it was so minded, but,
since, it did not do so, but chose the word "permission", it must
follow that section 29 contemplates previous permission only. We see no true
foundation for this submission. A reference to any dictionary or any book of
synonyms will show that every word has different shades of meaning and
different words may have the same meaning. It all depends upon the context in
which the word is used. If it was the intention of Parliament to comprehend
both previous and subsequent permission, the word "confirmation"
would not do at all. While it may be permissible to construe the word
"permission" widely, the word "confirmation" could never be
used to convey the meaning "previous permission". The word
"confirmation" would be totally misplaced in section 29.
It was also submitted on
behalf of the company that if the word "permission" was construed to
include ex post facto permission, it would really amount to giving
retrospective operation to the permission. The Reserve Bank, it was said, was
not competent to grant permission with retrospective effect. In our view, the
rule against retrospectivity cannot be imported into the situation presented
here. The rule against retrospectivity is a rule of interpretation aimed at
preventing interference with vested rights unless expressly provided or
necessarily implied. To invoke the rule against retrospectivity in a situation
where no vested rights are involved is to give statutory status to a rule of
interpretation forgetting the reason for a rule.
One of the submissions very
strenously urged before us was that the very authority which was primarily
entrusted with the task of administering the Foreign Exchange Regulation Act,
namely, the Reserve Bank, was, itself, of the view that the
"permission" contemplated by section 29(1)(b) of the Foreign Exchange
Regulation Act was "prior permission". Our attention was invited to
paragraph 24A.1 of the Exchange Control Manual where the first three sentences
read as follows:
"In terms of section
29(1)(b) of Foreign Exchange Regulation Act, 1973, no person resident outside
India whether an individual, firm or company (not being a banking company)
incorporated outside India can acquire shares of any company carrying on
trading, commercial or industrial activity in India without prior permission of
Reserve Bank. Also under section 19(1)(b) and 19(1)(d) of the Act, the transfer
and issue of any security (which includes shares) in favour of or to a person
resident outside India require prior permission of Reserve Bank. When
permission has been granted for transfer or issue of shares to a non-resident
investor under section 19(1)(b) or 19(1)(d), it is automatically deemed to be
permission under section 29(1)(b) for purchase of shares by him."
The submission of Shri
Nariman was two-fold. He urged that paragraph 24A.1 was a statutory direction
issued under section 73(3) of the Foreign Exchange Regulation Act and,
therefore, had the force of law and required to be obeyed. Alternately, he
urged that it was the official and contemporary interpretation of the provision
of the Act and was, therefore, entitled to our acceptance. The basis for the
first part of the submission was the statement in the preface to the Exchange
Control Manual to the effect:
"The present edition
of the Manual incorporates all the directions of a standing nature issued to authorised
dealers in the form of circulars up to May 31, 1978. The directions have been
issued under section 73(3) of the Foreign Exchange Regulation Act, 1973, which
empowers the Reserve Bank to issue directions necessary or expedient for the
administration of exchange control. Authorised dealers should hereafter be
guided by the provisions contained in this Manual."
There is no force whatever
in this part of the submission. A perusal of the Manual shows that it is a sort
of guide-book for authorised dealers, money changers, etc., and is a compendium
or collection of various statutory directions, administrative instructions,
advisory opinions, comments, notes, explanations, suggestions, etc. For
example, paragraph 24A.1 is styled as "Introduction to Foreign Investment
in India". There is nothing in the whole of the paragraph which even
remotely is suggestive of a direction under section 73(3). Paragraph 24A.1
itself appears to be in the nature of a comment on section 29(1)(b), rather
than a direction under section 73(3). Directions under section 73(3), we
notice, are separately issued as circulars on various dates. No circular has
been placed before us which corresponds to any part of paragraph 24A.1. We do
not have the slightest doubt that paragraph 24A.I is an explanatory statement
of guideline for the benefit of the authorised dealers. It is neither a
statutory direction nor is it a mandatory instruction. It reads as if it is in
the nature of and, indeed it is, advice given to authorised dealers that they should
obtain prior permission of the Reserve Bank so that there may be no later
complications. It is a helpful suggestion, rather than a mandate. The
expression "prior permission" used in paragraph 24A.1 is not meant to
restrict the range of the expression "general and special permission"
found in sections 29(1)(b) and 19(1)(b). It is meant to indicate the ordinary
procedure which may be followed. Shri Nariman argued that none of the
prescribed forms provided for the application and grant of subsequent permission.
That may be so for the obvious reason that ordinarily one would expect
permission to be sought and given before the act. Surely, the form cannot
control the Act, the Rules or the directions. As one learned judge of the
Madras High Court was fond of saying " it is the dog that wags the tail
and not the tail that wags the dog." We may add what this court had
occasion to say in Vasudev Ramchandra Shelat v. Pranlal Jayanand Thakar [1975]
45 Comp Cas 43, 54 (SC)
"The subservience of
substance of a transaction to some rigidly prescribed form required to be
meticulously observed savours of archaic and outmoded jurisprudence."
According to Shri Nariman,
even if as found by us, the permission to purchase shares of an Indian company
by a non-resident investor of Indian origin or nationality under section
29(1)(b)of the Foreign Exchange Regulation Act could be obtained after the
purchase, the Reserve Bank ceased to have such power after the formulation of
the portfolio investment scheme since it did not reserve to itself any such
power under the portfolio investment scheme promulgated in exercise of its
powers under section 73(3) of the Foreign Exchange Regulation Act. We do not
see any foundation for this argument in the scheme itself. The scheme does not
talk of any prior or previous permission, nor are we able to understand how a
power possessed by the Reserve Bank under a parliamentary legislation can be so
cut down as to prevent its exercise altogether. It may be open to a subordinate
legislating body to make appropriate rules and regulations to regulate the
exercise of a power which Parliament has vested in it so as to carry out the
purposes of the legislation but it cannot divest itself of the power. We are,
therefore, unable to appreciate how the Reserve Bank, if it has the power under
the Foreign Exchange Regulation Act to grant ex post facto permission, can
divest itself of that power under the scheme. The argument was advanced with
particular reference to the forms prescribed under the scheme. We have already
pointed out that the forms under the scheme cannot abridge the legislation
itself.
Before proceeding further,
it is just as well to have a clear picture of the nature of the property in
shares, the law relating to transfer of property in shares under the law and
the effect of the provisions of the Foreign Exchange Regulation Act. For that
purpose, it is desirable that we read together all the relevant statutory
provisions relating to the acquisition, transfer and registration of shares.
Besides referring to the relevant statutory provisions, we will also refer to
the leading cases on the topic.
Section 2(46) of the
Companies Act defines "share" as meaning "share in the share
capital of a company, and includes stock except where a distinction between stock
and shares is expressed or implied." Section 82 of the Companies Act
states : "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." Section 84 makes a certificate, under the common seal of the
company, specifying any shares held by any member, prima facie evidence of the
title of the member to such shares. Section 87 gives every member of a company
holding any equity share capital therein a right to vote, in respect of such
capital, on every resolution placed before the company, his voting right to be
in proportion to his share of the paid-up equity capital of the company.
Section 106 makes provision for ' alteration of rights of holders of special
classes of shares' under certain circumstances. Section 108(1) prohibits a
company from registering a transfer of shares in a 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 has been delivered to the
company along with the certificate relating to the shares. Section 108(1A)(a)
provides for the presentation of the instrument of transfer, in the prescribed
form, to the prescribed authority for the purpose of having duly stamped on it
the date of such presentation. Section 108(1A)(b) provides for the delivery of
the duly stamped instrument to the company generally within two months from the
date of such presentation. Sections 108A to 108H impose certain restrictions on
transfer of shares in the company with which we are not concerned for the
purpose of this case. Section 110 provides for application for transfer of
shares. Section 111(1) preserves the power of the company under its articles to
refuse to register the transfer of any shares of the company, and section
111(3) provides for an appeal to the Central Government against such refusal to
register. Section 206 obliges a company not to pay the dividend in respect of
any share except to the registered holder of such share or to his order or to
his bankers or where a share warrant has been issued in respect of the share to
the bearer of such warrant or to his banker. Default in payment of dividend is
also made punishable under section 207. A shareholder along with others, making
a minimum of one hundred members of the company or one-tenth of the total
number of members, has the right to apply to the court under section 397 for
relief in case of oppression and under section 398 for relief in case of
mismanagement. Section 428 defines "contributory" and it includes the
holder of any shares which are fully paid-up. The shareholder, as a
contributory, has also the right to apply for winding-up of the company under
section 439. On winding-up, section 475 enables the court to adjust the rights
of the contributories amongst themselves and to distribute the surplus among
the persons entitled thereto.
We have also to notice here
section 27 of the Securities Contracts (Regulation) Act, 1956, which provides
that it shall be lawful for the holder of any security, whose name appears on
the books of the company issuing the said security to receive and retain any
dividend declared by the company in respect thereof for any year,
notwithstanding that the said security has already been transferred by him for
consideration, unless the transferee who claims the dividend from the
transferor has lodged the security and all other documents relating to the
transfer which may be required by the company with the company for being
registered in his name within fifteen days of the date on which the dividend
became due.
We have to notice further
here that the Sale of Goods Act, 1930, also applies to stocks and shares.
Section 2(7) of the Sale of Goods Act defines "goods" as meaning
"every kind of movable property other than actionable claims and money;
and includes stock and shares, growing crops, grass and things attached to or
forming part of the land which are agreed to be severed before sale or under
the contract of sale."
Section 19 prescribes that
where there is a contract for the sale of specific or ascertained goods, the
property in them is transferred to the buyer at such time as the parties to the
contract intend it to be transferred. Intention may be ascertained having
regard to the terms of the contract, the conduct of the parties and the
circumstances of the case. Unless a different intention appears, the rules
contained in sections 20 to 24 are to determine the intention as to the time at
which the property in the goods is to pass to the buyer. Section 20 deals with
specific goods in a deliverable state. Section 21 deals with specific goods to
be put in a deliverable state. Section 22 deals with specific goods in a
deliverable state when the seller has to do anything thereto in order to
ascertain the price. Section 23 deals with sale of unascertained goods and
appropriation and section 24 deals with goods sent on approval or "on sale
or return".
We have referred at the
outset and indeed we have extracted some of the important provisions of the
Foreign Exchange Regulation Act which have relevance to the case before us. We
have seen that while section 19 (1)(b) prescribes that no person shall, except
with the general or special permission of the Reserve Bank, transfer any
security or create or transfer any interest in a security, to or in favour of a
person resident outside India, section 29(1)(b) provides that no person
resident outside India (whether a citizen of India or not) or a company which
is not incorporated under any law in force in India or in which the
non-resident interest is more than 40 per cent, shall except with the general
or special permission of the Reserve Bank purchase the shares in India of any
company carrying on any trade, commerce or industry. The provisions of section
29 are stated to the without prejudice to the provisions of section 47 which
while prohibiting any person from entering into any contract or agreement which
would directly or indirectly evade or avoid in any way the operation of any
provision of the Act or rule or direction or order made there under also
provides that the provisions of the Act requiring that anything for which the
permission of the Central Government or the Reserve Bank is necessary shall not
prevent legal proceedings being brought in India to recover any sum which apart
from the said provisions would be due as debt, damages or otherwise, subject to
the condition that no step shall be taken for the purpose of enforcing any
judgment or order for the payment of any sum, unless the Central Government or
the Reserve Bank, as the case may be, may permit the sum to be paid. We have
also referred earlier to section 19(4) which stipulates that no person shall,
except with the permission of the Reserve Bank, enter the transfer of
securities in any register if he has any ground for suspecting that the
transfer involves any contravention of the provisions of section 19. Sections
48, 50, 56 and 63 prescribe the consequences of non-compliance with the
provisions of the Act and the rules orders and directions issued under the Act
and provide for penalties and prosecutions. The provisions of the Foreign
Exchange Regulation Act, to which we have just now referred, do not appear to
stipulate that the purchase of shares without obtaining the permission of the
Reserve Bank shall be void. On the other hand, legal proceedings arising out of
such transactions are contemplated subject to the condition that no sum may be
recovered as debt, damages or otherwise, unless and until requisite permission
is obtained. We have already held that the permission may be ex post facto. If
permission may be granted ex post facto, quite obviously the transaction cannot
be a nullity and without any effect whatsoever.
In the course of the
submissions, we were referred to Manekji Pestonji Bharucha v. Wadilal Sarabhai
and Co. [1925] 52 IA 92; AIR 1926 PC 38, Bank of India v. Jamsetji A. H.
Chinoy, AIR 1950 PC 90, In re Fry: Chase National Executor and Trustees
Corporation Ltd. v. Fry [1946] 2 All ER 106 (Ch D); [1946] Ch 812, Swiss Bank
Corporation v. Lloyds Bank Ltd. [1981] 2WLR893; [1981]2 A11ER 449 ; [1982] AC
584 (HL), Charanajit Lal Chowdhury v. Union of India, AIR 1951 SC 41, R.
Mathalone v. Bombay Life Assurance Co. Ltd. [1954] 24 Comp Cas 1 (SC) and
Vasudev Ramchandra Shelat v. Pranlal Jayanand Thakar [1975] 45 Comp Cas 43
(SC), A. R. Ramiah v. Reserve Bank of India [1970] 1 MLJ 1 and Baliv v. Chopra,
ILR 1971 2 Delhi 637. We have read all of them and we think it is enough if we
refer to some of them.
In Charanjit Lal Chowdhury
v. Union of India, AIR 1951 SC 41 ; 21 Comp Cas 33, Mukherjea J. summarised the
rights of a shareholder in company in the following manner (at p. 58 of 21 Comp
Cas):
"The petitioner as a
shareholder has undoubtedly an interest in the company. His interest is
represented by the share he holds and the share is a movable property according
to the Indian Companies Act, with all the incidence of such property attached
to it. Ordinarily, he is entitled to enjoy the income arising from the shares
in the shape of dividends ; the share like any other marketable commodity can
be sold or transferred by way of mortgage or pledge. The holding of the share
in his name gives him the right to vote at the election of the directors and
thereby take a part, though indirectly, in the management of the company's
affairs. If the majority of shareholders sides with him, he can have a
resolution passed which would be binding on the company and, lastly, he can
institute proceedings for the winding up of the company which may result in a
distribution of the net assets among the shareholders."
It is interesting to notice
that Mukherjea J., in the course of his opinion, expressed the view that a
corporation, which is engaged in the production of a commodity vitally
essential to the community has a social character of its own and it must not be
regarded as the concern primarily or only of those who invest their money in
it.
In
R. Mathalone v. Bombay Life Assurance Co. Ltd. [1954] 24 Comp Cas 1 (SC), the question of relationship between the transferor
and transferee of shares before registration of the transfer in the books of
the company came to be considered in connection with the right of the
transferee to the "right shares" issued by the company. On the
transfer of shares, transferee became the owner of the beneficial interest
though the legal title was with the transferor, the relationship of trustee and
"cestuique trust" was established and the transferor was bound to
comply with all the reasonable directions that the transferee might give and
that he became a trustee of dividends as also a trustee of the right to vote.
The relationship of trustee and cestui que trust arose by reason of the
circumstance that till the name of the transferee was brought on the register
of shareholders in order to bring about a fair dealing between the transferor
and the transferee, equity clothed the transferor with the status of a
constructive trustee and this obliged him to transfer all the benefits of
property rights annexed to the sold shares of the cestui que trust. The
principle of equity could not be extended to cases where the transferee had not
taken active steps to get his name registered as a member on the register of
the company with due diligence and in the meantime, certain other privileges or
oppprtunities arose for purchase of new shares in consequence of the ownership
of the shares already acquired. The benefit obtained by a transferor as a
constructive trustee in respect of the share sold by him cannot be retained by
him and must go to the beneficiary, but that cannot compel him to make himself
liable for the obligations attaching to the new issues of shares and to make an
application for the new issue by making the necessary payments, unless
specially instructed to do so by the beneficiary.
In
Vasudev Ramchandra Shelat v. Pranlal Jayanand Thakar [1975] 45 Comp Cas 43 (SC), the question arose this way. The donor
gifted certain shares in companies to the appellant by a registered deed. She
also signed several blank transfer forms to enable the donee to obtain transfer
of shares in the register of companies. However, she died before the shares
could be transferred to the appellant in the books of the companies. The
respondent, a nephew of the donor, filed the suit, claiming the shares on the
ground that the gift was incomplete for failure to comply with the formalities
prescribed by the Indian Companies Act, 1913, for transfer of shares. Noticing
that in Maneckji Pestonji Bharucha v. Wadilal Sarabhai & Co. [1925] 52 IA
92; [1926] ILR 50 Bom 360, a distinction was made between "the title to
get on the register "and" the full property in the shares in a
company", the court expressed the view that section 6 of the Transfer of
Property Act also justified such a splitting up of a right constituting
"property" in shares just as it was well recognised that rights of
ownership of a property might be split up into a right to the " corpus '
and another to the "usufruct" of the property and then separately
dealt with. On the delivery of the registered deed of gift together with the
share certificate to the donee, the donation of the right to get the share
certificate transferred in the name of the donee became irrevocable by
registration as well as by delivery. Either was sufficient. The actual transfer
in the registers of the companies constituted a mere enforcement of this right
to enable the donee to exercise the rights of the shareholder. The mere fact
that such transfers had to be recorded in accordance with the company law did
not detract from the completeness of what was donated. Referring to regulation
18 of the First Schedule to the Indian Companies Act of 1913, which prescribed
the mode of transfer of shares, it was observed by the court that there was
nothing either in the regulation or elsewhere to indicate that without strict
compliance with some rigidly prescribed form, the transaction must fail to
achieve its purpose. It was said, "the subservience of substance of a
transaction to some rigidly prescribed form required to be meticulously
observed savours of archaic and outmoded jurisprudence". The court
referred to the passage in Buckley on the Companies Acts, 13th edition, p. 813:
"Non-registration of a transfer of shares made by a donor does not render
the gift imperfect", and the passage in Palmer's Company Law, 21st
edition, p. 334: "A transfer is incomplete until registered. Pending
registration, the transferee has only an equitable right to the shares
transferred to him. He does not become the legal owner until his name is
entered on the register in respect of these shares." The two statements of
law were reconciled by the court and it was stated, "the transferee, under
a gift of shares, cannot function as a shareholder recognised by company law
until his name is formally brought upon the register of a company and he
obtains a share certificate as already indicated above. Indeed, there may be
restrictions on transfers of shares either by gift or by sale in the articles
of association". It was pointed out that, "a transfer of ' property '
rights in shares, recognised by the Transfer of Property Act, may be antecedent
to the actual vesting of all or the full rights of ownership of shares and
exercise of the rights of shareholders in accordance with the provisions of the
company law", and that while transfer of property in general was not the
subject-matter of the Companies Act, it deals with "transfers of shares
only because they give certain rights to the legally recognised shareholders
and imposes some obligations upon them with regard to the companies in which they
hold shares. A share certificate not merely entitles the shareholder whose name
is found on it to interest in the share held but also to participate in certain
proceedings relating to the company concerned."
In In re Fry [1946] 2 All
ER 106 (Ch D), F, a resident of the United States of America desiring to make a
gift to his son of certain shares of an English company, executed a deed of
transfer and sent it to the company for registration. As the Defence (Finance)
Regulations prohibited any transfer of any securities or any interest in
securities held by a non-resident without permission from the treasury, the
company wrote to F that certain forms had to be completed by him and the
transferee and that a licence had to be obtained from the treasury. Before F
could apply and obtain the permission of the treasury, he died. The question
arose whether F's son was entitled to require F's personal representatives to
obtain for him legal and beneficial possession of the shares. It was held that
the permission of the treasury not having been obtained, the company could not
register the transfer and, therefore, the son acquired no legal title to the
shares in question. Nor was there a complete gift of the equitable interest in
the shares to the son because F had not obtained the consent of the treasury
and had, therefore, not done all that was necessary to divest himself of his
equitable interest in favour of his son. The son was, therefore, not entitled
to sue the father's personal representatives to obtain for him legal and
beneficial possession of the shares.
In
Swiss Bank Corporation v. Lloyds Bank Ltd. [1981] 2 WLR 893; [1981] 2 All ER 449 ; [1982] AC 584 (HL) the question was
about the consequence of an authorised depository under section 16(2) of the
Exchange Control Act, 1947, parting with a certificate relating to a foreign
currency security without the permission of the treasury contrary to Bank of
England Exchange Control Notice E.C. 7. In the Court of Appeal, Buckley L. J.
observed (at p. 431 of [1980] 2 All ER):
"..........the Bank of
England, we must assume for sufficient reasons, declined to validate the
transfer of custody. It must consequently be treated as having been made in
contravention of section 16(2), which, as I have already mentioned, is conceded
; but an act done in contravention of a statute is not necessarily a nullity.
Whether it is so or not must depend upon the terms and effect of the statute,
and may depend upon the policy of the statute and the nature of the act itself.
By section 34 of the 1947 Act, effect is given to the provisions of Schedule 5
to the Act for the purposes of the enforcement of the Act. Paragraph 1(1) of
Part II of Schedule 5 provides that any person in or resident in the United
Kingdom who contravenes any restriction or requirement imposed by or under the
Act shall be guilty of an offence punishable under that part of that Schedule.
The subsequent provisions of that part of the Schedule impose maximum penalties
by way of imprisonment or fine for such offences.
In my judgment offences
under the Act are clearly mala prohibita, not mala in se; they are not acts the
validity of which the law refuses to coun tenance for any purpose. As such they
are not devoid of any effect; they merely expose the culprits to the penalties prescribed
by the Act none of which, so far as I am aware, has been exacted or sought to
be exacted in this case......... If the legislature had intended that such a
security, if trans ferred from the custody of one authorised depositary to the
custody of another without compliance with all the conditions of any relevant
per mission, should not be treated as being in the custody of the latter deposi
tary, one would, I think, expect to find an express provision to that effect,
for otherwise the consequence of an irregular transfer of custody is left in
doubt."
Earlier we mentioned that
section 111 of the Companies Act preserves the power of the company under its
articles to refuse to register the transfer of any shares of the company. The
nature and extent of the power of the company to refuse to register the
transfer of shares has been explained by this court in Bajaj Auto Ltd. v. N.K.
Firodia [1971] 41 Comp Cas 1, 6, 7 (SC). It was said that even if the articles
of the company provided that the directors might at their absolute and
uncontrolled discretion decline to register any transfer of shares, such
discretion does not mean a bare affirmation or negation of a proposal.
Discretion implies just and proper consideration of the proposal, in the facts
and circumstances of the case. In the exercise of that discretion, the
directors will act for the paramount interest of the company and for the
general interest of the shareholders because the directors are in a fiduciary
position both towards the company and towards every shareholder. The directors
are, therefore, required to act bona fide and not arbitrarily and not for any
collateral motive. " Where the articles permitted the directors to decline
to register the transfer of shares without assigning reasons, the court would
not necessarily draw adverse inference against the directors but will assume
that they acted reasonably and bona fide. Where the directors gave reasons, the
court would consider whether the reasons were legitimate and whether the
directors proceeded on a right or wrong principle. If the articles permitted
the directors not to disclose the reasons, they could be interrogated and asked
to disclose the reasons. If they failed to disclose that reason, adverse
presumption could be drawn against them.
On an overall view of the
several statutory provisions and judicial precedents to which we have referred,
we find that a shareholder has an undoubted interest in a company, an interest
which is represented by his shareholding. Share is movable property, with all
the attributes of such property. The rights of a shareholder are (i) to elect
directors and thus to participate in the management through them ; (ii) to vote
on resolutions at meetings of the company ; (iii) to enjoy the profits of the
company in the shape of dividends ; (iv) to apply to the court for relief in
the case of oppression; (v) to apply to the court for relief in the case of
mismanagement ; (vi) to apply to the court for winding up of the company ;
(vii) to share in the surplus on winding up. A share is transferable but while
a transfer may be effective between transferor and transferee from the date of
transfer, the transfer is truly complete and the transferee becomes a
shareholder in the true and full sense of the term, with all the rights of a
shareholder, only when the transfer is registered in the company's register. A
transfer effective between the transferor and the transferee is not effective
as against the company and persons without notice of the transfer until the
transfer is registered in the company's register. Indeed, until the transfer is
registered in the books of the company, the person whose name is found in the
register alone is entitled to receive the dividends, notwithstanding that he
has already parted with his interest in the shares. However, on the transfer of
shares, the transferee becomes the owner of the beneficial interest though the
legal title continues with the transferor. The relationship of trustee and
"cestuique trust" is established and the transferor is bound to
comply with all the reasonable directions that the transferee may give. He also
becomes a trustee of the dividends as also of the right to vote. The right of
the transferee "to get on the register" must be exercised with due
diligence and the principle of equity which makes the transferor a constructive
trustee does not extend to a case where a transferee takes no active interest
"to get on the register". Where the transfer is regulated by a
statute, as in the case of a transfer to a non-resident which is regulated by
the Foreign Exchange Regulation Act, the permission, if any, prescribed by the
statute must be obtained. In the absence of the permission, the transfer will
not clothe the transferee with the right "to get on the register"
unless and until the requisite permission is obtained. A transferee who has the
right to get on the register, where no permission is required or where
permission has been obtained, may ask the company to register the transfer and
the company who is so asked to register the transfer of shares may not refuse
to register the transfer except for a bona fide reason, neither arbitrarily nor
for any collateral purpose. The paramount consideration is the interest of the
company and the general interest of the shareholders. On the other hand, where,
for instance, the requisite permission under the Foreign Exchange Regulation
Act is not obtained, it is open to the company and, indeed, it is bound to
refuse to register the transfer of shares of an Indian company in favour of a
non-resident. But once permission is obtained, whether before or after the
purchase of the shares, the company cannot, thereafter, refuse to register the
transfer of shares. Nor is it open to the company or any other authority or
individual to take upon itself or himself, thereafter, the task of deciding
whether the permission was rightly granted by the Reserve Bank. The provisions
of the Foreign Exchange Regulation Act are so structured and woven as to make
it clear that it is for the Reserve Bank alone to consider whether the
requirements of the provisions of the Foreign Exchange Regulation Act and the
various rules, directions and orders issued from time to time have been
fulfilled and whether permission should be granted or not. The consequences of
non-compliance with the provisions of the Act and the rules, orders and
directions issued under the Act are mentioned in sections 48, 50, 56 and 63 of
the Act. There is no provision of the Act which enables an individual or
authority functioning outside the Act to determine for his own or its own
purpose whether the Reserve Bank was right or wrong in granting permission
under section 29(1) of the Act. As we said earlier, under the scheme of the
Act, it is the Reserve Bank that is constituted and entrusted with the task of
regulating and conserving foreign exchange. If one may use such an expression,
it is the "custodian-general" of foreign exchange. The task of
enforcement is left to the Directorate of Enforcement, but it is the Reserve
Bank and the Reserve Bank alone that has to decide whether permission may or
may not be granted under section 29(1) of the Act. The Act makes it its
exclusive privilege and function. No other authority is vested with, any power
nor may it assume to itself the power to decide the question whether permission
may or may not be granted or whether it ought or ought not to have been
granted. The question may not be permitted to be raised either directly or
collaterally. We do not, however, rule out the limited class of cases where the
grant of permission by the Reserve Bank may be questioned by an interested
party in a proceeding under article 226 of the Constitution on the ground that
it was mala fide or that there was no application of the mind or that it was
opposed to the national interest as contemplated by the Act, being in
contravention of the provisions of the Act and the rules, orders and directions
issued under the Act. Once permission is granted by the Reserve Bank,
ordinarily it is not open to anyone to go behind the permission and seek to
question it. It is certainly not open to a company whose shares have been
purchased by a non-resident company to refuse to register the shares even after
permission is obtained from the Reserve Bank on the ground that permission
ought not to have been granted under the Foreign Exchange Regulation Act. It is
necessary to remind ourselves that the permission contemplated by section 29(1)
of the Foreign Exchange Regulation Act is neither intended to nor does it
impinge in any manner on any legal right of the company or any of its
shareholders. Conversely neither the company nor any of its shareholders is
clothed with any special right to question any such permission.
Much was said before us
about the mala fides of the Government of India and the Reserve Bank of India
and the non-application of mind by the Reserve Bank of India which was said to
amount to legal mala fides. Though Shri Nariman, learned counsel for the
company, now and then, in the course of his argument mentioned that Shri Swraj
Paul had been issuing press statements which were generally followed up,
according to him, by some action or the other by the Government or the Reserve
Bank, he properly refrained from reading to us the press statement said to have
been made by Shri Swraj Paul. However, the gist of some of the press statements
and press releases of Shri Swraj Paul has been included in the pleadings which
were read out to us. It may be that Shri Swraj Paul was ever ready and anxious
to issue press releases for his own ends either because he had an inkling or
made a guess of what course of action the Government or the Reserve Bank was
likely to pursue or because he, like every interested party, was interested in
making statements which may find some receptive ears somewhere. These is nothing
whatever to indicate that Shri Swraj Paul had any access to anyone who was in a
position to take a decision in the matter or influence a decision in the
matter. We do not think we can attach any importance to the vainglorious and
grandiloquent press statements and releases made by Shri Swraj Paul. They
deserve to be ignored as the overrated statements of a person, who rated
himself very high. The most important circumstance on which reliance was placed
on behalf of the company in support of the argument relating to mala fides was
the 'turn-about' of the attitude of the Reserve Bank in the matter. It was said
that in the beginning, the Reserve Bank of India had serious reservations on
the question whether indirect purchase of shares by non-residents of Indian
nationality/origin was permissible under the original scheme. Later, after the
Governor of the Reserve Bank had discussions with the Finance Secretary,
Finance Minister and the Personal Secretary to the Prime Minister, the Reserve
Bank of India changed its attitude and issued the impugned circular and the
permission. Our attention was particularly invited to: (i) the letter dated
June 1, 1983, from the Reserve Bank to the Government of India in which the
Reserve Bank appeared to take the view that the scheme did not contemplate
indirect investment by non-resident individuals of Indian nationality/origin
and proposed to reject the application of all the 13 overseas companies, but
sought the confirmation of the Government of India, (ii) the reply dated September
17, 1983, of the Government of India to the Reserve Bank of India, and (iii)
the endorsement made on the letter dated September 17, 1983, by the Governor of
the Reserve Bank. We have already referred to the contents of (i) and (ii), the
two letters in the preceding paragraphs. We have also extracted the endorsement
of Dr. Manmohan Singh in full. The inference sought to be drawn from (i), (ii)
and (iii) is that though the Reserve Bank had expressed itself strongly in (i),
it was under the pressure of the Finance Secretary, Finance Minister and the
Personal Secretary to the Prime Minister that the Governor of the Reserve Bank
finally agreed to adopt the line suggested by the Government in its letter
dated September 17, 1983, and that the decision of the Reserve Bank was not
that of a free agent. The circular issued by the Reserve Bank of India and the
permission granted by it, it was suggested, were so issued and granted under
the pressure of the Government of India. We do not think that we will be justified
in drawing any such inference. It would be wholly unfair and uncharitable to
Dr. Manmohan Singh. An enormous amount of foreign exchange vital to the economy
of the country was involved. Though the Reserve Bank appeared to have taken, in
the beginning, a certain position in the matter, it thought it necessary to
consult and seek the advice of the Government of India in the matter. There
were high level discussions obviously because of the amount of foreign exchange
and the question of policy involved and the matter had also attracted
considerable attention from the press and the public. If, after high level
discussions, the Reserve Bank changed its views, it would be unreasonable and
impermissible to hold that it was done under pressure. Every question of this
nature is bound to have different facets which present themselves in different
lights when viewed from different angles. If after full discussion with those
in the higher rungs of the Government who are concerned with policy-making, the
Reserve Bank changed its former negative attitude to a more positive attitude
in the interests of the economy of the country, one fails to see how its
decision can be said to be the result of any pressure.
It was argued that, from
time to time, the company had addressed several communications to the Reserve
Bank drawing the latter's attention to several irregularities and illegalities,
which it claimed, had been committed by Mr. Swraj Paul and the Caparo Group of
companies, but to no avail, as the Reserve Bank failed to respond and make any
enquiry into the matter. It was said that the Reserve Bank was guilty of total
non-application of the mind and, therefore, mala fides in law could be
attributed to it. We are unable to agree with this submission. Merely because
the Reserve Bank did not choose to send a reply to the communications received
from the company, it did not follow that the Reserve Bank was not acting bona
fide. While we may say that the Reserve Bank would have done well to
acknowledge the communications received from the company and to reply to them,
we are unable to infer mala fides from their failure to do so. It was not as if
the Reserve Bank ignored the complaints of the company. They did enquire into
the matter in their own way. As already mentioned by us during the course of
the narration of events, the Reserve Bank pursued its enquiry by seeking
information from the Punjab National Bank, who was an authorised dealer
appointed under the provisions of the Foreign Exchange Regulation Act and who,
therefore, could be expected to supply the Reserve Bank with full and accurate
information. At that stage, there was nothing to doubt the bona fides and the
ineptitude of the Punjab National Bank. The company also in its several
communications to the Reserve Bank did not make any allegations against the
Punjab National Bank. In those circumstances, if the Reserve Bank thought it
fit to seek information from the Punjab National Bank and proceeded to act on
the information obtained from the Punjab National Bank, the Reserve Bank cannot
be accused of non-application of mind. The Reserve Bank was entitled to rely on
the Punjab National Bank and the information supplied by that bank as the bank
held a statutory position under the Foreign Exchange Regulation Act. It may be
that the Punjab National Bank did not act with that degree of competence and
diligence as should be expected from it, but at that stage, there was nothing
to provoke any suspicion in the mind of the Reserve Bank. We will revert to the
part played by the Punjab National Bank presently, but there is no reason to
charge the Reserve Bank with want of bona fides and non-application of mind
merely because it placed reliance upon the Punjab National Bank and the
information supplied by it although with the aid of some of the material now
brought out during the hearing, we perceive that the Reserve Bank could have
acted with greater wisdom than to rely on the Punjab National Bank. But that
would really be speaking with "hindsight".
Earlier we had referred to
the failure of the Punjab National Bank to inform the Reserve Bank, as it was
bound to do, about the remittance of Ł1,30,000 received from Mr. Swraj Paul by
their Parliament Street branch. It was a sorry confession to hear from the
Punjab National Bank that their ECE House Branch which was monitoring the NRE
Accounts and the purchase of shares by the Caparo Group of companies was not
aware of the remittance received by the Parliament Street branch. We are now
told that this amount of Ł1,30,000 was also utilised for purchasing shares for
the Caparo Group of companies. If that was so, the ECE House Branch should have
known about it. Otherwise, one wonders what was the monitoring that was done by
the ECE House Branch, if it was not even aware that a large remittance of Ł
1,30,000 received by their Parliament Street branch had been utilised for
purchase of shares for the Caparo Group of companies ! If the amount was not
utilised for the purchase of shares for the Caparo Group of companies, it must
necessarily follow that locally available funds and not foreign remittances
must have been utilised for purchasing some of the shares. The fact that this
large sum had been remitted by Shri Swraj Paul and received by the Punjab
National Bank was never brought to the notice of the Reserve Bank of India
which was apparently kept in the dark about it. We consider this a serious
matter which requires further probe by the Reserve Bank. We find that the
entire conduct of the Punjab National Bank in this affair has been most irresponsible.
They had been appointed as authorised dealers under the Foreign Exchange
Regulation Act and by virtue of such appointment, great confidence had been
reposed in them for the purpose of regulating the flow and conserving the
foreign exchange and protecting the national interest. The portfolio investment
scheme provided that the banks which were designated as authorised dealers
could purchase shares on behalf of their non-resident customers of Indian
nationality/origin through a stock exchange. The applications of the foreign
investors for permission to invest in shares of Indian companies were in fact
to be made through the designated banks. By paragraph 11 of Circular No. 9,
dated April 14, 1982, the designated banks were required to maintain separately
a proper record of the investment made in shares, with and without repatriation
benefits, on account of the investor, showing all relevant particulars
including the numbers of share certificates and distinctive numbers of shares.
They were required to keep a systematic and up-to-date record of the shares
purchased by them for each investor through stock exchange so that they would
be able to ensure that the purchase of shares in any one company by a single
investor would not exceed Rs. 1 lakh in face value of the company. Again by
Circular No. 10 of April 22, 1982, the authorised dealer (designated bank) was
required to obtain from the investing overseas companies a certificate from an
auditor/chartered accountant/certified public accountant in form OAC. The
certificate was to be obtained by the authorised dealer every year. When by
Circular No. 12 of May 16, 1983, an overall ceiling of 5 per cent of the total
paid-up equity capital of the company was imposed, it was prescribed, for the
purpose of monitoring the ceiling of 5 per cent., that authorised-dealers who
were permitted to purchase shares under the portfolio investment scheme on
behalf of the eligible non-resident investors should nominate a link office in
Bombay for the purpose of co-ordinating the purchases and sales of equity
shares made by their designated branches on a daily basis and notify the same
to the Controller, Exchange Control Department, Reserve Bank of India. The link
offices were required to submit a consolidated statement of the total purchases
and sales of equity shares made by the designated branches in the prescribed
form. The daily statements were to be submitted to the Controller positively on
the succeeding day. We may straightaway say that the Punjab National Bank,
apart from receiving the remittances from the Caparo Group Ltd. and passing on
the amount to the stock brokers, Raja Ram Bhasin & Co., did nothing
whatsoever to discharge their prescribed duties as authorised dealers. It is
now admitted that they did not give any instructions to Raja Ram Bhasin &
Co. regarding the purchase of shares, that they never maintained any
systematic, up-to-date and proper record of the investments made in shares and
that they did not submit daily statements of purchases and sales of shares to the
Controller. Of course, in the beginning, they submitted the applications of the
Caparo Group of companies to the Reserve Bank for permission to purchase shares
in Indian companies. That was on the 4th and the 12th of March, 1983.
Thereafter, they wrote to the Reserve Bank on April 23, 1983, reminding the
latter about the applications of their customers for permission and informing
them about the receipt of four remittances on March 9, 1983, April 12, 1983,
April 13, 1983, and March 23, 1983. They also mentioned that investment
operations were being conducted through Raja Ram Bhasin and Co. What shares,
how many, when and for what amount, these details were not mentioned, not even
the total number of shares purchased and the amount expended till then. Thereafter,
in answer to a letter from the Reserve Bank, they wrote on May 6, 1983, that
they had been advised that Mr. Swraj Paul and family members hold 61.6 per cent
of share capital of Caparo Group Ltd. and that Caparo Group hold 100 per cent
of share capital of the remaining companies except Caparo Properties in which
the holding was 98 percent. In this letter, it was expressly stated "as
regards details of shares of Indian companies purchased by or on behalf of the
said non-resident clients, they have advised us that the same would be supplied
when the purchases were complete." This statement appears to us to be in
complete breach of the duties of an authorised dealer under the portfolio
investment scheme. The letter shows that not only the sales were not put
through by the authorised dealers, the authorised dealers were not even aware
of the transactions that had taken place till then, though we are now told that
all the shares had been purchased by April 28, 1983. It was only on May 31,
1983, that the Punjab National Bank sent a telegram to the Reserve Bank of
India that they had been advised by the brokers that up to April 28, 1983,
75,000 equity shares of the Escorts Ltd. had been purchased on behalf of and
for the benefit of each of the thirteen overseas companies. The Reserve Bank
sought information by their letters dated June 11, 1983, of the purchases of
shares made for the benefit of the overseas companies, (i) up to December, 1982
; (ii) from January 1, 1983, to February 28, 1983 ; (iii) from March 1, 1983,
to May 2, 1983 ; and (iv) after May 2, 1983. Details of purchases including the
total number and face value of the shares were required to be given. The Punjab
National Bank replied on June 23, 1983, to the effect that their brokers had
informed them by their letter dated June 22, 1983, that 75,000 shares of
Escorts Ltd. had been purchased for each of the thirteen companies during the
period from March 1, 1983, to May 2, 1983, but none were purchased before or
after. It was also stated that the brokers had confirmed that no other
purchases had been made besides these shares. This letter again discloses how
casual they were in the discharge of their duties as authorised dealers. Not
only did they not maintain up-to-date and proper record of the purchases made
on behalf of each of the companies, not only did they not submit daily
statements to the Controller, they were not even aware of the transactions
which had taken place but were solely dependent on the information supplied to
them once in a way by Raja Ram Bhasin & Co. Though the Reserve Bank did
make some enquiries from the Punjab National Bank, the Reserve Bank did not
pursue the matter as vigorously as they might have done but, apparently,
preferred to rely upon the Punjab National Bank probably for the reason that
they were authorised dealers under the Foreign Exchange Regulation Act and
could be expected to have been doing everything properly and in a manner
authorised and contemplated by the Act and the Scheme. It has to be remembered
that Escorts Ltd. also had made no complaint regarding the Punjab National
Bank. It is only now it has come to light that the Punjab National Bank acted
no better than a mere dumb dummy and signally failed to discharge the functions
entrusted to them under the Act and the Scheme.
The result of the
dereliction of duty on the part of the Punjab National Bank is that there had
been no proper monitoring of the purchase of shares by the thirteen Caparo Group
of companies. While we are unable to hold that the Reserve Bank did not act
bona fide or apply its mind to the relevant facts and circumstances which were
required to be considered by it before granting permission, because, it did
bona fide apply its mind to whatever material was then available to it and
supplied to it by the Punjab National Bank, we must hold on the material now
available to us that their implicit reliance on the Punjab National Bank was
entirely misplaced. What further action must be taken on that finding is a
question which we have to consider. We will do so later after considering the
other questions argued before us.
Shri Nariman contended that
there were several circumstances in the record which established that a large
number of shares were purchased with funds which were made available locally
and not funds remitted from abroad and also that the shares were purchased
subsequent to May 2, 1983. The circumstances were: (i) the purchase of shares
commenced before the remittances started; (ii) the price at which the shares
were available in the market showed that funds in excess of what was remitted
must have been utilised for purchasing the shares and this could only have been
with rupee funds; (iii) the company was able to obtain two brokers' notes from
two of the sellers' brokers which showed that the sales were made long
subsequent to May 2, 1983 ; and (iv) out of the total number of shares
purchased on behalf of the thirteen companies, 4,62,000 shares only were lodged
with the company on May 14, 1983, for registering the transfers. 3,68,463
shares were lodged on August 19, 1983, that is, 3˝ months, after May 2, 1983,
which was the cut-off date fixed for the imposition of the ceiling of 5 per
cent. 1,44,200 shares were not lodged at all with the company. The failure to
lodge the shares within a reasonable period after April 28, 1983, which was
supposed to be the date by which all the purchases had been made indicated that
the purchases must have been made long afterwards. Every one of these
circumstances is capable of some explanation, adequate or not and we do not
have the necessary material to say on the record now before us. The question
will involve a probe into individual purchases and the adducing of evidence.
That would be beyond the scope of the writ petition in the High Court. It is to
be remembered that the High Court refused to issue a rule nisi in regard to
prayer (d), obviously as it was thought that the court exercising jurisdiction
under article 226 of the Constitution should not explore the evidence to
determine the dates of the various transactions of purchase of shares and
whether they were purchased with foreign exchange or locally available funds.
We consider that it is really a matter for the consideration of the final
monitoring authority, namely, the Reserve Bank. We will later indicate what we
propose to do about this aspect of the matter.
It was submitted that the
thirteen Caparo companies were thirteen companies in name only; they were but
one and that one was an individual, Mr. Swraj Paul. One had only to pierce the
corporate veil to discover Mr. Swraj Paul lurking behind. It was submitted that
thirteen applications were made on behalf of the thirteen companies in order to
circumvent the scheme which prescribed a ceiling of one percent, on behalf of
each non-resident of Indian nationality or origin or each company 60 per cent,
of whose shares were owned by non-residents of Indian nationality/origin. Our
attention was drawn to the picturesque pronouncement of Lord Denning M. R. in
Walletsteiner v. Moir [1974] 1 WLR 991 ; [1974] 3 All ER 217 (CA) and the
decisions of this court in Tata Engineering and Locomotive Co. Ltd. v. State of Bihar [1964] 34 Comp Cas
458 (SC), CIT v. Sree Meenakshi Mills Ltd. [1967] 63 ITR 609 (SC) and Workmen
v. Associated Rubber Ltd, [1986] 59 Comp Cas 134; 157 ITR 77; 67FJR 196. While
it is firmly established ever since Salomon v. A. Salomon and Co. Ltd. [1897] AC 22 (HL) was decided that a company has an
independent and legal personality distinct from the individuals who are its
members, it has since been held that the corporate veil may be lifted, the
corporate personality may be ignored and the individual members recognised for
who they are in certain exceptional circumstances. Pennington in his Company
Law (Fourth Edition) states :
"Four inroads have
been made by the law on the principle of the separate legal personality of
companies. By far the most extensive of these has been made by legislation
imposing taxation. The Government, naturally enough, does not willingly suffer
schemes for the avoidance of taxation which depend for their success on the
employment of the principle of separate legal personailty, and in fact
legislation has gone so far that in certain circumstances taxation can be
heavier if companies are employed by the taxpayer in an attempt to minimise his
tax liability than if he uses other means to give effect to his wishes.
Taxation of companies is a complex subject, and is outside the scope of this
book. The reader who wishes to pursue the subject is referred to the many
standard text books on corporation tax, income tax, capital gains tax and
capital transfer tax.
The other inroads on the
principle of separate corporate personality have been made by two sections of
the Companies Act, 1948, by judicial disregard of the principle where the
protection of public interests is of paramount importance, or where the company
has been formed to evade obligations imposed by the law, and by the courts
implying in certain cases that a company is an agent or trustee for its
members."
In Palmer's Company Law
(Twenty-third Edition), the present position in England is stated and the
occasions when the corporate veil may be lifted have been enumerated and
classified into fourteen categories. Similarly, in Gower's Company Law (Fourth
Edition), a chapter is devoted to "lifting the veil" and the various
occasions when that may be done are discussed. In Tata Engineering and Locomotive Co. Ltd.
[1964] 34 Comp Cas 458 (SC), the company
wanted the corporate veil to be lifted so as to sustain the maintainability of
the petition filed by the company under article 32 of the Constitution by
treating it as one filed by the shareholders of the company. The request of the
company was turned down on the ground that it was not possible to treat the
company as a citizen for the purposes of article 19. In CIT v. Sree Meenakshi
Mills Ltd. [1967] 63 ITR 609 (SC), the corporate veil was lifted and evasion of
income-tax prevented by paying regard to the economic realities behind the
legal facade. In
Workmen v. Associated Rubber Industry [1986] 59 Comp Cas 134 resort was had to the principle of lifting the veil to prevent
devices to avoid welfare legislation. It was emphasised that regard must be had
to substance and not to the form of a transaction. Generally and broadly
speaking, we may say that the corporate veil may be lifted where a statute
itself contemplates lifting the veil, or fraud or improper conduct is intended
to be prevented, or a taxing statute or a beneficent statute is sought to be
evaded or where associated companies are inextricably connected as to be, in
reality, part of one concern. It is neither necessary nor desirable to
enumerate the classes of cases where lifting the veil is permissible, since
that must necessarily depend on the relevant statutory or other provisions, the
object sought to be achieved, the impugned conduct, the involvement of the
element of the public interest, the effect on parties who may be affected, etc.
In the present case, we do
not think "lifting the veil" is necessary or permissible beyond the
essential requirement of the Foreign Exchange Regulation Act and the portfolio
investment scheme. We have noticed that the object of the Act is to conserve and
regulate the flow of foreign exchange and the object of the scheme is to
attract non-resident investors of Indian nationality or origin to invest in
shares of Indian companies. In the case of individuals, there can be no
difficulty in identifying their nationality or origin. In the case of companies
and other legal personalities, there can be no question of nationality or
ethnicity of such company or legal personality. Which of such non-resident
companies or legal personalities may then be permitted to invest in shares of
Indian companies ? The answer is furnished by the scheme itself which provides
for "lifting the corporate veil" to find out if at least 60 per cent,
of the shares are held by non-residents of Indian nationality or origin.
Lifting the veil is necessary to discover the nationality or origin of the
shareholders and not to find out the individual identity of each of the
shareholders. The corporate veil may be lifted to that extent only and no more.
The particulars of the
scheme have already been extracted by us. First, a ceiling of one per cent, of
the equity capital of the Indian company was imposed on the purchase of its
shares by any single foreign investor. The obvious object of the imposition of
the ceiling was the prevention of destablisation of Indian companies by foreign
investors purchasing large blocks of shares and attempting to take over the
Indian companies. We have already explained the futility of the imposition of
the one per cent, ceiling since that would not effectively prevent a group of
foreign investors of Indian origin from investing in shares of Indian companies
by each of them purchasing one per cent, of the shares. We also pointed out
that different foreign companies in which several different groups of resident
Indians with one individual common to all together held more than 60 per cent,
of the shares could not be denied the facility of investing in shares of Indian
companies merely because the foreign companies were dominated by the single
common non-resident individual. That would be unfair to the other non-resident
Indian shareholders of the foreign companies who would otherwise be entitled to
the benefit of investment in Indian companies, via the foreign companies in
which they hold shares. Clearly, it was the realisation of the futility of the
one per cent, limit that led to the imposition of the five per cent, aggregate
limit. The five per cent, aggregate limit would effectively prevent any single
foreign investor or a combination of foreign investors from attempting to destabilise
Indian companies by purchasing large blocks of shares. If this is borne in
mind, it will be clear that the lifting of the corporate veil is necessary and
permissible in the present case, only to find out the nationality or origin of
the shareholders of the foreign companies seeking to invest in shares of Indian
companies and not to explore the individual identity of the shareholders. We do
not think that merely because more than 60 per cent, of the shares of the
several foreign companies which have applied for permission are held by a trust
of which Mr. Swraj Paul and the members of his family are the beneficiaries,
the companies can be denied the facility of investing in Indian companies. In
fact, if each of the six beneficiaries of the trust had separately applied for
permission to purchase shares of Indian companies, they could not have been
denied such permission. It cannot, therefore, be said that there has been any
violation of the portfolio investment scheme merely on that account or that the
permission granted is illegal.
We now turn to the case of
Escorts Ltd. against the Life Insurance Corporation of India. While narrating
the sequence of events, we referred to the impleading of the Life Insurance
Corporation of India as a respondent to the writ petition a few months after it
was originally filed. The primary allegation which led to the impleading of the
Life Insurance Corporation of India was that there was confabulation between
the Government of India, Reserve Bank and the Life Insurance Corporation to
pressurise Escorts Ltd. to register the transfer of shares in favour of the
Caparo group of companies. The inference of collusion and conspiracy was sought
to be drawn from the sequence of certain events which we will mention
immediately. A few days before the filing of the writ petition, there was the
report of a speech of the Finance Minister, to which we have earlier made a
reference, to the effect that he has in his possession an effective weapon to
end the uncertainty. After the writ petition was filed and before it was
admitted, there was a meeting of the board of directors of Escorts Ltd. on
January 6,1984, at which Mr. D.N. Davar, claiming to speak for the financial
institutions holding 52 per cent, of the shares of Escorts Ltd., circulated three
notes and moved resolutions, the purport of which was that the writ petition
should be withdrawn as it had been filed without consulting the financial
institutions and that the matter should be placed before the board for careful
consideration of all aspects of the case and that the cheques sent in part
payment of certain institutional loans should be recalled as the question was
still under consideration. The resolutions proposed by Mr. Davar were rejected.
On January 9, 1984, Mr. Nanda wrote to Mr. Punja informing him about the events
that took place at the board meeting on January 6, 1984, and pointing out that
in the last 20 years, there had not been a single occasion on which the
financial institutions had even a single word to say against any decision taken
or proposed by the management. Complete confidence was reposed in each other in
the past by the management of Escorts Ltd. and the financial institutions. Mr.
Nanda explained the position of the management of Escorts Ltd. in regard to
pre-payment of loans of financial institutions and the filing of the writ
petition. Mr. Nanda pointed out that though the Reserve Bank had granted
permission to the Caparo Group of companies to purchase shares, it had not
condoned any of the illegalities that had already been committed and it was
strange that the financial institutions should continue to press the company to
register the shares. It was also stated by Mr. Nanda that he had repeatedly
drawn the attention of Mr. Punja and others to the fact that funds far in
excess of those remitted by the Caparo Group of companies had been invested in
the purchase of shares and, therefore, repatriation benefits in foreign
exchange could not be allowed to such shares by registering their transfer. Mr.
Nanda complained that he was forced to believe that the institutions were
adopting this attitude against the company because of external pressures
brought upon the institutions as a result of the non-registration of the shares
purchased by Mr. Swraj Paul's companies. There was no reply to this letter by
Mr. Punja. But on January 13, 1984, Mr. Punja informed Escorts Ltd. that the
financial institutions had decided to accept the proposal of Escorts Ltd. for
pre-payment of the outstanding loan. At this stage, that is, on January 7,
1984, a meeting of the board of the Life Insurance Corporation was held and it
was resolved that a requisition should be served on Escorts Ltd. to convene an
extraordinary general meeting to pass resolutions for the removal of the nine
non-executive directors and for the appointment as new directors, officers and
nominees of the financial institutions, in their place. This subject was not
one of the matters listed in the agenda for the meeting of the board of the
Life Insurance Corporation. The resolution was considered after all the
officers of the Corporation, except one, left the meeting. The minutes of the
meeting did not record any discussion. But the minutes do show that Mr. Punja
of the I.D.B.I, was present in his capacity as a director of the Life Insurance
Corporation. It was thereafter that the Life Insurance Corporation served a
requisition on Escorts Ltd. to call an extraordinary general meeting of the
company.
What does the sequence of
events go to show ? It shows that the financial institutions which held 52% of
the shares of the company and, therefore, had a very big stake in its working
and future were aggrieved that the management did not even choose to consult
them or inform them that a writ petition was proposed to be filed which would launch
and involve the company in difficult and expensive litigation against the
Government and the Reserve Bank. The financial institutions must have been
struck by the duplicity of Mr. Nanda, who was holding discussions with them,
while he was simultaneously launching the company, of which they were the
majority shareholders, into a possibly trouble-some litigation without even
informing them. The financial institutions were instrumentalities of the State
and so was the Reserve Bank and it must have been thought unwise to launch such
a litigation. The institutions were, therefore, anxious to withdraw the writ
petition and discuss the matter further. As the management was not agreeable to
this course, the Life Insurance Corporation thought that it had no option but
to seek removal of the nonexecutive directors so as to enable the new board to
consider the question whether to reverse the decision to pursue the litigation.
Evidently, the financial institutions wanted to avoid a confrontation with the
Government and the Reserve Bank and adopt a more conciliatory approach. At the
same time, the resolution of the Life Insurance Corporation did not seek
removal of the executive directors, obviously because they did not intend to
disturb the management of the company. It is, therefore, difficult to accuse
the Life Insurance Corporation of India of having acted mala fide in seeking to
remove the nine non-executive directors and to replace them by representatives
of the financial institutions. No aspersion was cast against the directors
proposed to be removed. It was the only way by which the policy which had been
adopted by the board in launching a litigation could be reconsidered and
reversed, if necessary. It was a wholly democratic process. A minority of
shareholders in the saddle of power could not be allowed to pursue a policy of
venturing into a litigation to which the majority of the shareholders were
opposed. That is not how a corporate democracy may function.
A company is, in some
respects, an institution like a State functioning under its "basic
constitution" consisting of the Companies Act and the memorandum of
association. Carrying the analogy of constitutional law a little further, Gower
describes "the members in general meeting" and the directorate as the
two primary organs of a company and compares them with the legislative and the
executive organs of a Parliamentary democracy where legislative sovereignty
rests with Parliament, while administration is left to the Executive
Government, subject to a measure of control by Parliament through its power to
force a change of Government. Like the Government, the directors will be
answerable to "Parliament" constituted by the general meeting. But in
practice (again like the Government), they will exercise as much control over
Parliament as that exercises over them. Although it would be constitutionally
possible for the company in general meeting to exercise all the powers of the
company, it clearly would not be practicable (except in the case of one or
two-man-companies) for day-to-day administration to be undertaken by such a
cumbersome piece of machinery. So, the modern practice is to confer on the
directors the right to exercise all the company's powers except such as the
general law expressly provides must be exercised in general meeting (Gower's Principles of Modern
Company Law). Of course, powers which are strictly
legislative are not affected by the conferment of powers on the directors as
section 31 of the Companies Act provides that an alteration of an article would
require a special resolution of the company in general meeting. But a perusal
of the provisions of the Companies Act itself make9 it clear that in many ways
the position of the directorate vis-a-vis the company is more powerful than
that of the Government vis-a-vis Parliament. The strict theory of parliamentary
sovereignty would not apply by analogy to a company since under the Companies
Act, there are many powers exercisable by the directors with which the members
in general meeting cannot interfere. The most they can do is to dismiss the
directorate and appoint others in their place, or alter the articles so as to
restrict the powers of the directors for the future. Gower himself recognises
that the analogy of the Legislature and the executive in relation to the
members in general meeting and the directors of a company is an
oversimplification and states "to some extent a more exact analogy would
be the division of powers between the Federal and the State Legislature under a
Federal Constitution". As already noticed, the only effective way the
members in general meeting can exercise their control over the directorate in a
democratic manner is to alter the articles so as to restrict the powers of the
directors for the future or to dismiss the directorate and appoint others in
their place. The holders of the majority of the stock of a corporation have the
power to appoint, by election, directors of their choice and the power to
regulate them by a resolution for their removal. And, an injunction cannot be
granted to restrain the holding of a general meeting to remove a director and
appoint another.
In Shaw & Sons
(Salford) Ltd. v. Shaw [1935] 2 KB 113, Greer L. J. expressed :
"The only way in which
the general body of the shareholders can control the exercise of powers vested
by the articles in the directors is by altering the articles or, if opportunity
arises under the articles, by refusing to re-elect the directors of whose
action they disapproved."
In Isle of Wight Railway
Co. v. Tahourdin [1884] 25 Ch 320 (Ch D) Cotton L. J. said (at p. 332):
"Then there is a
second object, 'To remove (if deemed necessary or expedient) any of the present
directors, and to elect directors to fill any vacancy in the board.' The
learned judge below thought that too indefinite, but in my opinion a notice to
remove 'any of the present directors' would justify a resolution for removing
all who are directors at the present time; 'any' would involve 'all.' I think
that a notice in that form is quite sufficient for all practical purposes."
Fry L.J. said (at p. 335):
"The second objection
was, that a requisition to call a meeting 'to remove (if deemed necessary or
expedient) any of the present directors' is too vague. I think that it is not.
It appears to me that there is a reasonably sufficient particularity in that
statement. It is said that each director does not know whether he is attacked
or not. The answer is, all the directors know that they are laid open to
attack. I think that any other form of requisition would have been embarrassing,
because it is obvious that the meeting might think it fit to remove a director
or allow him to remain, according to his behaviour and demeanour at the meeting
with regard to the proposals made at it."
In the same case,
considering the question whether an injunction should be granted to restrain
the holding of a general meeting, one of the purposes of the meeting being the
appointment of a committee to reorganise the management of the company, Cotton
L.J. said (at p. 329):
"It is a very strong thing
indeed to prevent shareholders from holding a meeting of the company, when such
a meeting is the only way in which they can interfere, if the majority of them
think that the course taken by the directors, in a matter which is intra vires
of the directors, is not for the benefit of the company."
In Inderwick v. Snell (42
English Reports 83, 85), the deed of settlement of a company provided for the
removal of any director "for negligence, misconduct in office or any other
reasonable cause". Some directors were removed and others were appointed.
The directors who were removed sued for an injunction to prevent the new
directors from acting on the ground that there was no reasonable cause for
their removal. The court negatived the claim for judicial review of the reasons
for removal and made the following interesting observations :
"The argument for the
plaintiffs rested on the allegation that the general cause of removal referred
to in the clause being expressed to be 'reasonable' prevents the power referred
to from being a power to remove at pleasure arbitrarily or capriciously, and
made it requisite that the proceeding for exercising the power should be in its
nature judicial, and that the reasonable cause should be such as a court of
justice would consider good and sufficient. If this argument could be
sustained, all proceedings at such meetings would be subject to the review of
the courts of justice, which would have to inquire whether the cause of removal
which was charged was in their view reasonable, whether the charges were bona
fide brought forward, whether they were substantiated by such evidence as the
nature of the case required, and whether the conclusion was come to upon a due
consideration of the charge and evidence. But the deed is silent as to these
matters and the question is whether any such power of control in the courts of
justice is to be inferred from the words 'reasonable cause' contained in the
27th clause; whether the expression 'reasonable cause' contained in such a deed
of a trading partnership can be held to be such a cause, as upon investigation
in a court of justice must be held to be bona fide founded on sufficient
evidence and just; or whether it ought not to be held to mean such cause as in
the opinion of the shareholders duly assembled shall be deemed reasonable. We
think the latter is the true construction and effect of the deed.
In a moral point of view,
no doubt every charge of a cause of removal ought to be made bona fide,
substantiated by sufficient evidence, and determined on a due consideration of
the charge and evidence ; and those who act on other principles may be guilty
of a moral offence : they may be very unjust, and those who (being misled by
the statements made to them), have no doubt a just right to complain that they
have been led to concur in an unjust act. But the question is, whether by this
deed the shareholders duly assembled at a general meeting might not, or had not
a right to, remove a director for a cause which they thought reasonable,
without its being incumbent upon them to prove to this or any other court of
justice that the charge was true and the decision just, or that the case was
substantiated after a due consideration of the evidence and charge. We cannot
take upon ourselves to say that in the case of a trading partnership like this,
this court has upon such a clause in the deed of partnership jurisdiction or
authority to determine whether, by the unfounded speech of any supporter of the
charge, the shareholders present may not have been misled or unduly influenced.
All such meetings are
liable to be misled by false or erroneous statements, and the amount of error
or injustice thereby occasioned can rarely, if ever, be appreciated. This court
might inquire whether the meeting was regularly held, and in cases of fraud
clearly proved, might perhaps interfere with the acts done; but supposing the
meeting to be regularly convened and held, the shareholders assembled at such
meeting may exercise the powers given to them by the deed. The effect of
speeches and representations cannot be estimated, and for those who think
themselves aggrieved by such representations, or think the conclusion
unreasonable, it would seem that the only remedy is present defence by stating
the truth and demanding time for investigation and proof, or the calling of
another meeting, at which the whole matter may be reconsidered. The plaintiffs,
objecting to this meeting and considering it illegal, protested against it, but
abstained from attending, and, therefore, made no answer or defence to, and
required no proof of, the charges made against them. The adoption of this
course was unfortunate, but does not afford any grounds for the interference of
this court."
Again in Bemtley-Stevens v.
Jones [1974] 1 WLR 638 ; [1974] 2 All ER 653 (HL), it was held that a
shareholder had a statutory right to move a resolution to remove a director and
that the court was not entitled to grant an injunction restraining him from
calling a meeting to consider such a resolution. A proper remedy of the director
was to apply for a winding-up order on the ground that it was "just and
equitable" for the court to make such an order. The case of Ebrahimi v.
Westbourne Galleries Ltd. [1972] 2 WLR 1289; [1972] 2 All ER 492 (HL), was
explained as a case where a winding-up order was sought. In the case of
Ebrahimi v. West-bourne Galleries Ltd. [1972] 2 WLR 1289 ; [1972] 2 All ER 492
(HL), the absolute right of the general meeting to remove the directors was
recognised and it was pointed out that it would be open to the director sought
to be removed to ask the company court for an order for winding-up on the
ground that it would the "just and equitable" to do so. The House of
Lords said (at p. 500 of [1972] 2 All ER):
"My Lords, this is an
expulsion case, and I must briefly justify the the application in such cases of
the just and equitable clause...The law of companies recognises the right, in
many ways, to remove a director from the board. Section 184 of the Companies
Act, 1948, confers this right on the company in general meeting whatever the
articles may say. Some articles may prescribe other methods, for example, a
governing director may have the power to remove (of In re Wondoflex Textiles P.
Ltd. [1951] VLR 458). And quite apart from removal powers, there are normally
provisions for retirement of directors by rotation so that their re-election
can be opposed and defeated by a majority, or even by a casting vote. In all
these ways a particular director-member may find himself no longer a director,
through removal, or non-re-election: this situtation he must normally accept,
unless he undertakes the burden of proving fraud or mala fides. The just and
equitable provision nevertheless comes to his assistance if he can point to,
and prove, some special underlying obligation of his fellow member(s) in good
faith, or confidence, that so long as the business continues he shall be
entitled to management participation, an obligation so basic that if broken,
the conclusion must be that the association must be dissolved."
Thus, we see that every
shareholder of a company has the right, subject to statutorily prescribed
procedural and numerical requirements, to call an extraordinary general meeting
in accordance with the provisions of the Companies Act. He cannot be restrained
from calling a meeting and he is not bound to disclose the reasons for the
resolutions proposed to be moved at the meeting. Nor are the reasons for the
resolutions subject to judicial review. It is true that under section 173(2) of
the Companies Act, there shall be annexed to the notice of the meeting a
statement setting out all material facts concerning each item of business to be
transacted at the meeting including, in particular, the nature of the concern
or the interest, if any, therein, of every director, the managing agent, if
any, the secretaries and treasurers, if any, and the manager, if any. This is a
duty cast on the management to disclose, in an explanatory note, all material
facts relating to the resolution coming up before the general meeting to enable
the shareholders to form a judgment on the business before them. It does not
require the shareholders calling a meeting to disclose the reasons for the
resolutions which they propose to move at the meeting. The Life Insurance
Corporation of India, as a shareholder of Escorts Ltd., has the same right as
every shareholder to call an extraordinary general meeting of the company for
the purpose of moving a resolution to remove some directors and appoint others
in their place. The Life Insurance Corporation of India cannot be restrained
from doing so nor is it bound to disclose its reasons for moving the
resolutions.
It was, however, urged by
the learned counsel for the company that the Life Insurance Corporation was an
instrumentality of the State and was, therefore, debarred by article 14 from
acting arbitrarily. It was, therefore, under an obligation to state to the
court its reasons for the resolution once a rule nisi was issued to it. If it
failed to disclose its reasons to the court, the court would presume that it
had no valid reasons to give and its action was, therefore, arbitrary. The
learned counsel relied on the decisions of this court in Sukhdev Singh v.
Bhagatram Sardar Singh Raghu-vanshi [1975] 45 Comp Cas 285; AIR 1975 SC 1331;
Maneka Gandhi v. Union of India AIR 1978 SC 597, Ramana Dayaram Shetty v.
International Airport Authority of India, AIR 1979 SC 1628, and Ajai Hasia v.
Khalid Mujib Sehravardi, AIR 1981 SC 487. The learned Attorney-General, on the
other hand, contended that actions of the State or an instrumentality of the
State which do not properly belong to the field of public law but belong to the
field of private law are not liable to be subjected to judicial review. He
relied on O'Reilly v. Mackman [1982] 3 WLR 1096 ; [1982] 3 All ER 1124 (HL),
Davy v. Spelthorne Borough Council [1983] 3 WLR 742 ; [1983] 3 All ER 278 ;
[1984] AC 262 (HL), I Congreso del Parido [1981] 3 WLR 328 ; [1981] 2 All ER
1064 (HL), Reg. v. East Berkshire Health Authority : Ex parte Walsh [1984] 3
WLR 818 ; [1984] 3 All ER 425 (CA) and Radha Krishna Agarwal v. State of Bihar
[1977] 3 SCR 249; AIR 1977 SC 1496. While we do find considerable force in the
contention of the learned Attorney-General, it may not be necessary for us to
enter into any lengthy discussion of the topic, as we shall presently see. We
also desire to warn ourselves against readily referring to English cases on
questions of constitutional law, administrative law and public law as the law
in India in these branches has forged ahead of the law in England, guided as we
are by our Constitution and uninhibited as we are by the technical rules which
have hampered the development of the English law. While we do not for a moment
doubt that every action of the State or an instrumentality of the state must be
informed by reason and that, in appropriate cases, actions uninformed by reason
may be questioned as arbitrary in proceedings under article 226 or article 32
of the Constitution, we do not construe article 14 as a charter for judicial
review of State actions and to call upon the State to account for its actions
in its manifold activities by stating reasons for such actions.
For example, if the action
of the State is political or sovereign in character, the court will keep away
from it. The court will not debate academic matters or concern itself with the
intricacies of trade and commerce. If the action of the State is related to
contractual obligations or obligations arising out of tort, the court may not
ordinarily examine it unless the action has some public law character attached
to it. Broadly speaking, the court will examine actions of State if they
pertain to the public law domain and refrain from examining them if they
pertain to the private law field. The difficulty will lie in demarcating the
frontier between the public law domain and the private law field. It is
impossible to draw the line with precision and we do not want to attempt it.
The question must be decided in each case with reference to the particular
action, the activity in which the State or the instrumentality of the State is
engaged when performing the action, the public law or private law character of
the action and a host of other relevant circumstances. When the State or an
instrumentality of the State ventures into corporate world and purchases the
shares of a company, it assumes to itself the ordinary role of a shareholder,
and dons the robes of a shareholder, with all the rights available to such
shareholder. There is no reason why the State as a share holder should be expected
to state its reasons when it seeks to change the management, by a resolution of
the company, like any other shareholder.
In the instant case, the
reason for the resolution stares one in the face. The financial institutions
who held the majority of the stock were not only not told by the management
about the filing of the writ petition in the High Court but were deliberately
kept in the dark about it. The matter was not even discussed at a meeting of
the directors before the writ petition was filed. It was filed in a furtive
manner even as Mr. Nanda was purporting to hold discussions with Mr. Punja and
others. And that was not all. Mr. Nanda was also unduly exerting himself in
certain matters to the detriment of the majority shareholders. We will immediately
refer to these matters.
One of the circumstances
relied upon to establish the mala fides of the Life Insurance Corporation, a
consideration of which leads us to the conclusion that the boot was on the
other leg was the attitude taken by the Life Insurance Corporation in regard to
(i) the issue of equity-linked-deben-tures; (ii) repayment of loans to Indian
financial institutions ; and (iii) the proposal for the merger of Goetze with
Escorts. It was argued that the facts clearly disclosed an attempt on the part
of the Life Insurance Corporation to exert pressure on Escorts Ltd. It is
impossible to agree with the submission.
In regard to the proposal
for the issue of equity-linked-debentures, the facts are as follows: Escorts
obtained the approval of the Government , under the MRTP Act to establish a new
undertaking to manufacture motor cycles/scooters. According to Escorts, the
proposal for the issue of equity-linked-debentures was conceived to meet the
cost of the new project. According to the Life Insurance Corporation, the issue
was solely motivated by an anxiety to reduce the percentage of the holdings of
the Life Insurance Corporation and other financial institutions in the equity
capital of the company. The barest scrutiny of the proposal, as it finally
emerged from Escorts Ltd., is sufficient to expose the game of Escorts Ltd. The
proposal, as it finally emerged from Escorts Ltd., was to issue 17,50,000
secured redeemable debentures of Rs. 100 each and equity shares of the value of
Rs. 17.50 crores divided into 87,50,000 equity shares of Rs. 10 each for cash
at a premium of Rs. 10 per share. It was proposed that 20 per cent, of the. new
issue would be offered on preferential basis to existing resident equity
shareholders of Escorts Ltd. and Goetze Ltd. (in accordance with the
amalgamation proposal)
subject to maximum allotment of 100 debentures and 500 equity shares to any single shareholder. The promoters, directors
and their friends and relatives, business associates and employees were to be
offered 15 per cent, of the new issue on a preferential basis, but in their
case there was to be no ceiling on the number of shares which might be allotted
to any one of them. 30 per cent, of the new issue was to be offered to the
public. Having regard to the ceiling of 500 shares proposed to be imposed in
the case of allotment to existing equity shareholders, the Life Insurance
Corporation, notwithstanding the fact that it owned 30 per cent, of the shares
of Escorts Ltd., would be entitled to a meagre 500 shares in the new issue. The
result would be that its holdings would be reduced from 30 per cent, to 18.14
per cent. The holding of all the financial institutions would be reduced from
51.62 to 31.21 per cent. Not merely would it result in the reduction of the percentage
of the holding of the financial institutions in the capital stock of the
company, but it would also result in great financial loss to the institutions
in the following manner : if the existing shareholders were to be given
preferential allotment in the new issue on the basis of their existing holdings
without any ceiling, the Life Insurance Corporation and other financial
institutions would be entitled not to the meagre 500 shares each, but to some
tens of thousands of shares in the new issue. Taking the market value of the
shares into account at Rs. 50 per share, the loss to the financial institutions
would be in the neighbourhood of about Rs. 10 crores. We do not think that any
financial institution with the slightest business acumen could possibly accept
the proposal as it finally emerged from Escorts Ltd. No man of ordinary
prudence would have accepted the proposal. To expect the financial institutions
to agree to the proposal, we must say, was sheer audacity on the part of those
that made the proposal. That was evidently the reason why at all the initial
stages, the details of the proposal were never put to the financial
institutions or before the board of directors. It was urged by Shri Nariman
that Mr. Davar, who represented the financial institutions in the board of
directors also voted in favour of the proposal at earlier stages, and,
therefore, it must be inferred that the later change of attitude on the part of
the financial institutions was not bona fide. We are afraid we cannot agree with
Mr. Nariman. The resolution of the board of directors merely accepted in
principle the issue of convertible debentures to raise finances required by the
company, subject to the approval of financial institutions. At that stage, no
details of the proposals were placed before the board and even then there was
the reservation that it was subject to the approval of the financial
institutions. We think that it was too much for Mr. Nanda and his associates to
expect the financial institutions or for that matter any other shareholder
having large holdings in the company to agree to the proposal as it finally
emerged. We reach the limit when we hear the complaint of Mr. Nanda and his
associates that the refusal of the financial institutions to accept their
proposal was mala fide. It is a clear case of an attempt on the part of Mr.
Nanda and his associates to overreach themselves. We do not think it is
necessary for us to go into any further details in regard to the
equity-linked-debenture issue.
The proposal to merge
Goetze with Escorts Ltd. was also agreed to in principle in the first instance.
However, the share exchange ratio had apparently not been agreed to by the
financial institutions even at that time. This is evident from the letter dated
December 30, 1983, of Mr. Nanda to Mr. Nadharna of ICICI in which he stated:
"The proposals
together with the report of the chartered accountants and the resolution of the
board of directors are with ICICI and IFCI and we understand that the matter
has been discussed in the inter-institutional meeting of the financial
institutions. We have been eagerly waiting and have made several requests to
all the financial institutions to expedite their approval so that the other
processes of the merger including the permission of the High Court followed by
the extraordinary shareholders meeting of both the companies may proceed.
Yesterday's meeting with the chairman and senior executives of the Financial
Institutions, I was informed, for the first time, that the financial
institutions were still examining our request for approval they were primarily
concerned about the 53% (52%) holding of all the investing financial
institutions (LIC, GIC, UTI) post-merger coming down close to 49 per
cent."
It is seen from the letter
that Mr. Nanda was not proceeding on the basis that the financial institutions
had already agreed to the proposal for merger, but was in fact awaiting their
approval. When he learnt the reason for the hesitation of the financial
institutions to agree to the proposal, he wrote a letter on December 30, 1983,
explaining his views and requesting the financial institutions to expedite the
approval of the proposal. It is, therefore, futile for Mr. Nanda to contend
that the proposal for merger of Goetze with Escorts Ltd. was a lever which the
financial institutions were using to exert pressure on him to agree to register
the transfer of shares in favour of the Caparo Group of companies. It is
difficult to understand why anyone holding a majority of the equity capital of
a company should allow himself to be hustled into becoming a minority
shareholder.
The proposal for
pre-payment of institutional loans, though finally agreed to by the
institutions, was not quite as straight as claimed by Escorts. In the first
place, Escorts asked for pre-payment of loans by Indian financial institutions,
but not the foreign currency loan. In the second place, the cost of pre-payment
of institutional loans was to be met by part of the debenture issue which would
entail payment of interest at the rate of 14 per cent, whereas the
institutional loans carried interest at the rate of 10% only. It certainly
could not be said to be in the interests of the company to pay interest at a
higher rate than that payable to Indian financial institutions. Obviously, the
object of pre-payment was to get rid of the directors whom the financial
institutions had a right to nominate. True, Escorts offered to appoint Mr.
Davar as a director even if the financial institutions had no right to nominate
him. But it is one thing to have the right to nominate a director and quite
another thing to be a director on sufferance.
We do not think that it is
necessary to discuss these proposals at greater length than we have done. The
correspondence which passed between the parties and which has been read to us
shows that Mr. Nanda was certainly trying to hustle the financial institutions
into accepting the proposals.
We have discussed the
submissions made to us in broad perspective. We have not referred to the myriad
minutiae which were presented to us, as we consider it unnecessary to do so and
we do not wish to further lengthen an already long judgment. This does not mean
that we have not taken into account all the little submissions and trifling
details which were brought to our notice.
We may now state our
conclusions as follows:
(1) The permission of the Reserve Bank contemplated by the
FERA could be ex post facto and conditional.
(2) The press release (exhibit "A") dated September
17, 1983, the circular (exhibit "B") dated September 19, 1983, and
the letter (exhibit "C") dated September 19, 1983, are all valid.
(3) Under the scheme, any foreign company whose shares were
owned to the extent of more than 60 per cent by persons of Indian nationality
or origin could avail of the facility given by the scheme irrespective of the
fact whether the same group of shareholders figured in the different companies.
(4) Where any of the purchases were made subsequent to May 2,
1983, they were subject to the 5 per cent ceiling in the aggregate.
(5) The ReserveBank was not guilty of any mala fides in
granting per mission to the Caparo Group of companies. Nor was it guilty of
non- application of mind.
(6) No mala
fides could be attributed to the Union of India either.
(7) There was a total and signal failure
on the part of the Punjab National Bank in the discharge of their duties as
authorised dealers under the FERA and the scheme with the result that there was
no monitoring of the purchases of shares made on behalf of the Caparo Group of
companies.
(8) The allegation;of mala fides
against the Life Insurance Corporation of India was baseless.
(9) The notice requisitioning a meeting
of the company by the Life Insurance Corporation was not liable to be
questioned on any of the grounds on which it was sought to be questioned in the
writ petition.
On
our finding that there was no monitoring whatsoever of the purchase of shares
made on behalf of the Caparo Group of companies by the Punjab National Bank and
on our further finding that though the Reserve Bank was not actuated by malice
and was not guilty of non-application of mind, the reliance placed by the
Reserve Bank on the Punjab National Bank was misplaced in the event, the Punjab
National Bank having totally abandoned its duties as authorised dealer, it follows
that the permission granted by the Reserve Bank must be reconsidered by the
Reserve Bank in the light of the failure of the Punjab National Bank to
discharge its duties. Therefore, while allowing the appeals of the Union of
India, the Reserve Bank of India and the Life Insurance Corporation of India
and dismissing the appeal of Escorts Ltd. and setting aside the judgment of the
High Court, we direct the Reserve Bank of India to make a full and detailed
enquiry into the purchase of shares of Escorts Ltd. by the Caparo Group of
companies and consider afresh the question whether permission ought or ought
not to have been granted. If the Reserve Bank of India is satisfied that
permission ought not to have been granted, it may cancel the permission already
granted and take such further action as may be necessary under the FERA if it
considers that there has been any infraction of the FERA or the scheme; if the
Reserve Bank of India is of the view that the permission may be granted subject
to restrictions, it may impose such restrictions and conditions as it may think
fit, in addition to the condition that either the capital or the profits or
both cannot be repatriated. We further direct respondents Nos. 3 to 17, 20 and
21 (in the writ petition), that is the Punjab National Bank, the thirteen
Caparo Group of companies, Mr. Swraj Paul, M/s. Raja Ram Bhasin and Co. and
M/s. Bharat Bhusan and Co., to make available to the Reserve Bank of India each
and every document in their possession pertaining to the remittances made for
the purchase of shares on behalf of thirteen Caparo Group of companies and the
purchase of shares made on their behalf. They are also directed to produce
every document which the Reserve Bank of India may require them to produce. The
enquiry by the Reserve Bank should be concluded within three months from today.
We
also direct the Reserve Bank to enquire into the conduct of Punjab National
Bank and take such action as may be necessary including cancellation of the
authorisation granted under section 6 of the Foreign Exchange Regulation Act.
In regard to costs, the Union of India, the Reserve
Bank and the Life Insurance Corporation are certainly entitled to their costs.
We do not see any reason why the company, Escorts Ltd., should be mulcted with costs.
The litigation was launched by Mr. Nanda and he should personally be made
liable for the costs. We also think that the litigation has been unnecessarily
complicated by the failure of Mr. Swraj Paul and Raja Ram Bhasin & Co. to
co-operate by appearing before the court. We think that they should also be
liable for a portion of the costs. So also the Punjab National Bank. The
appeals filed by the Union of India, the Life Insurance Corporation and the
Reserve Bank are allowed with costs payable as follows : Three-fifths of the
taxed costs in each case will be payable by Har Prasad Nanda, one-fifth by
Swraj Paul and one-fifth by the Punjab National Bank. The cross-appeal filed by
Escorts Ltd. and Nanda is dismissed with the costs of the Union of India, the
Reserve Bank and the Life Insurance Corporation. The Union of India, the
Reserve Bank and the Life Insurance Corporation are entitled to their costs in
the High Court, three-fifths payable by Nanda, one-fifth by Swraj Paul and
one-fifth by Punjab National Bank. In modification of our order dated April 4,
1985, in C. M. P. No. 12832 of 1985, we direct Shri H. P. Nanda and Rajan Nanda
to continue as managing directors until the board of directors takes a decision
in the matter.
[1985] 57 COMP. CAS. 12 (BOM.)
HIGH COURT OF BOMBAY
Centron Industrial Alliance Ltd
v.
Pravin Kantilal Vakil
MRS. SUJATHA V. MANOHAR, J.
COMPANY APPLICATION NO. 235 OF 1982 IN COMPANY
PETITION NO. 84 OF 1981 CONNECTED WITH COMPANY APPLICATION NO. 2665 OF 1980.
M.H.
Shah ,Y.H. Mithi, A.M. Setalwad, S.H. Doctor, K.H. Bhabha, M.O. Chinoy, I.M.
Chagla, Jimmy Avasis, C.A. Shah, Kuldip Dharampal, J.I. Mehta and J.J. Bhatt for Appearing parties.
Sujata V. Manohar, J.—The petitioner-company, Centron
Industrial Alliance Limited, has filed a Company Petition bearing No. 84 of
1981 (See [1984] 55 Comp Cas 731 (Bom)), under the provisions of s. 391 of the
Companies Act, 1956, for sanctioning a scheme of amalgamation of the
petitioner-company with M/s. Brooke Bond India Ltd. The petitioner-company was
incorporated in the year 1949. It became a public limited company in the year
1974. It is admittedly in financial difficulties since 1975. In September,
1976, the board of directors of the petitioner-company was reconstituted and
directors sponsored or nominated by the State Industrial and Investment
Corporation of Maharastra Ltd. (SICOM) and United Commercial Bank (UCO Bank)
were inducted on the board of directors of the petitioner-company. Ever since
the petitioner-company became a public limited company in the year 1974, the
petitioner-company has not paid any dividend whatsoever to the shareholders.
The company has been declared a relief undertaking under the provisions of the
Bombay Relief Undertakings (Special Provisions) Act, 1958, with effect from
January 1, 1977. In these circumstances, in or about 1980, a scheme of
amalgamation was proposed on behalf of the petitioner-company for its
amalgamation with the Brooke Bond India Ltd. Thereafter, in pursuance of an
order passed by this court in November 26, 1980, statutory meetings of the
shareholders, secured creditors and unsecured creditors of the
petitioner-company were held on January 27, 1981, to consider the proposed
scheme of amalgamation. At the meetings so held, 97.30 per cent. of the
shareholders, 100 per cent. of the secured creditors and 98.50 per cent. of the
unsecured creditors approved of this scheme. Thereafter, on March 6, 1981,
Company Petition No. 84 of 1981 (See [1984] 55 Comp Cas 731 (Bom) ) was filed for
sanctioning the said scheme of amalgamation. An application was also made to
the Central Govt. under the provisions of s. 23 of the Monopolies and
Restrictive Trade Practices Act, 1969 (hereinafter referred to as "the
MRTP Act"), for its approval to the said scheme of amalgamation.
It
seems that at about the time that the scheme of amalgamation in question was
propounded, there was an alternative scheme under which Harbans Lal Malhotra
and Sons Ltd. (hereinafter referred to as "the Malhotras"), who were competitors
in trade of the company, had proposed to take on lease the factory premises of
the petitioner-company. This alternative
proposal was rejected at that time by the board of directors and the two
secured creditors (SICOM and UCO Bank) of the petitioner-company as not
advantageous to the company.
When the petitioner-company
applied for approval of the Central Govt. under s. 23 of the MRTP Act, the
scheme was strongly opposed by the Malhotras. The secured creditors, on the
other hand, supported the scheme of amalgamation. By an order dated January 21,
1982, the Central Govt. approved of the proposal of M/s. Brooke Bond India Ltd.
for amalgamation of the petitioner-company with it as contained in the
application dated February 20, 1980. The Malhotras moved the Supreme Court
against the order of the Central Govt. dated January 21, 1982. The Supreme
Court, however, by its order dated March 12, 1982, declined to stay further
proceedings in any High Court or any authority but ordered that any order
passed would be subject to the result of the appeals. It also directed that in
the event of either of the High Courts sanctioning the scheme of amalgamation,
the judgment will not take effect for a period of four weeks. After the above
order was passed by the Supreme Court, the opponents in this company
application, Pravin Kantilal Vakil and another, lodged a requisition dated May
28, 1982, signed by the requisite number of shareholders at the registered
office of the petitioner-company requisitioning an extraordinary general
meeting of the company to be held on July 9, 1982, to consider the following
resolution:
"Resolved that the company renegotiate
with the Brooke Bond India Ltd. and/or examine alternate scheme(s) in the
interest of the company and for the purpose, resolved further that the company
should withdraw Company Petition No. 84 of 1981 (See [1984] 55 Comp Cas 731
(Bom)) filed in the High Court in Bombay from the date of this
resolution".
There was an explanatory
statement annexed to this notice to which I will refer later. Pursuant to this
requisition, the board of directors by their notice dated June 11, 1982,
convened an extraordinary general meeting of the company as requisitioned. The
notice convening the extraordinary general meeting is exhibit "C" to
the petition. Thereafter, one Bhagwandas, a shareholder of the
petitioner-company, filed a suit in the Bombay City Civil Court for an
injunction restraining the company from holding the extraordinary general
meeting. He also took out a notice of motion for an injunction to restrain the
holding of the meeting. The City Civil Court, however, did not grant such an
injunction. Thereafter, the applicant herein, who is also a shareholder of the
petitioner-company, has taken out the present judge's summons for an order,
that pending the hearing and final disposal of Company Petition No. 84 of 1981
(See [1984] 55 Comp Cas 731 (Bom)), the opponents, their servants and agents
should be restrained from holding and proceeding with the extraordinary general
meeting.
In order to consider
whether an injunction as prayed for can be granted or not, it is necessary to
consider the nature of the requisition which has been received by the
petitioner-company and the purpose for which the requisition is made. The
resolution which is proposed to be considered at the requisitioned meeting is
in two parts. The first part of the resolution calls upon the company to
renegotiate with M/s. Brooke Bond India Ltd. and/or to examine alternate
schemes in the interest of the company. The main part of the resolution,
however, calls upon the company to withdraw Company Petition No. 84 of 1981
(See [1984] 55 Comp Cas 731 (Bom)). The main purpose of requisitioning the
meeting of shareholders is to compel the company to withdraw Company Petition No.
84 of 1981 (See [1984] 55 Comp Cas 731 (Bom)) which is a petition for
sanctioning the scheme of amalgamation. The resolution itself makes it quite
clear that unless Company Petition No. 84 of 1981 is withdrawn, the company
cannot either renegotiate with M/s. Brooke Bond India Ltd. or examine any
alternative schemes. It was strongly argued by Mr. Bhabha, the learned counsel
for the opponents, that the requisitioned meeting has been called mainly for
the purpose of considering alternative schemes which may be beneficial to the
company. On a perusal of the said resolution and the explanatory statement
attached to it, it becomes quite clear that the requisitionists have not put
forth before the shareholders any alternative scheme whatsoever. The
explanatory statement sets out the following:
(i) That one of the shareholders of the company, Mr. Joseph
Sabastian D'Mello has filed an affidavit setting out the facts and figures for
the proposed scheme of amalgamation with M/s. Brooke Bond India Ltd. as not
fair and equitable to the shareholders of the company. Under sub-paras, (a) to
(e), the explanatory statement sets out why, according to the requisitionists,
the scheme of amalgamation is not beneficial to the shareholders of the
petitioner-company.
(ii) In the next paragraph, it is stated that the final
sanctioning of the scheme will not be granted before September, 1982, and this
delay is very long. It then sets out that the company should either renegotiate
the terms of merger with M/s. Brooke Bond India Ltd. or it should examine any
alternative course of action. There is nothing in this explanatory statement
which would show either that there are any alternative proposals more
beneficial to the company, or that there is any possibility of renegotiation,
with M/s. Brooke Bond India Ltd. Quite clearly, the purpose of requisitioning
the meeting of the shareholders is to get rid of the company petition which is
pending before this court for considering the scheme of amalgamation with M/s.
Brooke Bond India Ltd.
Under s. 391 of the
Companies Act, 1956, whenever a scheme of amalgamation is put before the
members or classes of members or creditors or classes of creditors of a company
at the statutory meetings convened for the purpose under s. 391(1) of the
Companies Act, 1956, if a majority in number representing three-fourths in
value of the class of members or creditors, as the case may be, present and
voting at the meeting agree to any compromise or arrangement, it shall, if
sanctioned by the court, be binding on all the members or creditors of the
class, as the case may be, and also on the company. As pointed out by the Privy
Council in the case of Raghubar Dayal v. Bank of Upper India Ltd., AIR 1919 PC
9, the arrangement will take effect from the date of approval of the
arrangement at the statutory meeting held for the purpose, and not from the
date of sanction by the court. Thus, under s. 391 of the Companies Act, 1956, a
specific method is provided for obtaining the approval of the members and
creditors of a company to a proposed scheme. Once such an approval is obtained
in the manner provided by s. 391, the scheme, subject to it being sanctioned,
becomes binding on all the members and/or creditors of the company as also on
the company from the date of granting of such approval by the members and/or
creditors. Under r. 79 of the Companies (Court) Rules, 1959, where the proposed
compromise or arrangement is agreed to, with or without modification, as
provided by sub-s. (2) of s. 391, the company shall, within 7 days of the
filing of the report by the chairman of the statutory meeting(s), present a
petition to the court for confirmation of the arrangement. If the company fails
to present any petition for confirmation within the time prescribed, it shall
be open to any creditor or contributory, with the leave of the court, to
present the petition and the company shall be liable for the costs thereof.
Thus, after a scheme is approved at the statutory meeting(s) held for the
purpose, the company is under an obligation to present a petition for
confirmation of the scheme within 7 days of the filing of the report by the
chairman of such meeting or meetings.
Can the shareholders
thereafter requisition a meeting for the purpose of compelling the company to
withdraw the petition for sanctioning the scheme ? In other words, is it open
to the shareholders to compel the company to resile from its legal obligation
to present a petition for confirmation of the scheme ?
It is nobody's case in this
application that the statutory meetings which were convened and held for the
purpose of considering the scheme for the amalgamation in question were either
not properly convened or that there was any withholding of the relevant
information from the persons attending and voting at these meetings. The
statutory meetings were properly convened and properly held. At these meetings,
there was no dispute that an overwhelming majority of members and secured
creditors and unsecured creditors approved of the scheme. What is stated is
that, now, the secured creditors and a substantial body of the shareholders
have changed their mind; and they wish to demonstrate this change of mind at
the requisitioned meeting. The two secured creditors of the company,
"SICOM and UCO Bank", have appeared through a common counsel and have
stated that they do not now support the scheme of amalgamation. While
"SICOM" has filed an affidavit purporting to explain this change of
stand, no affidavit has been filed on behalf of "UCO Bank". I have to
consider whether such a subsequent change of mind by some of the members and
creditors of the company can be taken note of and whether it is necessary to
permit the shareholders to hold a requisitioned meeting of the company in order
to demonstrate that they have changed their stance.
There have been instances
where at the time of consideration of a scheme of amalgamation, a dispute has
been raised as to whether the statutory meetings held for the purpose of
considering the scheme of amalgamation were properly held or not. In Dorman
Long and Co. Ltd., In re [1934] 1 Ch D 635, there was a dispute as to whether
the statutory meetings for considering the scheme had been properly held and
whether voting was properly recorded at the statutory meetings. It was, in this
context, that the court was required to consider whether the petition should be
dismissed or whether fresh meetings should be summoned. The question of holding
a fresh meeting for considering the scheme on account of a subsequent change in
the stand of the members did not arise in that case at all. In Waxed Papers
Ltd., In re [1937] 156 LT 452, the court was required to consider whether proxy
votes which were cast at the statutory meeting convened for considering the
scheme were valid. The difficulty in that case arose because the proxy votes
were utilised for voting on a resolution to adjourn consideration of the scheme
and a point was raised that the power to vote by proxy on the scheme did not
entail a power to vote on a resolution to adjourn the consideration of the
scheme. Once again, the dispute related to the manner in which the statutory
meeting had been held. The court was not called upon to consider any subsequent
change of mind by any members. In that case, however, Lord Justice Slesser
observed:
"Speaking for myself, I should like to
reserve the question, whether, in any event, a subsequent change of mind on the
part of the shareholders is a matter which the court ought to consider at all
if when considered by the court, the scheme cannot be legally impeached for
reasons other than those which would be appropriate at the meeting. I do not
think that in the present case, it is necessary to express a final conclusion
upon the matter, because the learned judge has said that such change of mind as
did arise in this case was induced by statements which were not fair, and,
therefore, I think that he was perfectly justified in disregarding that matter;
but it would appear, when the section is looked at, that that which the court
is sanctioning is the arrangement or compromise made at the meeting which has
been called under the order of the court. I think it is difficult to see how,
if no new matters, had they been known at the time the meeting was held, would
have influenced the position (so that at that time, the scheme was a proper one
for all reasons to sanction) a mere change of mind later, on the part of
persons, either transferees of the shares or the shareholders themselves, where
there were really no new circumstances producing any different legal situation,
could be a matter to be considered by the court. Certainly, the number of such
persons do not seem to me material in this sense, that, while it is true that
under sub-s. (2) the majority to approve the scheme must represent
three-fourths in value of the members or class of members, it cannot I think
make any difference that the members who change their minds and oppose later on
are or are not more or less than three-fourths in number, if they have a good
ground for opposition, that ground would be good, even if they were less than
three-fourths in value, if they have no ground, it does not seem to me to avail
them to show that they represent more than three-fourths in value".
Nearer home, in the case of
Sidhpur Mills Co. Ltd., In re, AIR 1962 Guj 305, a learned judge of the Gujarat
High Court, while considering a scheme of amalgamation, observed as follows (at
p. 311):
"Therefore, in my judgment, the correct
approach to the present case is (i) to ascertain whether the statutory
requirements have been complied with, and (ii) to determine whether the scheme
as a whole has been arrived at by the majority bona fide and in the interests
of the whole body of shareholders in whose interests the majority purported to
act, and (iii) to see whether the scheme is such that a fair and reasonable
shareholder will consider it to be for the benefit of the company and for
himself............. I do not wish to be understood to say that, in no case
post facto circumstances or events cannot be taken into account, but, on the
whole, I have come to the conclusion that, whilst, in some rare and exceptional
cases, the court may take into consideration subsequent events to protect the
interests of the company or the shareholders, as a general rule, the court
should consider the resolution on the footing of the circumstances which were
in existence at the time when the scheme was formulated, deliberated upon and
approved. If any other approach were to be made, then, in that case, there
would be no sanctity about business contracts. In fact, such an approach may
induce interested persons to shape [future events and circumstances in such a
way as to convert a reasonable scheme into an unreasonable one".
With all respect to the
learned judge, I am inclined to agree with his observations.
I have not been shown a
single case where in considering a scheme of amalgamation, the court ordered a
fresh meeting of the members and/or creditors on the ground that after the
statutory meetings were held, the members or creditors have had second thoughts
about the scheme. All cases where the question of reconvening the statutory
meeting was discussed, were cases where there were disputes relating to the
validity of the statutory meetings. There is no such dispute in the present
case. Secondly, though the requisition talks about a change of circumstances, I
have not been told what these changed circumstances are which make it necessary
for the members to reconsider the scheme. Mr. Bhabha has pointed out lapse of
time as one such circumstance. He has submitted that more than 20 months have
elapsed since the scheme was put before the statutory meetings of the members
and the creditors. This delay, however, has been occasioned because sanction of
the Central Govt. was required under the MRTP Act, and the application for
sanction was strenuously opposed by persons who were interested in the
alternate scheme. How this delay of 20 months has affected the merits of the
scheme has not been explained by anybody. Nor is there any guarantee that any
alternate scheme will be sanctioned within a shorter period. It was also
submitted before me that alternative and better schemes are forthcoming. No
particulars, however, have been given in any affidavit of anybody as to what
these alternative schemes are, who has submitted them and in what manner such
alternative schemes are more beneficial. SICOM, who is one of the secured
creditors of the petitioner company, has filed an affidavit in which it has
stated as follows:
"After the scheme of merger was presented
to this Hon'ble court and the meetings of the shareholders and the creditors
were held in January, 1981, the Government of Maharashtra which is holding 100
per cent. shares of SICOM received an alternative proposal for rehabilitation
of the petitioners which, according to the Government, had the main advantage
of continuing the petitioners as an independent entity.
The Government of Maharashtra, therefore,
instructed SICOM to withdraw its support to the merger".
It is apparent from this
affidavit that SICOM has withdrawn its support to the merger on instructions
from the Government of Maharashtra. Apart from a bare reference to the
alternative proposal, there is nothing in this affidavit which would show that
SICOM is aware of the nature of the alternative proposal or whether it is
better than the existing proposal or whether it is sufficiently worked out so
as to be capable of being put before the statutory meetings of members and
creditors of the company. If there is such a scheme which is more beneficial to
the company, there is nothing which prevents any member or creditor from coming
before the court and asking for the scheme being considered at the statutory
meeting, though whether the propounding of a subsequent but more beneficial
scheme can be a good reason for not sanctioning a scheme beneficial to the
company and binding on the company and its members and creditors, is a moot
point.
It has also been submitted
that the shareholders are entitled to express their views and the voice of the
shareholders should not be stifled. If the shareholders or any of them have
good grounds for opposing the scheme of amalgamation, there is nothing which
prevents such shareholders from appearing at the company petition for
sanctioning the scheme of amalgamation and pointing out their objections. If
the objections are weighty, they can be certainly considered at the time of the
hearing of the company petition. It makes no difference whether such an
objection is by one shareholder or a large number of shareholders. What matters
is the basis of the opposition. Thus, the requisition is wholly misconceived.
It has next been submitted
that under s. 391, statutory meetings are required to be called to ascertain
the views of the shareholders. If the voice of the shareholders is required to
be heard, then they must be allowed to hold a requisitioned meeting. A
requisitioned meeting, however, is not the only way in which the voice of the
shareholder can be heard, nor is such a requisitioned meeting contemplated in
the scheme of s. 391. Views of the shareholders under s. 391 are required to be
ascertained by calling a statutory meeting of the shareholders for that
purpose. In addition, the shareholders also have a right to appear at the
hearing of the scheme of amalgamation and to put forth their objections to the
scheme, if they have any. Both these methods clearly ensure that the voice of
the shareholders will be heard, and there is no need, nor is there any legal
sanction, for departing from the prescribed method.
It has been submitted
before me that it will be easier for the shareholders to attend the
requisitioned meeting, and it will be more difficult for the shareholders to
appear in court in order to voice their objections. I do not see how it will be
more difficult for the shareholders to appear in court. Undoubtedly, their
objections, if voiced before the court, will have to be supported by reasons,
while presumably, in a requisitioned meeting, the resolution can be carried by
a majority vote without having to assign any reason for it. If giving reasons
for objections make for hardship, then there is a hardship in appearing before
the court. In the interests of justice, the shareholders must put up with this
hardship.
It has next been submitted
that by calling the requisitioned meeting, the shareholders will be able to
draw attention to the change of circumstances that has taken place. In spite of
my repeated enquiries, I have not been told what these changed circumstances
are except that a period of about 20 months has elapsed since the scheme was
first proposed. This lapse of 20 months does not, in my view, justify the
calling of the requisitioned meeting.
As I have pointed out
earlier, under r. 79 of the Companies (Court) Rules, 1959, the company is required
to present the petition for sanctioning the scheme within 7 days of the filing
of the report by the chairman; and if the company does not do so, then any
member or creditor has been given the right to present a petition for
sanctioning the scheme. The company is thus under a statutory obligation to
present a petition for sanctioning the scheme. The requisitioned meeting
clearly interferes with the company's obligation in this connection.
It is also extremely
doubtful if any subsequent change of circumstances can be taken into account
while considering the scheme of amalgamation (See Sidhpur Mills Co. Ltd., In
re, AIR 1962 Guj 305).
The opponents, in the
present case, have strongly relied on the provisions of s. 169 of the Companies
Act and have submitted that no injunction should be granted restraining the
holding of a requisitioned meeting of the company. Under the provisions of s.
169 of the Companies Act, the board of directors of a company shall, on the
requisition of such number of members of the company as is specified in sub-s.
(4) forthwith proceed duly to call an extraordinary general meeting of the
company. Thus, if the board of directors receive a valid requisition signed by
the requisite number of members, they are bound to call a requisitioned meeting
of the company. In this connection, the opponents rely upon a decision in the
case of Isle of Wight Railway Co. v. Tahourdin [1884] 25 Ch D 320 (CA). The
court, in that case, held that it would not interfere with the internal working
of the company and that when the shareholders had requisitioned a meeting, the
board of directors is bound to call such a meeting and it cannot refuse to call
such a meeting on the ground that some of the resolutions, if passed at such a
meeting, would be irregular. Lord Justice Lindley observed in that case as
follows (at p. 333):
"We must bear in mind
the decisions in Foss v. Harbottle [1843] 2 Hare 461 and the line of cases
following it, in which this court has constantly and consistently refused to
interfere on behalf of shareholders, until they have done the best they can to
set right the matters of which they complain, by calling general meetings.
Bearing in mind that line of decisions, what would be the position of the
shareholders if there were to be another line of decisions, prohibiting
meetings of the shareholders to consider their own affairs ? It appears to me
that it must be a very strong case indeed which would justify this court in
restraining a meeting of shareholders. I do not mean to say of course that
there could not be a case in which it would be necessary and proper to exercise
such a power. I can conceive a case in which a meeting might be called under
such a notice that nothing legal could be done under it. Possibly in that case
an injunction to restrain the meeting might be granted".
In the case of Crickel Club
of India Ltd. v. Madhav L. Apte [1975] 45 Comp Cas 574 (Bom), a special case
was taken before a learned single judge of this court to consider the question
whether the board of directors of a public limited company was bound to call a,
meeting requisitioned by its members when the resolution which was purported to
be passed in such a meeting was contrary to the provisions of s. 274 of the
Companies Act. The learned single judge, who answered this question, held that
the board of directors were bound to call a meeting which was so requisitioned,
even though the resolution which would be passed at such a meeting would be
contrary to the provisions of s. 274 of the Companies Act. Now, these cases
pertain to the shareholders calling a requisitioned meeting of the company for
considering matters relating to the internal management of the company. In
neither of these cases, there was any question of a requisitioned meeting being
called to consider matters which affected persons other than the members and
the company or to compel the company to resile from its statutory obligations
or to interfere with the exercise of the court's jurisdiction under s. 391 of
the Companies Act.
One of the main reasons why
injunctions are not normally granted to restrain the holding of a requisitioned
meeting is that the shareholders ought to be allowed to regulate and set right
the affairs of the company by calling general meetings. The court, has,
therefore, been reluctant to interfere in the internal management of the
company. Secondly, such injunctions were sought in the cases cited before me by
the board of directors of the company. The courts have not normally permitted
the board of directors of the company to sit in judgment over the requisition
received by them to call a meeting of the shareholders. Normally, such a
meeting would be required to be requisitioned by the shareholders in order to
pass resolutions which are not supported by the board of directors or the
management of the company. The board of directors would, therefore, be expected
to thwart the calling of such requisitioned meeting. It is thus undesirable
that the board of directors should be allowed to refuse to call a requisitioned
meeting, because the board considers the resolutions which were proposed to be
passed at such a meeting, undesirable or not in the interest of the company.
Courts have, therefore, consistently held that if the requisition is called for
the purpose of passing a resolution which can be implemented in a legal manner,
although the form in which the resolution has been proposed is irregular on the
face of it, nevertheless, such a meeting must be called because ultimately a
decision taken at the meeting can be implemented in a legal manner. Lord
Justice Lindley has, in the case of Isle of Wight Railway Co. v. Tahourdin
[1884] 25 Ch D 320 (CA), in his guarded language, expressed a view that if the
resolution proposed to be passed at the requisitioned meeting were wholly
illegal, then the board of directors would be under no obligation to call a
meeting requisitioned for the purpose of passing such an illegal resolution.
Left to myself, I would rather lend my humble support to the weighty
pronouncement of Lord Justice Lindley rather than to the stand taken by learned
brother, Desai J. when he stated that the requisitioned meeting must be called,
even if the resolution proposed at the requisitioned meeting was illegal. To my
mind, there can be no point in calling a meeting for passing a resolution which
would be wholly illegal. In any event, in the present case, it is not necessary
to decide one way or the other on this aspect, because there are various
reasons why the meeting sought to be requisitioned in the present case is not
covered by any of the considerations which have led the courts in the past to
refuse to injunct such meetings.
In the first place, the
present meeting has not been called to consider the internal management of the
company. The resolution which has been proposed does not deal with matters
which concern only the company and its shareholders. The purpose of the
requisition is to compel the company to withdraw the petition for amalgamation
which is pending before the court. Such a resolution does not pertain only to
the company's management and the line of decisions starting with Foss v.
Harbottle [1843] 2 Hare 461, therefore, cannot have any bearing on such a
meeting. Secondly, the board of directors are not asking for an injunction to
prevent the shareholders from discussing the management of the company. They
have called the requisitioned meeting. If the meeting has been called to
pre-empt a consideration by the court of the scheme of amalgamation, the
calling of such a meeting can be questioned by any affected person. It is
irrelevant whether such a person has been put up by the board of directors or
not.
A scheme of amalgamation
affects not merely the company and its shareholders, but it also vitally
concerns an important body of outsiders, viz., the creditors of the company,
both secured and unsecured. It is, therefore, important that any opposition to
this scheme should be expressed and taken note of in the manner provided in s.
391 of the Companies Act and not by the shareholders requisitioning a meeting
in order to compel the company to withdraw the petition. In the present case,
there appears to be a clear attempt on the part of the opponents to interfere
with the petition under s. 391 which is pending in this court. It seems that
the opponents, by calling a requisitioned meeting of the shareholders, are
seeking to undo the effect of the statutory meetings which have been already
held to consider the scheme and are seeking to postpone the sanctioning of the
scheme by the court as far as possible. In fact, the timing of the requisition
lends support to such a suspicion. The requisition has been made after the
Supreme Court refused to stay consideration of the amalgamation petitions
pending in the High Court. The requisitioned meeting in the present case,
therefore, is convened for a purpose which is totally different from the
purpose for which such meetings are ordinarily convened. The ratio, therefore,
of Isle of Wight Railway Co. v. Tahourdin [1884] 25 Ch D 320 (CA) and Cricket Club of India Ltd. v.
Madhav L. Apte [1975] 45 Comp Cas 574 (Bom)
does not apply to the present application.
Lastly, learned counsel
appearing for the opponents and for the secured creditors have urged that the
requisitioned meeting has been called to consider alternative schemes. Even if I
accept this submission, it is clear from the requisition that no alternative
schemes are being put before the shareholders at the requisitioned meeting. The
resolutions which are proposed to be moved themselves do not refer to any
specific alternative scheme. In the explanatory statement annexed to the
requisition by the requisitionists, there is no reference to any specific
alternative proposal. The explanation is confined mainly to pointing out in
very vague and general terms why, according to the requisitionists, the Brooke
Bond Scheme should not be approved. The requisitionists have not put forth any
alternative or better scheme for the consideration of the shareholders at the
requisitioned meeting. If the purpose of calling the requisitioned meeting is
for the shareholders to consider an alternative proposal which may be more
beneficial to the company, that purpose is not going to be served by calling
the requisitioned meeting. It has been argued before me that in the 30th annual
report of the company for the year ending December 31, 1980, it has been
mentioned that a modified proposal to lease the company's factory at Aurangabad
to M/s. Harbans Lal Malhotra and Sons Ltd. had again been revived and that this
has been forwarded to the solicitors and chartered accountants for advice. In
the 31st annual report of the company for the year ended December 31, 1981, it
has been stated that a proposal to lease the company's undertaking by Harbans
Lal Malhotra & Sons Ltd., which has been dealt with in the last annual
report, has not been further considered in the light of legal advice that such
a scheme of leasing would also require the approval of the Government of India
under the MRTP Act. Learned counsel for the opponents and for the secured
creditors have submitted that in view of the statements made in the two annual
reports, it must be presumed that the shareholders knew what was the
alternative scheme; and, hence, in the requisition or in the explanatory
statement, it was not necessary to set out any alternative scheme. This
contention cannot be accepted. In the first place, I have not been shown in
either of the two annual reports in question, the alternative scheme of Harbans
Lal Malhotra and Sons Ltd. set out in detail anywhere. Secondly, in the
explanatory statement, there is not even a reference to the proposal of Harbans
Lal Malhotra and Sons Ltd. If the purpose of calling the requisitioned meeting
was to consider the scheme proposed by Harbans Lal Malhotra and Sons Ltd., it
should have been so stated. The explanatory statement, in my view, is extremely
vague and somewhat tricky. In fact, the explanatory statement is insufficient
and misleading. If this is so, then the requisition for calling the meeting
must be considered as bad in law. In this connection, reference may be made to
the decision in the cases of Laljibhai C. Kapadia v. Lalji B. Desai [1973] 43 Comp Cas 17 (Bom)
and Firestone Tyre and Rubber Co. Ltd. v. Synthetics and Chemicals Ltd. [1971]
41 Comp Cas 377 (Bom). The explanatory
statement which is required to be annexed under s. 173 is for the purpose of
ensuring that all facts which have a bearing on the question on which the
shareholders have to form their judgment are brought to their notice. If this
requirement is not complied with and all relevant facts in the present case,
and the alternative schemes are not put before the shareholders fairly, then
the resolutions will become bad in law. Calling such requisitioned meeting,
assuming that the requisitioned meeting is to consider alternative schemes,
will, in any case, be bad in law.
To sum up, the
requisitioned meeting which is being called is not to consider matters which
affect the company's management or which affect only the company and its
members. In view of the several features of the meeting requisitioned in the
present case, which distinguished it from ordinary requisitioned meetings, this
is a fit case where shareholders can be prevented from holding the
requisitioned meeting.
It was submitted by Mr.
Bhabha, learned counsel for the opponents, that s. 391 is not the only section
under which a scheme can be presented. He drew my attention to s. 395 of the
Companies Act and to s. 494 of the Companies Act. The latter deals with the
power of the liquidator to accept shares as a consideration for the sale of the
property of the company in liquidation. He submitted that it is open to the
shareholders to present a scheme under any of these provisions of the Companies
Act also. The requisition, in the present case, however, is not for the purpose
of presenting any scheme under any of the provisions of the Companies Act. The
purpose is only to get the pending petition under s. 391 of the Companies Act
withdrawn.
It was lastly submitted
that this is a fit case where a suit should be filed against the company and
that a judge's summons is not a proper method for obtaining reliefs. It was
also pointed out that a suit had, in fact, been filed in the city civil court
for this purpose. My attention was also drawn to a decision of the Kerala High
Court in the case of Prakasam v. Sri Narayana Dharmc Paripalana Yogam [1980] 50
Comp Cas 611 (Ker). In this case, the Kerala High Court held that the company
court will not assume jurisdiction where a member seeks to redress an
individual injustice done to him. In the present case, however, the resolution
is aimed at withdrawal of a petition pending under s. 391 of the Companies Act.
The meeting which is requisitioned has a direct nexus with the pending petition
under s. 391 of the Companies Act; and hence the company court exercising its
jurisdiction under s. 391 of the Companies Act can certainly deal with the
judge's summons taken out for the purpose of restraining the holding of such a
meeting. In the premises, the judge's summons is made absolute in terms of prayer
(a) except for the bracketed portion. The opponents to pay to the applicant the
costs of the judge's summons fixed at Rs. 300.
[1986] 60 COMP. CAS.1075
(P&H)
HIGH COURT OF PUNJAB AND HARYANA
v.
Paragaon Utility Financiers (P.)
Ltd.
R. N. MITTAL J
C.
NO. 158 OF 1983 IN COMPANY PETITION NO. 79 OF 1982
N. K. Sodhi for the
Applicant.
J. S. Narang for
Respondent.
JUDGMENT
Rajendra Nath Mittal J.—Paragaon Utility Financiers (P.) Limited (hereinafter
referred to as "the company") was incorporated on August 21, 1961,
under the provisions of the Companies Act (hereinafter referred to as "the
Act"). The registered office of the company is situated at Jullundur. Its
authorised capital is ten lakhs divided into 1,000 equity shares of Rs. 1,000
each. The called capital out of the authorised capital is Rs. 8,50,000 and the
paid up and subscribed capital is Rs. 7,91,000. The calls in arrears amount to
Rs. 59,000. Col. Kuldip Singh Dhillon and 6 other shareholders of the company
filed an application under sections 397 and 398 of the Act. Smt. Rattan Kaur
and Col. P. S. Dhillon claiming themselves as the director and the managing
director respectively of the company sought to defend the petition on behalf of
the company. They are represented by Mr. J. S. Narang, advocate. Ramesh Inder
Singh, respondent No. 4, claims himself to be a director and authorised by the
board of directors headed by Dr. Vikram Singh to contest the petition. He is
represented by Mr. N. K. Sodhi, advocate. Thus, two sets of parties, i.e., Col.
P.S.Dhillon and Smt. Rattan Kaur on the one hand and Ramesh Inder Singh on the
other claim to be authorised by two different boards of directors to contest
the petition.
The question arises whether
Col. P. S. Dhillon and Smt. Rattan Kaur or Ramesh Inder Singh should be allowed
to defend the petition on behalf of the company. Ramesh Inder Singh filed a
Civil Miscellaneous Petition No. 158 of 1983, stating that the management of
the company vests in the board of directors headed by Dr. Vikram Singh as
managing director and that Col. P. S. Dhillon and Smt. Rattan Kaur have nothing
to do with the affairs of the company. He has annexed 20 affidavits of the
shareholders of the company alleged to be holding 625 shares of Rs. 1,000 each.
He has prayed that affidavits be read for determining the issue. Reply to the
application has been filed on behalf of Smt. Rattan Kaur.
In order to determine the
issue, a few other facts are required to be stated. Col. P. S. Dhillon was
admittedly elected as the managing director of the company and continued to be
so up to April 20, 1982. The case of Col. P. S. Dhillon is that the board of
directors held a meeting on November 7, 1981, in which it was decided that ten
per cent, of the nominal value of each share be called and the same be paid by
the shareholders on or before January 5, 1982. In pursuance of the decision,
letters were posted to the shareholders to pay the call money. Most of the
shareholders supporting Dr. Vikram Singh did not pay the call money. The matter
was taken up again in the meeting of the board of directors on August 7, 1983,
and it was decided that notice be issued to the defaulter-shareholders stating
that if they failed to make the payment in respect of the call money on or
before September 2, 1983, their shares shall be liable to be forfeited. In
pursuance of the notice, ten out of the total number of defaulter-shareholders
came forward and made payment in respect of the call money and the rest of the
defaulter-shareholders neither asked for any extension nor made the payment.
The matter in respect of the arrears of the call money was again discussed in
the meeting of the board of directors on September 9, 1983, and it was decided
that if any shareholder had not made. the payment till that date, his share be
forfeited and consequently the shares of the following shareholders stood
forfeited :
1. S.
Pavitar Singh
2. Ramesh
Inder Singh
3. Ravinder
Singh
4. Smt.
Nasib Kaur
5. Dr.
Vikram Singh
6. Mrs.
Gurbax Kaur
7. Mrs. Inderjit Kaur
8. Mrs.
Bhagya Vikram
9. S.
Gurcharan Singh s/o Atma Singh
10. Mrs. Prem
Piari
11. S. Mohan
Singh
12. Smt.
Gurmej Kaur w/o S. Mohan Singh
13. Smt.
Gurcharan Kaur
14. S. Swaran
Singh and
15. Mohan
Singh
It is alleged that out of
the above defaulter-shareholders, some of them were posing themselves to be
shareholders and directors of the company.
The case of Ramesh Inder
Singh and his party is that some shareholders gave a requisition on January 25,
1982, to Col. P. S. Dhillon, that an extraordinary general meeting be
requisitioned for removal of Col. P. S. Dhillon and the board of directors and
appointment of another managing director and board of directors. Col. P. S.
Dhillon did not requisition the meeting within the period of 21 days.
Consequently, the requisitionists called the meeting for April 21, 1982, on
March 22, 1982. In the meeting, all the resolutions were passed unanimously and
were recorded in another set of books as Col. P. S. Dhillon did not hand over
the books to them. In the meeting, Dr. Vikram Singh was appointed as the
director-cum-managing director and Mrs. Bhagya Vikram, Smt. Nasib Kaur,
Niranjan Singh Domeli, Gurcharan Singh, Ramesh Inder Singh, Ravinder Singh,
Swaran Singh, Amar Singh, Avtar Singh, Bir Singh and Rajinder Singh Johl were
appointed as directors of the company. It is further stated that they did not
receive any notice for depositing the call money in pursuance of the alleged
meeting dated November 7, 1981. The party represented by Ramesh Inder Singh
claims that Dr. Vikram Singh and the abovesaid persons were duly elected as
directors in the meeting on April 21, 1982, and, therefore, he could represent
the company.
In order to determine the
aforesaid question, the pivotal point to be decided is whether the meeting
dated April 21, 1982, was a validly convened meeting or not and the
shareholders who attended the meeting had the right to vote. The contention of
Mr. Narang is that in case any sum is payable by a shareholder to the company
and he has not paid the same, he has no right of voting in a meeting. He
submits that after the meeting of November 7, 1981, notice for call money was
served upon all the shareholders and those who did not pay the call money had
no right of voting in the meeting held on April 21, 1982. According to him, the
majority of the shareholders who attended the meeting on that date had not paid
the call money and, therefore, they could not elect the managing director and
other directors. On the other hand, Mr. Sodhi has argued that no meeting of the
board of directors was held on November 7, 1981, and no notices in pursuance of
the alleged meeting were issued to the shareholder. He further submits that,
therefore, it cannot be held that any money was due to the company and thus the
meeting held on April 21, 1982, was a valid meeting.
I have given due
consideration to the arguments of learned counsel. The first matter to be
determined is whether any meeting took place on November 7, 1981, or not. It is
not disputed that up to April 20, 1982, Col. P. S. Dhillon was the managing
director of the company and the old board of directors was continuing. Col.
Dhillon has produced the register containing the minutes of the meeting of the
board of directors dated November 7, 1981. The meeting was attended by ten
directors whereas the quorum for the meeting was six. The directors who
attended the meeting were Niranjan Singh Domeli, Col. P.S. Dhillon, Puran
Singh, Bir Singh Johl, Ravinder Kaur, Col. K. S. Dhillon, Smt. Inder Kaur,
Didar Singh, Puran Chand and Hardev Singh Minhas. Niranjan Singh Domeli was in
the chair. The original proceedings book contains the signatures of all the
directors present at the meeting. At the conclusion of the minutes, Niranjan
Singh Domeli signed the register on the same date. One of the proposed
resolutions was to consider further call on shares. The resolution which was
passed by the board of directors reads as follows :
"Resolved unanimously
that a fourth call on shares of the company be and is hereby made at 10% of the
nominal value of each share, i.e., Rs. 100 per share, to be paid before
5-1-82."
Niranjan Singh Domeli, Bir
Singh Johl and Smt. Inder Kaur, who were present in the meeting dated November 7,
1981, and passed the above resolution, are also amongst the requisitionists for
calling a meeting on March 22, 1982, for April 21, 1982. Out of them, Niranjan
Singh Domeli and Bir Singh Johl were elected as directors on that date, i.e.,
on April 21, 1982. It has not been denied by them that they were present in the
meeting on November 7, 1981. Their presence in the meeting dated November 7,
1981, proves beyond a shadow of doubt that that meeting was held and the
resolution reproduced above was passed therein. I, therefore, do not find any
substance in the contention of Mr. Sodhi that in fact no meeting was held on
November 7, 1981, and false entries have been made in the proceedings book.
Now, it is to be seen
whether notices were sent to the shareholders in pursuance of the resolution
dated November 7, 1981. Col. P.S. Dhillon produced the despatch register in the
court along with the photostat copy of the relevant entries. The relevant
entires regarding despatch of the letter calling the share money are contained
in the register at serial Nos. 250 to 289. A copy of the letter is also annexed
to the register which reads as follows:
** ** **
"Ref. No./PUF/250 to
289 Dated : 20-11-81.
All
shareholders
Call
on shares
In the meeting of the board
of directors held on 7-11-81, it has been resolved that a further call of 10%
(Rs. 100) per share be made, to be paid on or before 5-1-82.
2. You are accordingly
called upon to pay the above call in this office by the due date."
** ** **
The register continues till
date. The last entry in the register is dated March 27, 1984. From the register
it is evident that the letters were despatched by the company to the
shareholders. Section 53 deals with service of documents on members by a
company. Sub-section (1), inter alia, provides that a document may be served by
a company on any member thereof either personally, or by sending it by post to
him to his registered address. Sub-section (2)(a) says that where a document is
sent by post, service thereof shall be deemed to be effected by properly
addressing, prepaying and posting a letter containing the document. A proviso
had been added to the sub-section saying that where a member has intimated to
the company in advance that documents should be sent to him under a certificate
of posting or by registered post with or without acknowledgment due and has
deposited with the company a sum sufficient to defray the expenses of doing so,
service of the document shall not be deemed to be effected unless it is sent in
the manner intimated by the member.
From a reading of the above
sub-sections, it is clear that if a letter is posted to a shareholder on his
registered address by affixing the requisite postal stamps, the service shall
be deemed to have been effected on him, unless he had issued instructions to
the company that he should be served after obtaining a certificate of posting
or under registered cover and provided funds for that purpose. It has not been
shown that any instructions had been issued and funds were provided by the requisitionists
for sending letters to them after obtaining certificate of posting or under
registered covers. I am, therefore, of the opinion that the company complied
with the provisions of law in sending the notices to the shareholders. It is
further relevant to mention that in pursuance of the notice dated November 20,
1981, Niranjan Singh Domeli, Smt. Inder Kaur and Smt. Pritam Kaur wives of
Niranjan Singh Dimeli, Smt. Vaneet, daughter of Niranjan Singh Domeli,
Raghuvinder Singh, Bir Singh Johl, Col. P. S. Dhillon, Smt Kir-pal Kaur, Smt.
Gurmej Kaur, Smt. Rattan Kaur, Hardev Singh Minhas, Puran Singh, Didar Singh,
Col. K. S. Dhillon and K. Gurdev Singh paid the call money. Since notices were
not received, it was not possible for Smt. Vaneet, Raghuvinder Singh, Smt.
Kirpal Kaur, Smt. Gurmej Kaur, Smt. Rattan Kaur and K. Gurdev Singh to pay the
call money as they were not present in the meeting of the board of directors.
Faced with that situation,
Mr. Sodhi argued that the requisitionists stated on affidavit that they did not
come to know about the resolution nor did they receive any letter dated
November 20, 1981 and, therefore, it cannot be held that they came to know of
the resolution. He tried to support his argument by making a reference to this
court's decision in Escorts
Ltd. v. Industrial Tribunal, Haryana [1983] Lab IC 223. I am not impressed with the submission of learned counsel. In
view of the provisions of the Companies Act, it cannot be held that the mode in
which the service was effected was not a proper mode of service. M/s. Escorts
Ltd.'s case, referred to by learned counsel, is under the Industrial Disputes
Act. There is no such provision in the Industrial Disputes Act as contained in
section 53 of the Companies Act. That case is thus distinguishable and the
observations therein are of no assistance to learned counsel.
Mr. Sodhi next argued that
the notice dated November 20, 1981, did not contain all the particulars,
namely, the exact amount, the place of payment, and interest, if any, and unless
these were provided, the notice was bad and the shares could not be forfeited.
To support his contention, he made reference to Public Passenger Service Ltd.
v. M. A. Khader, AIR 1962 Mad 276, Public Passenger Service Ltd. v. M. A.
Khadar, [1966] 36 Comp Cas 1; AIR 1966 SC 489 and Karachi Oil Products Ltd. v.
Kumar Shree Narendrasinghji, [1948] 28 Comp Cas 215 ; AIR 1950 Bom 149.
I have duly considered the
argument of learned counsel. The question to be decided at this stage is not
the one whether the shares of the requisitionists are to be forfeited or not.
The question is whether prima facie they had the right to requisition the
meeting and to vote therein. This question is required to be determined for the
purpose of deciding whether the board of directors headed by Dr. Vikram Singh
should be allowed to defend the petition under sections 397 and 398 of the Act.
In my view, the point raised by Mr. Sodhi has no relevance for the purpose of
deciding the aforesaid question. In Public Passenger Service Ltd.'s case, it is
observed by the Madras High Court that when the company forfeited the shares,
the shareholder whose shares are forfeited ceases to be a member of the
company. He loses the privileges and rights of the membership. The money he
paid on the shares is irrecoverable. But, on the other hand, he continues to
remain liable to pay to the company the moneys which are due and payable by him
on the date of forfeiture in respect of his shares and he becomes a debtor qua
the company. Forfeiture, being a penalty and sometimes a very severe one, the
greatest care should be taken to comply strictly with all the provisions
relating to it in the articles. It is further observed that any irregularity in
the procedure or any departure from the rules laid down, however slight, will,
as against the company, invalidate the forfeiture. An appeal against the
judgment of the Madras High Court was dismissed by the Supreme Court in Public
'Passenger Service Ltd.'s case, AIR 1966 SC 489. Similarview was taken by the
Bombay High Court in Karachi Oil Products Ltd.'s case. There is no quarrel with
the proposition laid down in the aforesaid cases but as no shares are being
forfeited, the ratio therein is not applicable to this case. Section 181, inter
alia, provides that notwithstanding anything contained in the Act, the articles
of a company may provide that no member shall exercise any voting right in
respect of any shares registered in his name on which any calls or other sums
presently payable by him have not been paid. Article 36 of the articles of
association had made a provision in this regard. It reads as follows :
"No member shall be
entitled to vote at any general meeting unless all sums presently payable by
him in respect of shares in the company or otherwise have been paid."
From conjoint reading of
the section and the article, it is clear that if any sum is due from a
shareholder in respect of a share, he is not entitled to vote at any general
meeting. It consequently follows that the requisitionists who had not paid the
call money in pursuance of the resolution dated November 7, 1981, were not
entitled to vote in the alleged meeting. Even the meeting dated April 21, 1982,
cannot be held to be a properly convened meeting. Section 169 deals with
calling of extraordinary general meeting on requisition. Sub-section (4) says
that the number of members entitled to requisition a meeting in regard to any
matter shall be in the case of a company having a share capital, such number of
them as hold at the date of the deposit of the requisition, not less than
one-tenth of such of the paid up capital of the company as at that date carry
the right of voting in regard to that matter. From a reading of the sub-section
it is clear that only those shareholders who have a right of voting can
requisition a meeting. It has already been held that many of the
requisitionists had no right of voting and, therefore, they were not entitled
to requisition the meeting. After taking into consideration all the facts and
circumstances of the case, I am of the opinion that the meeting dated April 21,
1982, was not a valid meeting, that the board of directors represented by Dr.
Vikram Singh is not a validly constituted board and, therefore, the party
represented by Ramesh Inder Singh has no right to defend the present
proceedings on behalf of the company.
Before parting with the
judgment, it may be mentioned that the observations made in the judgment shall
not be taken into consideration at the time of deciding the civil suit between
the parties.
[1985] 57 COMP. CAS. 31 (BOM.)
HIGH COURT OF BOMBAY
v.
Mrs. Rohini Ramesh Save
REGE AND BHARUCHA JJ.
APPEAL NO. 406 OF 1982, IN
COMPANY APPLICATION NO. 235 OF 1982 IN COMPANY PETITION NO. 84 OF 1981 CONNECTED
WITH COMPANY APPLICATION NO. 2635 OF 1980.
APRIL 5,1984
J. C. Bhatt,
S. D. Parekh, I. M. Chagla, S. R. Ganesh and J.P. Avasia for the Appellants.
M.H. Shah,
A.N. Mody, S.H. Doctor, Atul Rejadhyaksha, A.R. Vani and A.M. Khatlawala for
the Respondent.
J.J. Bhatt
for SICOM (secured creditors).
Rege J. —After having heard the learned counsel for the parties, the parties
have tendered minutes of the order signed by the learned counsel in terms of which they have no objection to
the order being passed. However, before doing so, we propose to give a
short-reasoned order in this case.
A few facts that are of some relevance are as under:
On November 21, 1980, a judge's summons for direction
under s. 391 of the Companies Act was taken out by respondent No. 2 herein,
M/s. Centron Industrial Alliance Ltd. (hereinafter referred to as
"Centron"), for sanction of the scheme of amalgamation of the company
with Brooke Bond India Ltd. On the said summons, the court directed that the
scheme be advertised and a meeting of the shareholders and the creditors, both
secured and unsecured, of the company be held. On January 26, 1981, the scheme
was advertised in the Times of India. At the meeting held on January 27, 1981,
to consider the scheme as directed by the court, the scheme was approved by
97.30% of the shareholders, 100% of the secured creditors and 98.50% of the
unsecured creditors. Thereupon the company filed before the company judge on
March 6, 1981, a petition being Company Petition No. 84 of 1981 for sanctioning
the said scheme.
During the time the said scheme was being considered
at the meeting, an alternative scheme was proposed under which one Harbans Lal
Malhotra & Sons Ltd., who were competitors in trade of the company, were to
take over on lease the factory premises of the company. However, the said
alternative scheme was rejected by the directors and the two secured creditors
of the petitioner company as not being advantageous to the company.
Simultaneously, the company made an application to
the Central Government for the approval of the said scheme under the provisions
of s. 23 of the Monopolies and Restrictive Trade Practices Act, 1969
(hereinafter referred to as "the MRTP Act"). The petitioner company's
said application was strongly opposed by the Malhotras, while it was strongly
supported by the secured creditors. The Central Government by its order dated
January 21, 1982, granted its approval to 'the said scheme. The Malhotras then
by Special Leave Application No. 1753 of 1982 moved the Supreme Court against
the order of the Central Government dated January 21, 1982. The Supreme Court,
however, by its order dated March 12, 1982, declined to stay further
proceedings in any of the High Courts or any authority but ordered that any
order passed would be subject to the result of the appeals. It also directed
that in the event of either of the High Courts sanctioning the scheme of
amalgamation, the judgment will not take effect for a period of four weeks.
After the said order of the Supreme Court was passed,
one Pravin Kantilal Vakil, who is appellant No. 1 in this case, as a
shareholder of the company, lodged a requisition dated May 28, 1982, signed by
the requisite number of shareholders at the registered office of the company
for holding an extraordinary general meeting of the company on July 9, 1982, to
consider and if found fit to pass the following resolution:
"Resolved that the company renegotiate with
Brooke Bond India Ltd. and/or examine alternate scheme(s) in the interest of
the company and for the purpose further
resolved that the company should withdraw Petition No. 84 of 1981 filed
in the High Court in Bombay from the date of this resolution".
The directors of the petitioner company, therefore,
issued to the shareholders of the company a notice of the said extraordinary
general meeting as called by the requisitionists to be held on July 9, 1982, to
consider and if thought fit to pass the abovementioned resolution. The notice
was also accompanied by an explanatory statement given by the requisitionists.
Before the said meeting was held, one Bhagwandas
Kapadia, another shareholder of the company, filed a suit, being Suit No. 3652
of 1983, in the City Civil Court, Bombay, for an injunction restraining the
company from holding the said extraordinary general meeting. In the said suit,
he also took out a notice of motion for a similar relief. The court, however,
dismissed the notice of motion and refused to grant any injunction. Thereafter,
the first respondent herein, Mrs. Rohini Save, also a shareholder of the
company, took out the judge's summons in the company's said petition, being
Company Petition No. 84 of 1981, for sanctioning the said amalgamation scheme
and for an injunction against the petitioner company from holding the said
requisitioned extraordinary general meeting and transaction thereat the
business set out in the said notice. The said judge's summons came to be
dismissed by Mrs. Sujata Manohar J., by her judgment and order dated August
13/16, 1982, against which this appeal has been filed.
On the basis on which the matter appears to have been
argued before the learned judge, the learned judge found that the notice of the
meeting showed that the meeting was basically called to make the company
withdraw Company Petition No. 84 of 1981, pending before the court for
sanctioning of the scheme of amalgamation with Brooke Bond India Ltd. and make
the company resile from the approval already given to the scheme as the reading
of the said notice showed that the last proposed resolution, viz., withdrawal
of the petition for sanction of the scheme pending before the court, was for
the purpose of passing the earlier two resolutions. On that basis, the learned
judge held that so long as the petition was before the court for sanctioning
the scheme and the court was seized of the matter, the company cannot be
compelled to resile from its statutory obligation and, therefore, the
requisition was misconceived. The learned judge,
therefore, granted an injunction against the company from holding the said
meeting for considering all the three proposed resolutions as mentioned in the
said notice.
However, at
the hearing before us, the learned counsel for the appellants did not press
this appeal in so far as the order of injunction related to the last two
proposed resolutions, viz, (1) "Resolution to examine alternative
scheme(s) in the interest of the company, and (2) a resolution that the company
should withdraw Petition No. 84 of 1981, filed in the High Court in Bombay from
the date of this Resolution". The lower court's order so far as it
restrains the company from considering at the meeting the said two resolutions
would, therefore, stand confirmed.
In view of
the appeal not being pressed as regards the last two resolutions mentioned in
the said notice, the only part of the order that could survive for
consideration would be the holding of the said meeting for passing the first
resolution, viz., to renegotiate with Brooke Bond India Ltd.
If one reads
the said resolution, viz., to renegotiate with Brooke Bond India Ltd., as
stated in the notice, which as it is, is in broader terms, along with that part
of the explanatory note relating to the said resolution, it was clear that what
was sought to be discussed at the said meeting was the renegotiation of only a
term in the scheme of amalgamation with Brooke Bond India Ltd., viz., the
proposed share exchange ratio of one share of the Brooke Bond India Ltd., to
five shares of the company, as the same was, according to the requisitionist,
not fair and equitable to the shareholders of the company for the reasons
mentioned in the explanatory note. It was, therefore, clear that what the
shareholders were seeking to do by proposing the said resolution was to discuss
only the modification to the scheme already before the court for sanction in
Company Petition No. 84 of 1981. The question was whether the court can prevent
the shareholders from doing so on the ground that a scheme of amalgamation was
already pending before the court for sanction.
Sections 391 and
392 of the Companies Act, 1956, read with r.79 of the Companies (Court) Rules,
1 959, provide for the sanction by the court of a scheme of arrangement or
compromise.
Under s.
391(1), where a compromise or arrangement is proposed, the court may, on the application
of a company or of any creditor or member of the company, order a meeting of
the creditors or class of creditors, or of members or class of members, as the
case may be, to be called, held and conducted in such manner as the court
directs. Admittedly, in this case, on the summons for direction taken out by
the company, such a meeting was held on the direction of the court at which the
shareholders and creditors of
the company both secured and unsecured, had overwhelmingly approved of the
Scheme.
Then the next
step under r.79 of the Companies (Court) Rules was that when the proposed
arrangement or compromise was approved at the said meeting with or without
modification, the company (or its liquidator, as the case may be) was required
within seven days of the filing of the report to the chairman, to present a
compromise or arrangement and the court after hearing the parties concerned
proceeds to sanction the compromise. In this case, the company has presented a
petition to the court being Company Petition No. 84 of 1981, for sanction of
the said scheme as approved by the shareholders and creditors of the company,
which is pending before the court.
Under
s.391(2), on such petition being presented, it was the court who is to sanction
the scheme.
Section 392
of the Companies Act gives wide powers to the court to give such directions in
regard to any matter or make such modification in the compromise or arrangement
as it may consider necessary for the proper working of the compromise or
arrangement, arrived at. (Underlining suplied).
It is not disputed that under the said section 392 any such modification in the
scheme could be considered by the court even at the instance of any shareholder.
In that
event, a mere discussion by the shareholders at a properly requisitioned
meeting about the proposed modification to the scheme pending before the court
for sanction and if approved, passing a resolution to that effect, would not by
itself affect either the scheme or the court's powers to consider the
modification and sanction the scheme with or without modification.
On the basis
that at the properly requisitioned meeting, the shareholders were to discuss
and if necessary to approve by a resolution only a modification to the scheme
pending sanction before the court, in our view, there was nothing either in the
Companies Act or Rules made there under empowering the court to prevent the
company from doing so.
Since the
company has now agreed to restrict the holding of the requisitioned meeting,
which it is not disputed, is properly requisitioned, only to the consideration
of the first resolution, viz., to renegotiate with Brooke Bond India Ltd. read
with the part of the explanatory note connected therewith, the court would not
be justified in preventing them from doing so.
In the view that we are taking, it was not necessary
to consider the further contention of Shri Parekh, the learned counsel for the
appellant, that the company court had no jurisdiction or had no power to deal
with this question.
With this, the order in the appeal would be in terms
of the minutes of the order signed by the counsel for the parties and handed
in.
[1984] 56 COMP. CAS. 103 (CAL.)
HIGH COURT OF CALCUTTA
v.
Time Travels Pvt. Ltd.
MRS. PADMA KHASTGIR, J.
Suit No. 4480 of 1982
JUNE 22, 1982
Sujit Sinha for the petitioner.
Rathin Nag and Hirak Mitter
for the respondent.
Padma Khastgir J.—This application had been made by Joginder Singh Palta
for an order of injunction restraining the defendants, Time Travels P. Ltd. and
others, from in any manner giving effect or further effect to the resolution,
dated May 14, 1982, restraining the defendants from interfering in any manner
with the right of the petitioner to act as the managing director of defendant
No. 1 and for other consequential reliefs.
It was the petitioner's
case that at all material times he was and still is the managing director of
defendant No. 1. The company was incorporated on or about March 8, 1978, under
the Companies Act, 1956, as a private company limited by shares. Defendants
Nos. 2, 3 and 4 at all material times were and still are directors of defendant
No. 1 and the petitioner along with the said directors constituted the board of
directors of defendant No. 1. The petitioner and defendants Nos. 2 and 4 were
the first named directors of the company in its articles of association.
According to the petitioner, he was duly appointed as the managing director of
defendant No. 1 by the board of directors for the initial period of three years
with effect from June 1, 1978, and subsequently from June 1, 1981, he was duly
appointed as the managing director of the defendant on various terms and
conditions as set out in paragraph 9 of the petition. Since June 1, 1976, the
petitioner has been duly acting as the managing director of defendant No. 1 and
performing his duties as such. It was the petitioner's case as made out in the
petition, that on May 23, 1982, the petitioner for the first time came to know
from an advertisement caused to be published by the defendants in an issue of
Amrita Bazar Patrika, dated May 16, 1982, that a resolution had been passed at
an extraordinary general meeting of defendant No. 1, dated May 14, 1982, for
the removal of the petitioner as director of defendant No. 1. The petitioner
denied and disputed the factum, validity and the genuineness of the said
resolution passed at the extraordinary general meeting inasmuch as, according
to the petitioner, no board meeting was held for the purpose of considering the
said purported resolution or convening the extraordinary general meeting of
defendant No. 1. According to him no notice of the said resolution or of the
said extraordinary general meeting was given by defendant No. 1 to him or by
any other defendants. According to him, no special notice had been served on
the petitioner and, under the circumstances, he was not given any opportunity
to be heard on the proposed resolution or at the meeting. Under those circumstances,
the petitioner had no opportunity to make any representation with regard to the
said proposed resolution for his removal as the director of defendant No. 1. It
was the petitioner's further case that such resolution had not been notified to
the Registrar of Companies removing the petitioner from the directorship of
defendant No. 1.
Mr. Sujit Sinha,
Barrister-at-Law, appeared in support of this application and submitted that
the removal of his client as a director was illegal, void and of no effect. First
of all, on the ground that no notice of the said resolution or of convening of
the said extraordinary general meeting was given, no board meeting was ever
held for the purpose of considering the said resolution. No special notice had
been given to the petitioner nor any particulars were given to the petitioner
to make any representation in respect of the said resolution for his removal as
a director of defendant No. 1. The meeting held and the resolutions passed on
May 14, 1982, were contrary to and in violation of the provisions of the
Companies Act as also the articles of association of defendant No. 1. According
to the petitioner, no effect whatsoever had been given to the resolution
inasmuch as the petitioner had been attending the office of defendant No. 1 and
performing and/or discharging his duties as the managing director of defendant
No. 1 by receiving visitors and callers and making arrangements on their behalf
by way of booking air passage with the diverse airlines and also making hotel accommodation for the
passengers. He gave particulars of the visitors and/or representatives of
different airways whom he met during that period and also relied on a few
letters written by the third parties to him as the managing director. Under the
circumstances, the petitioner was apprehensive, since defendant No. 1 and other
directors have threatened to invade the right of the petitioner to act as the
managing director of defendant No. 1.
The
petitioner instituted this suit for a declaration that the petitioner is the
managing director of the defendants and is entitled to act as such, for a
declaration that the resolution is illegal, void and of no effect, and for a
perpetual injunction restraining defendant Nos. 1, 2, 3 and 4 and/or their
agents or servants from in any way or manner interfering with the right of the
petitioner to act as the managing director of defendant No. 1 or from giving
effect to the resolution, dated May 14, 1982. The petitioner alleged that the
defendants have given instruction to the office staff not to carry out any
instructions of the petitioner and they in fact appointed security staff from
the Security Service of India for preventing the petitioner from attending or
having any access to his office from May 31, 1982. Mr. Sinha relied on the
cases in Bimal Singh Kothari v. Muir Mills Co. Ltd. [1952] 22 Comp Cas 248
(Cal) and Richard B.T.H. Chow v. James Chow Wakin [1970] 75 CWN 173.
The
learned lawyers, Mr. Rathin Nag with Mr. Hirak Mitter, appeared on behalf of
the company and opposed this application.
It
appears that the petitioner, on his own admission, is not a member of the
company inasmuch as he has no shareholding of defendant No. 1. Under the
circumstances, he, being a non-member of the company, is not entitled to
challenge the non-compliance of s. 173 of the Companies Act, 1956, which
provides as follows:
"173(1). For the
purposes of this section—
(a) in the case of an annual general meeting,
all business to be transacted at the meeting shall be deemed special, with the
exception of business relating to (i) the consideration of the accounts,
balance-sheet and the reports of the board of directors and auditors, (ii) the
declaration of a dividend, (iii) the appointment of directors in the place of
those retiring, and (iv) the appointment of, and the fixing of the remuneration
of, the auditors; and
(b) in
the case of any other meeting, all business shall be deemed special.
(2) Where any items of business to be transacted
at the meeting are deemed to be special as aforesaid, there shall be annexed to
the notice of the meeting a statement setting out all material facts concerning
each such item of business, including in
particular the nature of the concern or interest, if any, therein, of every
director, the managing agent, if any, the secretaries and treasurers, if any,
and the manager, if any".
In view of the provisions
of s. 173 of the Companies Act, the petitioner is not entitled to any notice
under s. 173. Apart from that, factually it had been the case of defendant No.
1 as made out in the affidavit-in-opposition affirmed by Rajendra Prosad
Khaitan on June 7, 1982, that the petitioner had been served with the notice
accompanied by the requisition letter given by one of the shareholders having
more than 10% shareholding as also the explanatory statement of the said notice
by registered covers with acknowledgment due. The said cover was tendered to
the petitioner on more than one occasion by the postal delivery peon and the
petitioner refused to accept such cover, as a result whereof the said cover was
returned to the company. The sealed envelope was opened by the court's officer
in the presence of the learned lawyers appearing for both the parties and the
contents of the said cover were brought out which corroborated the affidavit
testimony of Rajendra Prosad Khaitan. Under the circumstances, the petitioner's
submission that he had not been served with any notice whatsoever of the
proposed meeting to be held on May 14, 1982, as also the proposed resolution to
be passed at such meeting is untenable and equally unacceptable is his
submission that he did not get any chance of making any representation against
the proposed resolution which was going to be passed at such meeting removing
him from acting as a director. Under the General Clauses Act, 1897, under s. 27
such tender of the registered cover and his refusal to accept the same is valid
service in accordance with law.
Mr. Sujit Sinha submitted
that the explanatory statement given by the company was not sufficient inasmuch
as the special notice given by the requisitionists should also have been
accompanied by the explanatory statement. In support of his contention he
relied on an unreported judgment of Mr. Justice Salil K. Roychowdhury (as he
then was) and submitted that inasmuch as there was no explanatory statement
annexed to the special notice given by the shareholder, it was contrary to law
and as such any resolution passed on the basis of such special notice and/or
requisition was void.
The suit filed by the
defendant seems to be not maintainable in law inasmuch as he has asked for a
declaration to the effect that he is still the managing director of the company
and he is liable to remain there. Such relief is not tenable in law inasmuch as
the managing director is an employee of the petitioner. In the cases reported
in Catherine Lee v. Lee's Air Farming Ltd. [1961] AC 12 (PC), Boulling v. Association of
Cinematograph, Television & Allied
Technicians [1963] 2 QB 606 at 607, it had been held that a managing director
is merely an employee of a company. Under the circumstances, no injunction
could be passed restraining the company from removing him as the managing
director inasmuch as the court of law will not compel a company to keep one of
its employees inasmuch as the court does not enforce an agreement for
employment specifically in case of personal service. No court can compel an
unwilling employer to keep a particular employee in whom the employer has lost
confidence. Mr. Nag craves reference to a judgment of this court passed in the
matter in Gobind Pritamdas Malkani v. Amarendra Nath Sircar [1980] 50 Comp Cas
219 (Cal), and submitted that in view of the observation there, this court
should not pass an order of injunction restraining the company from dispensing
with the service of the petitioner as its managing director.
The petitioner's submission
that there had been some irregularities in the conduct as also in convening the
said meeting cannot be a ground for an order of injunction inasmuch as the
company is at liberty to remove those irregularities at the next meeting of the
company and cure such irregularities and set at naught the order. Under those
circumstances, relying on the principles as laid down in Bentley-Stevens v.
Jones [1974] 2 All ER 653; [1974] 1 WLR 638 (Ch D) no order of injunction could
be passed against the defendants from interfering with the right of the
petitioner to act as the managing director.
Palmer's Company Law, 22nd
edn., page 651, article 59/25, article 59/30, page 554, observes that what
applies to directors applies with greater force to managing directors. In the
event of any breach of contract of employment of a managing director, in the
opinion of Palmer, at article 60/11 at page 668, is the remedy for damages for
such breach of contract.
The decisions relied by Mr.
Sinha have no application to the facts and circumstances of this case.
Section 170 of the
Companies Act provides as follows:
"170(1). The provisions of sections 171 to
186—
(i) shall, notwithstanding anything to the contrary in the articles
of the company, apply with respect to general meetings of a public company, and
of a private company which is a subsidiary of a public company; and (ii) shall,
unless otherwise specified therein or unless the articles of the company
otherwise provide, apply with respect to general meetings of a private company
which is not a subsidiary of a public company.
(2) (a) Section
176, with such adaptations and modifications, if any, as may be prescribed,
shall apply with respect to meetings of any class of members, or of debenture
holders or any class of debenture holders, of a company, in like manner as it
applies with respect to general meetings of the company.
(b) Unless the articles of the company or a contract binding on the
persons concerned otherwise provide, sections 171 to 175 and sections 177 to
186 with such adaptations and modifications, if any, as may be prescribed,
shall apply with respect to meetings of any class of members, or of debenture
holders or any class of debenture holders, of a company, in like manner as they
apply with respect to general meetings of the company."
Pursuant to such provision
this particular company in its articles of association under art. 40 provides
in the manner following:
"The provisions contained under ss. 171 to
186 of the Act shall not apply to the company."
Under those circumstances,
as per the articles of association of the company, there need not be any
explanatory statement as provided under s. 173 of the Companies Act, 1956, for
the purpose of convening a meeting by a shareholder by giving any special
notice annexing therewith any explanatory statement. Mr. Sinha's submission is
that the expression "unless otherwise specified" in cl. (ii) of
sub-s. (1) of s. 170 does not mean omission of the provisions of the Companies
Act inasmuch as under art. 40 it does not make any other provision but only
excludes the application of certain sections of the Companies Act. In that
respect he craved reference to Black's Law Dictionary. So far as the word
"otherwise" is concerned, he submitted that the company should have
made some provisions in a different manner and in some other way so far as ss.
171 to 186 were concerned. From the various provisions made in the articles of
association of the defendant company it would appear that from arts. 40, 41,
42, 43, 44, 45, 46, 47, 48 and 49, various provisions have been made so far as
general meetings were concerned. Mr. Sinha's submission is that by virtue of s.
9 any provision made in the articles of association which is contrary to the
provisions of the Companies Act shall be void. That submission of Mr. Sinha is
also unacceptable inasmuch as the opening words of s. 9 provides "save as
otherwise expressly provided in the Act". Under the circumstances, by
virtue of s. 170, the company was entitled to frame its articles of association
by making other provisions and/or specifying otherwise.
Considering the balance of
convenience, it seems that the members of the company had unanimously resolved
to remove the petitioner as the managing director. Under the circumstances, to
insist on the company to engage such a managing director would be disastrous
for the company. There are allegations of removal of minutes of board meetings,
register of shareholdings and other statutory documents including the common
seal of the company. The company had duly notified to the Registrar of
Companies and the Officer-in-Charge of the Park Street Police Station to that
effect.
As a result, in view of the
peculiar facts and circumstances of this case and the principles as laid down
in the case of Bentley Stevens v. Jones [1974] 2 All ER 653; [1974] 1 WLR 638
(Ch D), no order of injunction should be passed even if there are
irregularities, which can be rectified by the company at its next general
meeting. Under the circumstances, this application is dismissed with costs.
[1994]
80 COMP. CAS. 693 (MAD)
HIGH COURT OF MADRAS
v.
Venkateswara Solvent Extraction (P.) Ltd.
LAKSHMANAN
J.
Company Application No. 602 of
1992 in
Company Petition No. 126 of 1989
A.K.
Mylsamy for the applicant.
A.C.
Muthanna, S. Sandurkar, N.S. Nandahumar, R.L. Narayanan and M. Subramaniam for
the other respondents.
Lakshmanan
J.—The first petitioner,
S. Varadarajan, in the main company petition is the applicant in Company
Application No. 602 of 1992. He filed the above application for an order of
interim injunction restraining the second
respondent, M. Sekaran, from holding the extraordinary general meeting on April
23, 1992, or any other adjourned date pending disposal of the main company
petition.
This application was
opposed by all the respondents. Elaborate arguments were heard by me on April
21, 1992. Since the meeting was to be held on April 23, 1992, at 4 p.m. and
having regard to the urgency of the matter, I passed an interim order on April
22, 1992, which is reproduced as under:
"Elaborate and lengthy
arguments were advanced by counsel for the applicant as well as counsel for the
respective respondents and very many decisions have been referred to in respect
of the respective contentions.
Since the meeting is to be
held on April 23, 1992, at 4 p.m. it will not be possible for this court for
want of time to pronounce final orders in the above application.
Hence, having regard to the
urgency of the matter and bearing in mind the interest of all parties the
following interim order is passed subject to the ultimate final orders in the
above matter.
The extraordinary general
body meeting to be held on April 23, 1992, pursuant to the notice dated March
28, 1992, will go on and resolutions, if any, passed in the said meeting will
not be implemented and given effect to.
This above order is subject
to final orders in the above application".
The applicant herein and
four others have filed the main company petition under sections 397 and 398 of
the Indian Companies Act, 1956, against the second respondent and his
associates for mismanagement and oppression of the affairs of the first
respondent-company. While the main company petition was pending before this
court, petitioners Nos. 2 to 5 in Company Petition No. 126 of 1989 have sold
their shares to the second respondent. The applicant's counsel has also
received a communication from petitioners Nos. 2 to 5 stating that they are not
interested in prosecuting the main company petition. Hence the applicant alone
has now taken out the present application.
The second respondent,
Sekaran, was appointed as the managing director of the first respondent-company
for a period of three years and his office as managing director came to an end
with effect from September 1, 1990. Thereafter the board of directors of the first respondent
has duly appointed at a meeting of the board held on December 20, 1991, the third
respondent as the managing director of the company (viz., M. Durai Raj).
According to the applicant, the company is being run by the third and fifth
respondents as managing director and wholetime director of the company
respectively. While so, the second respondent has lodged a requisition on
February 8, 1992, under section 169 of the Companies Act calling upon the
company to convene an extraordinary general meeting. Another notice dated March
28, 1992, received by the applicant from the second respondent mentions that he
is convening the extraordinary general meeting since the company did not comply
with his demand as per letter dated February 8, 1992. The convening of the said
meeting is challenged by the applicant herein. The following are the grounds of
challenge:
(a) The meeting convened by the second
respondent on April 23, 1992, is not in order and the same is in violation of
the mandatory provisions of section 169 of the Act.
(b) As per section 169 of the Act, the
requisitionist must lodge the necessary resolution with the company. The board
must convene the meeting within 21 days and if the board of directors of the
company fail to convene the extraordinary general meeting within 21 days from
the date of lodgment of the said requisition, then the requisitionists them
selves within 45 days can convene the extraordinary general meeting.
(c) The notice sent by the second
respondent convening the extra ordinary general meeting on April 23, 1992, is
not valid since the notice itself relies on the earlier requisition dated
February 8, 1992, which does not contain any agenda.
(d) The second respondent cannot convene
the meeting of his own without complying with the mandatory provisions of
section 169 of the Act.
(e) The present notice includes various
items of business not listed in the earlier requisition lodged by the second
respondent with the company.
(f) Section
284 of the Act has not been complied with by the second respondent since he
wanted to remove the third respondent as the managing director of the company
and he was also not given any opportunity to show cause about the receipt of
the requisition from the second respondent.
Thus,
Mr. A.K. Mylsamy, learned counsel appearing for the applicant, contends that looking
from any point of view the notice convening the extraordinary general meeting
by the second respondent on April 23, 1992, to consider various items of
business as set out in the said notice is illegal and opposed to the mandatory
provisions of the Act. Therefore he prays that an injunction order should be
issued restraining the second respondent and his associates from holding an
extraordinary general meeting on April 23, 1992, pursuant to the notice dated
March 28, 1992, or any other adjourned date pending disposal of the main
company petition.
The
second respondent, M. Sekaran, filed a detailed counter-affidavit. He is
represented by Mr. A.C. Muthanna, learned senior advocate appearing on behalf
of Mr. S. Sandurkar. The main defence raised by the second respondent in his
counter-affidavit at the time of hearing are :
(1) The applicant has no locus standi to
interfere in the requisition meeting convened by the second respondent. As on
date the applicant is neither a director of the company nor is he empowered to
represent the first respondent-company. Hence the present application is
misconceived.
(2) The present application cannot be
maintained in this company petition, but only by way of separate suit and as
the main company petition is not maintainable, this application is also not
sustainable.
(3) The conduct of the applicant clearly
brings out the collusion between the applicant and the third and fifth
respondents-directors. The present application has been presented in collusion
with them.
(4) The applicant is holding only 3.5
per cent, of the paid up share capital of the company. Therefore, such a
minority shareholder cannot interfere with the extraordinary general meeting of
the members convened by the second respondent holding nearly 62 per cent, of
the paid-up capital of the respondent-company, in his own capacity and along
with his friends. This is a clear case of the minority oppressing the majority.
(5) The purchase of shares by the second
respondent to seek control of the respondent cannot constitute acts of
oppression. The requisition deposited by the second respondent is in accordance
with the provisions of law. As required by the law the requisition clearly sets
out the matters for consideration of which the meeting is convened. The allegation
that as per section 169 of the Act, the requisitionist must lodge the necessary
resolution with the company is misconceived.
(6) Section 284 of the Act has no
application to any of the matters to be considered at the said requisition
meeting, as there is no proposal to remove any director. In any event, the
present applicant has no locus standi to raise any of the alleged objections
which is purely within the domain of the board and the respondent-company.
(7) The requisition notice has been
properly lodged and the matters to be considered have been properly set out
therein.
(8) Every shareholder of the company has
the right to call an extraordinary general meeting in accordance with the
provisions of the Act.
(9) Since the board of the
respondent-company did not even consider the requisition and it failed and
neglected to take steps to convene the requisition meeting, the requisitionists
themselves have every right to convene this meeting as per the provisions of
law.
Mr.
Subramaniam, learned counsel appearing on behalf of Mr. S. Sandurkar, learned
counsel for the respondents Nos. 3, 6 and 7, has also raised the following
submissions at the time of hearing:
(1) The
applicant has no locus standi to file this application.
(2) The
fundamental requisites under Order 39, rule 1 have not been satisfied.
(3) There
is no violation of section 169 of the Act.
According to Mr.
Subramaniam, there is a distinction between sections 169 and 172 of the Act.
Under section 172 of the Act the statement of the business to be transacted
must be given whereas under section 169, it is enough if the matters are
mentioned. There is no further requirement. It is only when the notice under
section 172 is sent, the details are necessary. Even if the notice contains
additional matters to be considered it is for the general body to decide on the
consideration of these matters. The notice is not invalid on that score. The
word "agenda" is not used anywhere in the Act "Agenda"
means the business to be transacted at the meeting. This has been mentioned in
the requisition and the notice.
(4) In any event, this is a new cause of
action and cannot be agitated by way of an interlocutary application instead of
a separate suit. The meeting by the requisitionists cannot be injuncted as long
as there is a valid requisition.
(5) Section 284 does not apply to the
removal of the managing director. Only the person concerned can question the
resolution. The matter is one of internal management, and the court should not
ordinarily interfere in such matters.
Mr. R.L. Narayanan,
learned counsel appearing for the respondents Nos. 6 and 7, has adopted the
arguments of the other learned counsel appearing for all other respondents.
In
the light of the rival contentions urged by learned counsel for both the sides,
the following five crucial points arise for consideration:
(1) Whether the notice sent on March 28,
1992, requisitioning the extraordinary general meeting is valid or not and whether
the notice of the extraordinary general meeting dated March 28, 1992, conforms
to the requirements of the statute or not ;
(2) Whether the requirements of section
173(2) should be satisfied where the requisitionists issue the notice of
extraordinary general meeting ;
(3) Whether
the requirements of section 284 require to be satisfied in the present case ;
(4) Whether
the petitioner has locus standi to maintain the present application for
injunction ;
(5) Whether
the petitioner is entitled for an order of injunction as prayed for.
In order to
appreciate the above points, it is necessary to refer to the provisions of
sections 169, 172, 173 and 284 of the Companies Act. The said sections run as
follows:
"169Calling
of extraordinary general meeting on requisition,--(1) The board of directors of
a company shall, on the requisition of such number of members of the company as
is specified in sub-section (4), forthwith proceed duly to call an
extraordinary general meeting of the company.
(2) The requisition shall set out the matters for
the consideration of which the meeting is to be called, shall be signed by the
requisitionists and shall be deposited at the registered office of the company.
(3) The requisition may consist of several
documents in like form, each signed by one or more requisitionists.
(4) The number of members entitled to requisition
a meeting in regard to any matter shall be—
(a) in the case of a company having a share
capital, such number of them as hold at the date of the deposit of the
requisition not less than one-tenth of such of the paid up capital of the
company as at that date carries the right of voting in regard to that matter ;
(b) in the case of a company not having a share
capital, such number of them as have at the date of deposit of the requisition
not less than one-tenth of the total voting power of all the members having at
the said date a right to vote in regard to that matter.
(5) Where two or more distinct matters are
specified in the requisition, the provisions of sub-section (4) shall apply
separately in regard to each such matter ; and the requisition shall
accordingly be valid only in respect of those matters in regard to which the
condition specified in that sub-section is fulfilled.
(6) If the board does not, within twenty-one days
from the date of the deposit of a valid requisition in regard to any matters,
proceed duly to call a meeting for the consideration of those matters on a day
not later than forty-five days from the date of the deposit of the requisition,
the meeting may be called—
(a) by
the requisitionists themselves ;
(b) in the case of a company having a share
capital, by such of the requisitionists as represent either a majority in value
of the paid- up share capital held by all of them or not less than one-tenth of
such of the paid-up share capital of the company, as is referred to in clause
(a) of sub-section (4) whichever is less ; or
(c) in the case of a company not having a share
capital, by such of the requisitionists as represent not less than one-tenth of
the total voting power of all the members of the company referred to in clause
(b) of sub-section (4).
Explanation.—For the
purpose of this sub-section, the board shall, in the case of a meeting at which
a resolution is to be proposed as a special resolution, be deemed not to have
duly convened the meeting if they do not give such notice thereof as is
required by sub-section (2) of section 189.
(7) A meeting called
under sub-section (6) by the requisitionists or any of them—
(a) shall be called in the same manner, as
nearly as possible as that in which meetings are to be called by the board ;
but
(b) shall not be held after the expiration of
three months from the date of the deposit of the requisition.
Explanation.—Nothing
in clause (b) shall be deemed to prevent a meeting duly commenced before the
expiry of the period of three months aforesaid, from adjourning to some day
after the expiry of that period.
(8)
Where two or more persons hold any shares or interest in a company jointly, a
requisition, or a notice calling a meeting, signed by one or some only of them
shall, for the purposes of this section, have the same force and effect as if
it had been signed by all of them.
(9) Any reasonable expenses incurred by the requisitionists
by reason of the failure Of the board duly to call a meeting shall be repaid to
the requisitionists by the company ; any sum so repaid shall be retained by the
company out of any sums due or to become due from the company by way of fees or
other remuneration for their services to such of the directors as were in
default".
"172Contents
and manner of service of notice and persons on whom it is to be serued.-(1)
Every notice of meeting of a company shall specify the place and the day and
hour of the meeting, and shall contain a statement of the business to be
transacted thereat.
(2) Notice of every
meeting of the company shall be given—
(i) to every member of the company, in any
manner authorised by sub-sections (1) to (4) of section 53 ;
(ii) to the persons entitled to a share in
consequence of the death or insolvency of a member, by sending it through post
in a prepaid letter addressed to them by name, or by the title of
representatives of the deceased, or assignees of the insolvent, or by any like
description, at the address, if any, in India supplied for the purpose by the
persons claiming to be so entitled, or until such an address has been supplied,
by giving the notice in any manner in which it might have been given if the
death or insolvency had not occurred ; and
(iii) to the auditor or auditors for the time being
of the company in any manner authorised by section 53 in the case of any member
or members of the company:
Provided that where
the notice of a meeting is given by advertising the same in a newspaper
circulating in the neighbourhood of the registered office of the company under
sub-section (3) of section 53, the statement of material facts referred to in
section 173 need not be annexed to the notice as required by that section but it
shall be mentioned in the advertisement that the statement has been forwarded
to the members of the company.
(3) The accidental omission to give notice, 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".
"173.
Explanatory statement to be annexed to notice.-(1) For the purposes of this
section—
(a) in the case of an annual general meeting,
all business to be transacted at the meeting shall be deemed special, with the exception
of business relating to (i) the consideration of the accounts, balance-sheet
and the reports of the board of directors and auditors, (ii) the declaration of
dividend, (iii) the appointment of directors in the place of those retiring,
and (iv) the appointment of, and the fixing of the remuneration of, the
auditors, and
(b) in
the case of any other meeting all business shall be deemed special.
(2) Where any items of business to be transacted
at the meeting are deemed to be special as aforesaid, there shall be annexed to
the notice of the meeting a statement setting out all material facts concerning
each such item of business, including in particular (the nature of the concern
or interest), if any, therein of every director, and the manager, if any:
Provided that where
any item of special business as aforesaid to be transacted at a meeting of the
company relates to, or affects, any other company, the extent of shareholding
interest in that other company of every director and the manager, if any, of the
first mentioned company shall also be set out in the statement if the extent of
such shareholding interest is not less than twenty per cent, of the paid-up
share capital of that other company.
(3) Where any item of business consists of the
according of approval to any document by the meeting, the time and place where
the document can be inspected shall be specified in the statement
aforesaid".
"284.Removal
of directors-(1) A company may, by ordinary resolution, remove a director (not
being a director appointed by the Central Government in pursuance of section
408) before the expiry of his period of office:
Provided that this sub-section shall not, in
the case of a private company, authorise the removal of a director holding
office for life on the 1st day of April, 1952, whether or not he is subject to
retirement under an age limit by virtue of the articles or otherwise:
Provided further that nothing contained in this
sub-section shall apply where the company has availed itself of the option
given to it under section 265 to appoint not less than two-thirds of the total
number of directors according to the principle of proportional representation.
(2) Special notice shall be required of any resolution to remove a
director under this section, or to appoint somebody instead of a director so
removed at the meeting at which he is removed.
(3) On receipt of notice of a resolution to remove a director under
this section, the company shall forthwith send a copy thereof to the director
concerned, and the director (whether or not he is a member of the company)
shall be entitled to be heard on the resolution at the meeting.
(4) Where notice is given of a resolution to remove a director under
this section and the director concerned makes with respect thereto representations
in writing to the company (not exceeding a reasonable length) and requests
their notification to members of the company, the company shall, unless the
representations are received by it too late for it to do so,--
(a) in any notice of the resolution given to members of the company
state the fact of the representations having been made ; and
(b) send a copy of the representations to every member of the company
to whom notice of the meeting is sent (whether before or after receipt of the
representations by the company) ;
and if a copy of the representations is not
sent as aforesaid because they were received too late or because of the
company's default, the director may (without prejudice to his right to be heard
orally) require that the representations shall be read out at the meeting:
Provided that copies of the representations
need not be sent out and the representations need not be read out at the
meeting if, on the application either of the company or of any other person who
claims to be aggrieved, the Company Law Board is satisfied that the rights
conferred by this sub-section are being abused to secure needless publicity for
defamatory matter ; and the Company Law Board may order the company's costs of the application to be
paid in whole or in part by the director notwithstanding that he is not a party
to it.
(5) A vacancy created by the removal of a
director under this section may, if he had been appointed by the company in
general meeting or by the board in pursuance of section 262, be filled by the
appointment of another director in his stead by the meeting at which he is
removed, provided special notice of the intended appointment has been given
under sub-section (2).
A director so
appointed shall hold office until the date up to which his predecessor would
have held office if he had not been removed as aforesaid.
(6) If the vacancy is not filled under
sub-section (5), it may be filled as a casual vacancy in accordance with the provisions,
so far as they may be applicable, of section 262, and all the provisions of
that section shall apply accordingly:
Provided that the
director who was removed from office shall not be reappointed as a director by
the board of directors.
(7) Nothing in this
section shall be taken—
(a) as depriving a person removed thereunder of
any compensation or damages payable to him in respect of the termination of his
appointment as director or of any appointment terminating with that as director
; or
(b) as derogating from any power to remove a
director which may exist apart from this section".
It
is also necessary for me to refer to the contents of the notice of requisition
dated February 8, 1992, and the notice of the extraordinary general body meeting
dated March 28, 1992 :
From
M.
Sekaran,
Managing
Director,
Venkateswara
Solvent Extraction (Pvt.) Ltd.,
Pudukottai
Road, Annavasal, Pudukkottai Dist.,
Phone:
47 Extn./55 per./48 R.H.
Dated February 8, 1992.
To
Venkateswara
Solvent Extraction (Pvt.) Ltd.,
Pudukottai
Road,
Annavasal,
Pudukkottai
Dist.
Dear
Sirs,
Sub:
Extraordinary general meeting—Request to convene the extraordinary general
meeting under section 169 of the Companies Act, 1956.
I
am having 49.2 per cent, shareholding in our company and I request to convene
the extraordinary general meeting immediately to fill the vacancy in our board
and elect proper managing director for our company.
Thanking
you,
Yours faithfully,
(Sd.) M. Sekaran.
C.
Ct. All directors,
The
Registrar of Companies,
Sastri
Bhavan,
Haddows
Road,
Madras.
Venkateswara Solvent Extraction
Pvt. Ltd.,
16, K.M. Pudukkottai Road,
Annavasal-622 101,
Dated March 28, 1992. From
M.
Sekaran,
No.
30, Agraharam,
Varaganneri,
Trichy-620
008.
To
All
shareholders,
Venkateswara
Solvent Extraction P. Ltd.,
Pudukkottai
Road,
Annavasal.
An
extraordinary general meeting of the shareholders of the company was requisitioned
by the undersigned as per the provisions of section 169 of the Companies Act,
1956, by a requisition dated February 8, 1992.
Although
the said requisition was deposited with the company on February 8, 1992, the
board of directors of the company have not called for a meeting of the
shareholders in the manner contemplated under the said section.
Hence,
the undersigned requisitionist is issuing this notice to convene the
extraordinary general meeting of the members of the company on Thursday the 23rd
April, 1992 at 4 p.m. at No. 1, South St., Annavasal, Pudukkottai, to consider
and transact the following business.
1. To elect a director to fill the vacancy on the
board due to death of A.A.M. Ismail by passing the following resolution as
ordinary resolution:
"Resolved
that Mr. K. Palaniandi Pillai be and is hereby elected as director of the
company liable to retire by rotation".
2. To elect a director to fill the vacancy on the
board due to death of Mr. P.R. Muthiah by passing the following resolution as
ordinary resolution:
"Resolved
that Mr. K. Kandaswami Pillai be and is hereby elected as director of the
company liable to retire by rotation".
3. To elect a director to fill the vacancy on the board
due to the resignation of Mr. N.M.A. Jamal Mohideen by passing the following
resolution as ordinary resolution:
"Resolved
that Mr. K. Natesan Pillai be and is hereby elected as director of the company
liable to retire by rotation".
4. To remove Mr. K. Dorairaj from the office of
the company by passing the following resolution as a special resolution:
"Resolved
that Mr. M. Dorairaj, who is appointed as managing director by the board on
December 20, 1991, be and is hereby removed as the managing director".
Immediately
after conclusion of the above meeting, a meeting of the board of directors will
be held at the same place.
Date
: 28-3-1992. (Sd.)...................................................
Note :
1. A member entitled to attend and vote at the
meeting is entitled to appoint a proxy. The proxy need not be a member of the
company.
2. The proxy should be lodged at the registered office of the company
not later than 48 hours of the time of commencement of the meeting.
3. The explanatory
statement in regard to business under items 1 to 3 is annexed.
(Sd.)........................
Requisitionist.
Explanatory statement as
required under section 173 of the Companies Act, 1956.
Items (1) to (3) of the
agenda:
The directors referred to
under items (1) to (3) were on the board of the company as first directors.
Over the years Mr. P.R. Muthiah and Mr. A.A. M. Ismail died while they were
holding office of director. Mr. N.M.A. Jamal Mohideen resigned from the board.
However, the said vacancies on the board were not filled up. Hence this meeting
is requisitioned to consider the following names who have been proposed to the
office of director by one of the shareholders, i.e, appointment of (a)Mr. K.P.
Palaniandi Pillai, age 65, in place of vacancy under item (1); (b) Mr.
K.Kandaswami Pillai, age 52, in the place of vacancy under item (2); (c) Mr. K.
Natesan Pillai, age 47, in the place of vacancy under item (3). Each of them
who have consented to be director are businessmen and traders in rice and
allied products, which are raw materials for the company. Hence it is felt that
their association with the company would be of immense benefit to the company.
Each of the above resolutions is recommended for approval by the members.
The above directors are
related to M. Sekaran, director of the company. Item 4:
The appointment of Mr. M.
Dorairaj was made as managing director at the board meeting held on December
20, 1991, when the company petition was pending. This meeting was allegedly
convened pursuant to order of the hon'ble court at Madras on December 5, 1991
in C.A.No. 2356 of 1991 in C. P. No. 126 of 1989 restraining Mr. M. Sekaran,
managing director and director. However, the hon'ble court was pleased to
modify its order on December 20, 1991, whereby Mr. M. Sekaran was allowed to
function as a director.
Thereafter, the hon'ble
court heard the arguments on both sides and dismissed the said application on
January 30, 1992. Consequently, the injunction order was also vacated.
It
is noticed that Mr. M. Dorairaj is in active collusion with V. Varadha-rajan,
the first petitioner in C.P.No. 126 of 1989. He also parted with confidential
information relating to the company to the first petitioner. He has thus
created a situation as above. Therefore, Mr. M. Dorairaj has not acted in the
best interests of the company. Hence, it is proposed to remove him from the
office of managing director by passing the special resolution placed on the
agenda under this item.
(Sd...........................)
Requisitionist.
Place : Trichy
Date
: 28-3-1992.
It
is clear from the requisition dated February 8, 1992, sent by Mr. Sekaran
(second respondent) that the extraordinary general meeting is to be called for
the consideration of the following matters :
(1) To
fill vacancies in the board of directors of the company.
(2) To
elect a proper managing director for the company.
It
is also the claim of the second respondent that he has got the numerical
strength to requisition the extraordinary general meeting.
Most
of the legal controversies between the parties which arise for consideration in
this case have been settled by the highest court of the land in the case of LIC
of India v. Escorts Ltd. [1986] 59 Comp Cas 548.
A
shareholder of a company possessing the numerical strength as required by Act
has the right to requisition an extraordinary general meeting. Such a
shareholder cannot be restrained by injunction from calling the meeting and he
is not bound to disclose the reasons for the resolutions proposed at the
meeting. Nor are the reasons for the resolutions subject to judicial review.
Though section 169 uses the expression "such number of members of the
company" in the plural, yet the requirements of the provisions would be
satisfied even if one member holding the 'requisite number of shares or voting
rights makes the requisition. It is also well settled that words in the plural
include the singular.
As
already stated by me the requisition dated February 8,1992, clearly mentions
the purpose for which the extraordinary general meeting is to be called.
Therefore it has to be held that the requisition dated February 8, 1992, made
by the second respondent is in strict conformity with the statutory
requirements of section 169 of the Act.
The notice of the meeting
by the requisitionists issued on March 28, 1992, to all shareholders has been
issued because the company did not call the extraordinary general meeting
within 21 days from February 8, 1992 (date of deposit of the requisition) and
therefore the second respondent himself called the extraordinary general
meeting under the notice dated March 28, 1992, and the said meeting was
convened on April 23, 1992, at 4. p.m. at No. 1, South Street, Annavasal,
Pudukkottai. It is significant to notice that the aforesaid notice dated March
28, 1992, clearly sets out the business proposed to be transacted at the
extraordinary general meeting convened on April 23, 1992. Hence, the notice
dated March 28, 1992, has been issued in accordance with sub-section (6) of
section 169. The meeting was convened on April 23, 1992, which is well within
the period of three months from February 8, 1992, that is the date of deposit
of requisition.
The apex court in LIC of
India v. Escorts Ltd. [1986] 59 Comp Cas 548 had laid down the following legal
proposition while construing the scope of section 173(2) of the Act (at page
636):
"Thus we see that
every shareholder of a company has the right, subject to statutorily prescribed
procedural and numerical requirements, to call an extraordinary general meeting
in accordance with the provisions of the Companies Act. He cannot be restrained
from calling a meeting and he is not bound to disclose the reasons for the
resolutions proposed to be moved at the meeting. Nor are the reasons for the
resolutions subject to judicial review. It is true that under section 173(2) of
the Companies Act, there shall be annexed to the notice of the meeting a
statement setting out all material facts concerning each item of business to be
transacted at the meeting including, in particular, the nature of the concern
or the interest, if any, therein, of every director, the managing agent, if
any, the secretaries and treasurers, if any, and the manager, if any. This is a
duty cast on the management to disclose, in an explanatory note, all material
facts relating to the resolution coming up before the general meeting to enable
the shareholders to form a judgment on the business before them.-It does not
require the shareholders calling a meeting to disclose the reasons for the resolutions
which they propose to move at the meeting. The Life Insurance Corporation of
India, as a shareholder of Escorts Ltd., has the same right as every
shareholder to call an extraordinary general meeting of the company for the
purpose of moving a resolution to remove some directors and appoint others in
their place. The Life Insurance Corporation of India cannot be restrained from
doing so nor is it bound to disclose its reasons for moving the
resolutions".
Thus
it is clear that the obligation to annexe an explanatory statement to the
notice of the meeting is only on the company when it calls for a meeting to
transact special business. When a requisitionist calls for an extraordinary
general meeting under section 169, there is no obligation on the requisitionist
to annex an explanatory statement to the notice of the meeting. There is in my
view no warrant for imposing such an obligation on the requisitionists.
Therefore, I am of the view that there is no merit in the contention of Mr.
A.K. Mylsamy, learned counsel for the petitioner, that the requisition notice
dated February 8, 1992, and the notice of the meeting dated March 28, 1992, are
bad and that they contravene the provisions of the Companies Act.
Hence
points Nos. 1 and 2 are answered against the applicant in Application No. 602
of 1992.
Then
comes point No. 3 in regard to the satisfaction of the requirements of section
284 of the Act.
Section
284 of the Act deals with the removal of directors. This section does not deal
with the power of the board of directors to revoke the appointment of managing
director. The board of directors in the meeting of the board appoint a managing
director. When the authority given to the managing director is sought to be
revoked by the directors, the provisions of section 284 would not come into
play. It has been held in the case of Major General Shanta Shamsher Jung
Bahadur Rana v. Kamani Brothers P. Ltd. [1959] 29 Comp Cas 501 (Bom) that
section 284 does not affect the power of the board of directors to revoke the
appointment of the managing or other director made by the board. There is no
controversy in the present case that the business proposed to be transacted in
the extraordinary general meeting merely related to the removal of Mr. Dorairaj
as the managing director and the filling up of the vacancies of three directors
due to death and resignation of some directors. Therefore, there is no scope
for invoking section 284 when Mr. Dorairaj is not disturbed from his office as
a director and the business proposed to be transacted related only to the
removal of Mr. Dorairaj as managing director. Hence, I answer point No. 3 in
the negative.
Further
I, may add that very strangely Mr. Dorairaj, whose appointment as managing
director is one of the subject-matters of the agenda of the extraordinary
general meeting, has not chosen to raise his little finger on the above plea.
It is the individual and personal right of Mr. Dorairaj to continue as managing
director and it is for him to come and approach this court and seek appropriate
redressal if there is a threat to disturb his continuance as managing director
of the company. The said Dorairaj is either in deep slumber or adopting an
attitude of supine indifference. His cause, if any, cannot be espoused or
projected by the applicant who is neither a director nor the managing director.
However,
I am unable to accept the argument of Mr. M. Subramaniam, learned counsel
appearing for some of the respondents, that the present applicant cannot
maintain the application because the main petition itself is not maintainable
because the present applicant holds less than the required share strength as on
date even though on the date of filing of the main company petition there was
satisfaction of the required strength by the present applicant and four others.
In view of my decision in L. R.M. K. Narayanan v. Pudhuthottam Estates Ltd.
[1992] 74 Comp Cas 30 (Mad), this contention of Mr. M. Subramaniam does not
deserve acceptance. In my aforesaid judgment it has been held by me as follows
(head-note):
"Once
a petition under sections 397 and 398 of the Companies Act, 1956, is validly
presented, it is open to a shareholder to ask for substitution and prosecute
the proceedings even though such a shareholder by himself could not have
presented a petition under section 397 for want of the required share
qualification. The court has, in such a case, only to consider whether the
petition was a valid petition at the time of its presentation. The requirement
as to the share qualification is relevant and material only at the time of
institution of proceedings and once there is a valid petition and a shareholder
seeks to substitute himself in order to merely continue such a valid petition,
such a shareholder need not hold 10 per cent, of the share capital.
It
is not incumbent upon the court to dismiss a petition because a proceeding
under section 397 or 398 of the Act is a representative proceeding. Even if the
original petitioner does not want to continue the proceedings, the court cannot
be compelled to dismiss the petition. Even then, it is open to the court to
consider the merits of the case without dismissing the petition. Section 399(3)
of the Act permits an individual member to make an application 'on behalf and
for the benefit of all' members of a company entitled to move the court. He
acts clearly in a representative capacity. Rule 9 of the Companies (Court)
Rules, 1959, declaring inherent powers of the court gives the court authority
to transpose the other party as applicant in the interest of justice".
Point
No. 5: As already observed by me, a shareholder has the statutory right subject
to the fulfilment of the provisions of section 169 to call an extraordinary
general meeting. No injunction can be issued restraining him from calling a
meeting. I have already found that the requisition as well as the notice of
meeting are valid. The Supreme Court in LIC's case [1986] 59 Comp Cas 548 has
also ruled that no injunction can be granted restraining a shareholder from
convening an extraordinary general meeting and the said view is clear from the
following ratio found at pages 549, 550 and 551, which is as follows:
"A
shareholder has an undoubted interest in a company, an interest which is
represented by his shareholding. Share is movable property, with all the attributes
of such property. The rights of a shareholder are: (i) to elect directors and
thus to participate in the management through them; (ii) to vote on resolutions
at the meeting of the company ; (iii) to enjoy the profits of the company in
the shape of dividends ; (iv) to apply to the court for relief in the case of
oppression ; (v) to apply to the court for relief in the case of mismanagement
; (vi) to apply to the court for winding up of the company and (vii) to share
in the surplus on winding up".
"The
only effective way the members of a company in a general meeting can exercise
their control over the directorate in a democratic manner is to alter the
articles of association so as to restrict the powers of the directorate and
appoint other directors in their place. The holders of the majority of the
stock of a corporation have the power to appoint, by election, directors of
their choice and the power to regulate them by a resolution for their removal.
An injunction cannot be granted to restrain the holding of a general meeting to
remove a director and appoint another".
"Every
shareholder of a company has the right, subject to statutorily prescribed
procedural and numerical requirements, to call an extraordinary general meeting
in accordance with the provisions of the Companies Act. He cannot be restrained
from calling a meeting and he is not bound to disclose the reasons for the
resolutions proposed to be moved at the meeting. Section 173(2) of the
Companies Act, 1956, does not require the shareholder requisitioning a meeting
to disclose the reasons for the resolutions which he proposes to move at the
meeting".
Thus,
all the points are answered accordingly as above and Company Application No.
602 of 1992 is dismissed. No costs.
[1996] 87 COMP. CAS. 689 (CAL.)
Baboo Lall Jain, J.
February 13, 1995
Company
Petition No. 379 of 1994 connected with Company Application No. 242 of 1994.
S.B. Mukherjee,
S.N. Mukherjee, Ranjan Bachwat, D. Basak and Aniket Agarwal, for the petitioners.
Ashok Das
Adhikary, Dipak Kumar Pal, for the Respondent.
B. Debnath,
for the Union of India.
Baboo Lall
Jain J. —This is an
application made under sections 391(2) and 394 of the Companies Act, 1956, for
section of the scheme of amalgamation being annexure "A" to the
petition. The scheme envisages amalgamation of Maknam Investments Ltd.
(hereinafter shortly referred to as "Maknam") and Namtok Investments
Ltd. (hereinafter shortly referred to as "Namtok") being the two
transferor companies with India Foils Ltd. (hereinafter referred to as
"IFL") being the transferee-company.
The case of
the petitioner is, inter alia, to the effect that Maknam has an issued, subscribed
and paid-up capital of Rs. 15 crores. Namtok has a paid-up capital of Rs.
14,50,00,000. The transferee-company, i.e., IFL, has a paid-up capital of Rs.
6,66,88,980 divided into 66,68,898 equity shares of Rs. 10 each fully paid up.
Pursuant to
an order dated September 19, 1994, made by this court at the petition of the
said transferee and transferor companies, meetings were held under the
different chairmen appointed by this court. The said meetings were held on
October 26, 1994. At the meeting of the shareholders of Maknam 99.98 per cent.
of the shareholders attended the meeting and they all voted in favour of the
scheme and no one voted against the G scheme. At the meeting of equity
shareholders of Namtok, 99.90 per cent. of the shareholders attended the
meeting and they all voted in favour of the scheme. At the meetings of the
preference shareholders of Maknam and Namtok, the preference shareholders who
attended the meeting, voted in favour of the scheme. At the meeting of India
Foils Ltd. out of holders of 66,68,898 shares, holders only of 33,16,051 shares
attended the meeting. Out of-the shareholders attending and voting at the said
meeting, holders of 33,10,950 shares voted in favour of the scheme, and holders
of 723 shares voted against the scheme. The percentage of the persons who voted
against the scheme, so far as IFL is
concerned, works out to .02 per cent. and of those who voted in favour of the
scheme comes to 99.98 per cent. The other shareholders, holding 4,378 shares,
who were present in the meeting did not cast their votes. The instant
application was made for final sanction of the scheme. None of the holders of
the 723 shares, who voted
against the scheme, have appeared before this court to oppose this application.
So far as the Union of India is concerned, it was served with a notice of this
application and it has expressed through its advocate that the Union of India
has no objection to the sanction of the scheme.
Notice of
this application was published in the newspapers and Tamal Kumar Majumdar, a
shareholder of India Foil»Ltd., holding 13 fully paid equity shares of Rs. 10
each, has appeared and is opposing the sanction of the scheme.
The said
Tamal Kumar Majumdar received the notice in respect of the meeting of the
shareholders on October 28, 1994. The envelope in which the said notice was
sent has been produced before me and it appears that the notice was posted on
September 30, 1994. It also appears that due to some postal error, the notice
erroneously went to Noapara on October 10, 1994, and the stamp of that post
office is affixed on the said envelope. Thereafter, the envelope has been
stamped with the stamp of Haridebpur which is dated October 28, 1994. According
to the said objector, he received the notice on October 28, 1994, i.e., two
days after the meeting was held. Such notices are issued by the chairman
appointed by this court and the same are despatched by or under the supervision
of the chairman by certificate of posting. Section 172(3) of the Companies Act
provides that the accidental omission to give notice to or the non-receipt of
notice by that member to whom it should be given shall not invalidate the
proceeding at the meeting. I am satisfied that the late delivery of the notice
to Sri Tamal Kumar Majumdar on October 28, 1994, was due to postal delays
and/or omissions on the part of the postal authorities and this cannot be
treated so as to invalidate the meeting. Even if Mr. Majumdar could have
attended the meeting, his presence could not affect the result of the meeting
even if he voted against the meeting.
The next
grievance of the objector, Mr. Majumdar, is that he has not been supplied a
list of members. It appears that the objector had written a letter to the
chairman, Mr. B.M. Khaitan, in which he, inter alia, prayed for supply of an
updated list of members upon the usual terms. Section 163 of the Companies Act
provides that the company shall keep the register of members open during
business hours subject to such reasonable restriction as the company may impose
to the inspection of any member, A without fee. There is no allegation that any
such inspection was sought to be taken. Under section 163(2)(b), a member may
require a copy of such register on payment of such sum as may be prescribed for
every 100 words or fractional part thereof required to be copied. This
provision, in my opinion, envisages that the member on payment of such sum
obtain b copies of the register of members. This envisages a prior payment to
the company of the prescribed sum, and it is only upon such payment that a copy
is to be supplied as provided under section 163(4). A mere request to the
chairman by letter is, in my opinion, insufficient. I am not satisfied that the
objector complied with the requirements of section 163(3)(b) of c the Companies
Act. Furthermore, the petitioner did not even make any attempt to take any
inspection of the register of members which he could do under the said section
163 of the Companies Act. It was up to the objector to take appropriate steps
for obtaining the list of members or for inspection thereof, if he was of the
view that it could have in any manner helped the objector in his case before
this court.
A point has
also been taken that out of the eleven directors, only four directors were
present at the meeting and that two of them did not exercise their voting right
and one director voted in favour of the scheme for 800 equity shares whereas
his total holding was 2,207 equity shares. The court is concerned with the
total voting of the shareholders and the pattern of its voting. There is
nothing to show that there is any dispute as between the directors of IFL, as
is being sought to be alleged. It is said that one of the directors, Mr.
Amitava Roy, has left the company and joined another company. The said Amitava
Roy might have been an employee director of the IFL. In any event, the leaving
of the said Amitava Roy is in no manner relevant so far as the sanctioning of
the scheme is concerned.
The next point
that has been urged in the affidavit-in-opposition is that ten
groups/associated companies hold about 48.32 per cent. of the paid-up capital
of India Foils Ltd. The names of the said groups/associated companies are not
given in the affidavit-in-opposition affirmed by Mr. Majumdar. The scheme is a
scheme as between members of the company on the one hand and the company on the
other hand, and I do not see as to how a shareholder of a company can be
deprived of his voting rights at a meeting of the members. The shareholders of
the company stand on the same footing and they have to consider the scheme in
their capacity as members and to give their votes in the meeting of the
shareholders. The benefit or loss, if any, has to*go to the concerned
shareholders.
The objector
has also relied on certain resolutions which were passed at the annual general
meeting of the company held on August 23, 1994. The minutes of the meeting have
been placed before me. The resolutions passed thereat do not provide as to the
date within which the right shares are to be issued. The said resolutions also
provide for various requirements to be complied with before any rights issues
are to be made. For example, premium in respect of rights issues has to be
fixed by the board prior to the issues in consultation with SEBI or such other
authorities as may be prescribed. The rights shares have to be issued on such
date as may be fixed by the directors. Such shares have to be issued in
consultation with the Calcutta Stock Exchange with reference to equity shares.
By another special resolution of the same date, the board of directors was
authorised to issue and allot such number of equity shares as may be required
to be issued and allotted whether to the member of the company or not of an aggregate
amount not exceeding Rs. 150 crores. In short, it cannot be said that there has
been any violation of the special resolutions passed at the annual general
meeting held on August 23, 1994, since the date of issue of the rights shares
has been left to the discretion of the board of directors.
It was also
submitted on behalf of the objector that the word "private" has not
been removed from the certificate of registration and/or respective documents
in spite of the fact that both the transferor companies have become public
limited companies. The certificate of registration was produced before this
court and it appears that the name "private" has in fact been deleted
from the certificate by the Registrar of Companies, West Bengal, in respect of
both the transferor companies pursuant to a letter written in that respect.
Unfortunately, the copies supplied to the objector did not show the said
deletion in the copy. However, I do not think that there is any substance in
this objection since the name "private" has already been deleted in
accordance with law in the case of both the transferor companies.
Objection has
also been taken with regard to the increase in the share capital of the
transferor companies. If there has been increase in the share capital of the
transferor companies, I do not think as to how the same can be a subject-matter
of objection by the objector in so far as the amalgamation of the companies is
concerned.
It was also
submitted that the objects of the transferor and transferee companies are not
the same. The transferor companies are investment companies and it appears that
they have made large investments. So far as the transferee company is concerned, the said transferee company
also engages in investment and the investment of the transferee company as on
March 31, 1994, has been shown in the audited balance-sheet at Rs. 6,17,72,295.
The investments of Maknam as on March 31, 1994, are shown at Rs. 9,65.69.144
and those of Namtok as on March 31, 1994, are shown in the balance-sheet at Rs.
9,38,17,440. It shows that the transferee-company is also carrying on the
business of investments as is being done by the transferor companies and that
there is similarity in object so far as the business of investment is
concerned. It is not necessary that all the objects should be identical in
cases of amalgamation of companies.
The next
objection that has been taken is that the income of the transferor companies is
very meagre or even there are losses. So far as the transferee, IFL. is
concerned, it has vast reserves and it has been earning substantial profits.
The transferor companies have undoubtedly large investments which can be
utilised in the case of need for diversion in other useful purposes if the
companies are ultimately amalgamated. It is a matter for the shareholders to
consider commercially whether such merger is beneficial or not. The court is
really not concerned with the commercial decision of the shareholders until and
unless the court feels that the proposed merger is manifestly unfair or is
being proposed unfairly and/or to defraud the other shareholders. Whether the
merged companies will be ultimately benefited or will be able to economise in
the matter of expenses is a matter for the shareholders to consider. If three
companies are amalgamated, certainly, there will be some economies in the
matter of maintaining accounts, filing of returns and various other matters.
However, the court is really not concerned with the exact details of the matter
and if the shareholders approved the scheme by the requisite majority, then the
court only looks into the scheme as to find out that it is not manifestly
unfair and/or is not intended to defraud or do injustice to the other
shareholders. I do not find that there is any material before me to hold that the
proposed scheme of amalgamation is manifestly unfair or is intended to defraud
any shareholders or to do injustice to other shareholders.
It was also
submitted that the exchange ratio of shares has not been fixed properly. The
exchange ratio has been fixed by a reputed firm of chartered accountants,
namely, Price Waterhouse, and I do not think that it can be said that the same
is unfair or unreasonable, simply because the objector says so. It was also
submitted that the said Price Waterhouse did not fix the valuation on proper
basis as required under the guidelines issued by the Central Government. The guidelines relied on on behalf of
the objector mention that the same are purely administrative instructions for
internal official use and are, therefore, not to be quoted, cited or published
as the official guidelines of the Government. In my opinion, the court is not
going into the matter of fixing the exchange ratio in great detail or to sit in appeal from the decision
of the chartered accountant. If a chartered accountant of repute has given the
exchange ratio as per valuations made by him, and if the same is accepted by
the requisite majority of shareholders, the court will only see whether there
is any manifest unreasonableness or manifest fraud involved in the matter. Mr.
S.B. Mukherjee, learned counsel appearing on behalf of the companies, relied on
a judgment reported in Hindustan General Electric Corporation Limited, In re
[1959] 29 Comp Cas 46; AIR 1959 Cal 679. Some of the observations made in the said
judgment are set out hereunder (at page 48):
"The
function and duties of the court in the matter of sanctioning of schemes are
well-known. Any scheme which is fair and reasonable and made in good faith will
be sanctioned, if it could reasonably be supposed by sensible people to be for
the benefit of each class of the members or creditors concerned [Alabama. New
Orleans, Texas and Pacific function Railway Co., In re [1891] 1 Ch 213, 259,
243 and English, Scottish and Australian Chartered Bank, In re [1893] 3 Ch 385.
It is also the duty of the court to see that the resolutions were passed by the
statutory majority section 391(2) of the Indian Companies Act, 1956J [see
Dorman Long and Co., In re [1934] 1 Ch 635; [1955] 5 Comp Cas 30J. In the case
before me, Mr. Mitra, who opposed tin's scheme on behalf of the Hindustan
Commercial Bank Ltd., which is the holder of 2,000, 5 per cent. preference
shares of Rs. 100 each of the company, has contended that the scheme was not
passed by the requisite majority. It is argued with reference to the report of
the chairman of the meeting held on December 11, 1957, that holders of
preference shares of the value of Rs. 6,42,700 were present at the meeting but
only holders of the preference shares of the value of Rs. 4,42,700 voted in
favour of the resolution whereas to constitute the requisite majority, the
holders of the preference shares of the value of Rs. 4,82,000 should have voted
and so the resolution was not validly passed. Now, there is some controversy
raised in the affidavit of Mr. Pai, the representative of the Hindustan
Commercial Bank, as to what attitude he took up at the meeting held on December
11, 1957. Mr. Pai's suggestion is that he voted against the scheme for
reduction resolution which was passed at the meeting of February 14, 1957, when
this resolution was placed before the meeting of December 11, 1957. It is, however, clear from the report of
the chairman that those resolutions which were passed on February 14, 1957,
were not put to vote at all in the meeting of December 11, 1957. It was only
the modified scheme which was put to vote but Mr. Pai expressed his intention
to remain neutral in respect of this matter. He did not vote either in favour
of or against the modified scheme. In other words, he did not take part in the
voting at all. All the other preference shareholders present voted in favour of
the resolution.
Section
391(2) of the (Indian) Companies Act is as follows:
'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, 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 the contributories of the company.'
It will be
seen from the above provision that additional words 'and voting' between the
words 'present' and 'either in person' have been introduced in sub-section (2)
of section 591 which were absent from section 153(2) of the Act of 1913. There
can be no doubt that these words 'and voting' have been introduced with a
purpose and it appears to me that the intention of the framers of this section
was that the majority of the three-fourths value must be of persons who were
present and who took part in the voting'. Mere presence would not be enough.
This being the proper construction of sub-section (2) of section 391, it
appears that all the preference shareholders present besides Mr. Pai voted in
favour of the resolution. In other words, there was a unanimous passing of the
resolution. Therefore, there is no doubt that the requisite majority
contemplated in section 391(2) agreed to the arrangement now presented before
the court for sanction. Reference may be made to Buckley's Companies Acts,
latest edition, page 408, where Buckley points out that the words 'and voting'
had brought about an alteration in the corresponding English section. Mr. Mitra
relied on the case of Betuial Bank Ltd. v. Suresh Chakravarthy [1951] 21 Comp
Cas 315; AIR 1952 Cal 133; 55 CWN 206, in support of this argument, but that
was a case under section 153 of the Indian Companies Act of 1913 and so is not
of assistance to Mr. Mitra."
He-also
relied on the judgment reported in Hindusthan Commercial Bank Limited v.
Hindusthan General Electrical Corporation [1960] 30 Comp Cas 367; AIR 1960 Cal
637, which was in appeal from the aforesaid earlier judgment. The appeal court
affirmed the said judgment of the trial court.
The
petitioner also relied on the judgment reported in Sussex Brick Co. Ltd., In re
[1960] 30 Comp Cas 536; [1961] 1 Ch 289; [1960] 1 All ER 772. In the said case,
it was held as follows (at page 538 of 30 Comp Cas):
"That
being the undoubted law, I think that the present scheme and the present offer
are undoubtedly open to criticism, and that a clever businessman, a man
well-versed in company law and matters which influence dealings on the stock
exchange, could find a good many loopholes in it. That amounts to this: the
scheme is open to criticism; but does that go far enough? That is the
difficulty in the present case. It has not been suggested on behalf of the
applicant that there has been any bad faith or any intentional misleading of
the applicant, but although the scheme is open to a good deal of criticism,
which might be enlarged on at great length in one or more circulars, what
exactly the effect on the mind of the shareholders would have been I do not
pause to inquire. That the scheme is open to criticism I have no doubt, but can
it be said therefore, to be unfair? I think it rather difficult to predicate
unfairness in any case in which there has been perfect good faith on the side
of the person who is alleged to have been unfair. I think that the applicant is
faced with the very difficult task of discharging an onus which is undoubtedly
the heavy one of showing that he, being the only man in the regiment out of
step, is the only man whose views ought to prevail. That is the difficulty he
is faced with in the present case.
I agree that
certain criticisms set out in the applicant's affidavit show that a good case
could be made out for the formulation of a better scheme, of a fairer scheme,
of one which would have been more attractive to the shareholders if they could
have understood the implications of the criticism. I have no doubt at all that
a better scheme might have been evolved, but is that enough? Is it necessary to
establish the validity of such an offer as put forward in the present case? Is
there any point in the scheme on which a better view might have-prevailed, and
rather more generous treatment might have been offered to persons whose shares
are sought to be expropriated? A better and fairer offer might have been made,
possibly, but I do not think that because a scheme is not 100 per cent.
fair or right, there is the kind of unfairness with which Maugham J. was
dealing in the case Hoare and Co. In re [1933] 150 LT 374 to which I have
referred. The mere finding of items, or details, in the scheme which are open
to valid criticism, is not unfairness consistent with the spirit of that
judgment.
A scheme must be obviously unfair, patently unfair,
unfair to the meanest intelligence. It cannot be said that no scheme can be
effective to bind a dissenting shareholder unless it complies to the extent of
100 per cent. with the highest possible standards of fairness, equity and
reason. After all, a man may have an offer made to him and, although he would
prefer something better, would be quite prepared to accept it because it was
good enough in all the circumstances. It may be that the grounds for
criticising the present scheme are not grounds of such a nature as to render
the whole thing unfair in the sense in which Maugham J. used the words in the
case which I have cited.
A good deal of light is thrown in the consideration
of this section in Press Caps Ltd. In re [1949] 19 Comp Cas 327; [1949] Ch 434
(CA), where the test laid down by Maugham J. in Hoare and Co., In re [1955] 150
LT 374, 575, that where the statutory majority has accepted the offer, the onus
must rest on the applicant to satisfy the court that the price E offered is
unfair, was approved. . . . .
There is no suggestion that there has been anything
like intentional cheating or deception on the part of those promulgating this
scheme and, particularly, on the part of the authors of the circular.
Without putting my own view as to how this scheme
could have been improved and made a little more favourable and a little more
fair, perhaps, to the ordinary shareholders, I do not think that unfairness in
the sense in which it has been used in the reported cases has been established.
It must be affirmatively established that notwithstanding the view G of the
majority, the scheme is unfair, and that is a different thing from saying that
ii must be established that the scheme is not a very fair or not a fair one: a
scheme has to be shown affirmatively, patently, obviously and convincingly to
be unfair."
Learned counsel on behalf of the respondent objector
relied on the judgment in Alembic. Chemical Works Co. Limited, In re [1988] 64
Comp Cas 186 (Guj). The objections taken in the said case may be summarised as
follows (headnote):
"(a) that the explanatory statement sent along
with the notice of the meeting did not give enough details to enable the
shareholders to properly comprehend the ramifications of the scheme;
(b) that the shareholders of Neomer were to get
dividend for a period for which they were not members of Alembic and during
which Neomer had not made profits inasmuch as the scheme had to be deemed to
have effect from an earlier date, from 1983;
(c) that the value of the shares of Neomer
arrived at by the chartered accountants for the purpose of amalgamation had no
nexus to reality."
The findings of the court in the said
case may be summarised as follows:
"(i) That the scheme ought to be sanctioned
because the statutory provisions were complied with ; the majority was acting
bona fide; the class of creditors and shareholders were fairly represented and
that the scheme was sanctioned by an overwhelming majority; they had voted as
men of business in favour of the scheme and their votes were not obtained by
perpetrating any fraud upon them. The scheme was scrutinised from various
angles by the authority constituted under the Monopolies and Restrictive Trade
Practices Act as well as the income-tax authorities. Moreover, an industry in a
backward area generating employment was required to be resuscitated and
rejuvenated rather than annihilated and obliterated because the only
alternative outcome of not granting sanction to the scheme would be that Neomer
would have to be wound up. So far as it was practical, the court would always
be in favour of reviving an industry rather than closing it down.
(ii) That the break-up value of the shares of
Neomer arrived at by the chartered accountants was not one which could be
termed as grossly exaggerated. The only method which could be available for
arriving at a break-up value under such circumstances would be the quotation of
the Neomer share on the stock market. Where a large majority of shareholders
had approved of a valuation, the burden would be upon the objector to prove
that the said break-up value was either inadequate or that it was overrated.
While arriving at a valuation of a particular share even of a consistently
losing concern, neither the stock market quotation nor the intangible, assets
could be overlooked and the court would usually accept a valuation accepted by
the majority as fair and reasonable, unless the contrary was proved, and merely
because a different method of valuation could have been adopted would be no
reason for the court to dub the valuation as unfair.
(iii) That the shareholders of Neomer were not
being made A members with retrospective effect but were to be made members from
a particular date, namely, the effective date, and once the scheme was
sanctioned, the scheme of amalgamation would relate back to the effective date,
and hence they would be entitled to all the benefits of being members of
Alembic from the effective date just as they would be subjected to the b
disadvantages, if any, of being members of the transferee-company from the said
effective date. The provisions of section 205 of the Companies Act, 1956,
therefore, could not be said to have been violated, by making a provision for
payment of dividend from the effective date.
(iv) That the prospect of reviving the unit and
making it financially viable could not be totally disregarded. Moreover, the
court also could not be oblivious to the fact that an industry started in a
backward area and generating employment in such a backward area did not require
to be obliterated if it could be resuscitated with assistance from the magna
corporation like the transferee-company. It would be trite to say that when two
alternative courses were presented to the court, and while following one, an
established industry would be wiped out and by following the other it could be
revived, the court would lean in favour of the second alternative.
(v) That as a result of the amalgamation, a
sizable amount of almost three crores of rupees by way of tax benefit would
also result to Alembic.
While
sanctioning a scheme of amalgamation, a duty is cast upon the court to find out
whether the statutory requirements have been complied with. But even if the
statutory requirements have been complied with, the sanction of the court would
not automatically follow. A duty is cast upon the court to find out whether the
proposed scheme is for the benefit of the company as a whole. The court is not
supposed to set its seal upon a decision of the majority and while the court is
not supposed to scrutinise the scheme with a fine tooth comb to find out flaws
and then q to view them through a magnifying glass, the court must be satisfied
before the sanction is accorded that the majority vote was honestly obtained,
that the majority acted honestly, that no financial or arithmetical jugglery
was perpetrated either upon the creditors or upon the shareholders to cajole
them or coax them into voting in favour of the scheme. However, the scheme is
not to be scrtunised by the court with the eye of an expert or the exactness of
an accountant, but if the scheme is, broadly speaking, calculated to benefit
the company as a whole, it would be entitled to the sanction of the
court."
The
petitioner relied upon the judgment of the Supreme Court in Hindustan Lever
Employees' Union v. Hindustan Lever Limited [1995] 83 Comp Cas 30. In the said
case, one of the attacks on the sanction of the scheme was that there were statutory
violation, procedural irregularities of provisions of the Act and under
valuation of shares. The Supreme Court held that there was no violation of section 391(1)(a) of the Act and
the claim that the disclosures in the explanatory statements were not as
required was without basis, as it was not established that the statement did
not disclose the correct financial position of Tomco, nor was there anything to
show that the material was not disclosed. The court held that the petitioner
failed to establish any fraud or prejudice. On the valuation of shares for the
exchange ratio, the court found that a well-reputed valuer of a renowned firm
of chartered accountants and a director of Tomco determined the rate by
combining three well-known methods, namely, the net worth, the market value
method and the earning method. The figure so arrived at could not be shown to
be vitiated by fraud and mala fide and the mere fact that the determination
done by a slightly different method might have resulted in different conclusion
would not justify interference unless it was found to be unfair. In the instant
case also, it was sought to be suggested that the explanatory statement did not
disclose the full facts. The said explanatory statement was settled by an
officer of this court and I do not think that the same can be challenged by
simply saying that the same did not disclose the full facts. So far as the
requirements of the statute are concerned, the same have been complied with. As
in the case before the Supreme Court, here also overwhelming members of the
company have supported the claim and have not complained about the lack of
notice and/or the insufficiency of notice or lack of understanding of the same,
and it will not be right to hold that the explanatory statement was not proper
or was lacking in any material particulars.
In the said
case Hindustan Lever Employees' Union v. Hindustan G Lever Limited [1995] 83
Comp Cas 30 (SC) at page 39, the Supreme Court, inter alia, held as follows:
"Section
394 casts an obligation on the court to be satisfied that the scheme of
amalgamation or merger was not contrary to public interest. The basic principle
of such satisfaction is none other than the broad and general principles
inherent in any compromise or settlement entered into between parties that it
should not be unfair or contrary to public policy or unconscionable. In
amalgamation of companies, the courts have evolved the principle of 'prudent
business management test' or that the scheme should not be a device to evade law. But when the court is
concerned with a scheme of merger with a subsidiary of a foreign company then
the test is not only whether the scheme shall result in maximising the profits
of the shareholders or whether the interest of employees was protected, but it
has to ensure that merger shall not result in impeding promotion of industry or
obstruct growth of the national economy. Liberalised economic policy is to
achieve this goal. The merger, therefore, should not be contrary to this
objective. Indeed, the power of the court is to be satisfied only whether the
provisions of the Act have 'been complied with or that the class or classes
were fully represented and the arrangement was such as a man of business would
reasonably approve between two private companies-may be correct and may
normally be adhered to, but when the merger is with a subsidiary of a foreign
company, then the economic interests of the country may have to be given
precedence. The jurisdiction of the court in this regard is comprehensive.
Here, each of
the challenges claimed to be violative of public interest has to be examined in
the prevailing atmosphere which opted for liberalisation of the Government
policies to promote economic growth of the country. What is remarkable is that
the Legislature itself has amended Foreign Exchange Regulation Act, 1973, by
Act 29 of 1993 ('FERA' for short), the Monopolies and Restrictive Trade
Practices Act, 1969, and the Companies Act, 1956, by Act 58 of 1991.
The scheme of
amalgamation does not run counter to any legislative provision or policy of the
Government. Even assuming that the assets are being transferred for a very
meagre sum, but that by itself would not render the agreement bad or against
public policy. Once the FERA was amended and assets of the Indian company could
be transferred to the foreign company, then the amalgamation cannot be withheld
when the shareholders themselves did not raise any objection nor was it raised
by financial institutions or statutory bodies. The challenge, therefore, founded
on transfer of assets at a lower price cannot be upheld as violative of public
interest."
The court
further held (at pages 55 and 57 of 83 Comp Cas):
"It was
contended by Mr. Dholakia that a foreign company was being given a large
interest in the assets of Tomco at a gross undervalue. We are unable to uphold
this argument. The shareholder has no interest in the assets of the company
while the company is in existence. It is only at the stage of liquidation of
the company that the shareholders become interested in the assets of the company. The share of any member in a
company is movable property and transferable in the manner provided by the
articles of the company. This is provided by section 82 of the Companies Act.
The definition of 'goods' in the Sale of Goods Act, 1930, specifically includes
stocks and shares. A share represents a bundle of rights which includes, inter alia, the rights
(i) to elect directors; (ii) to vote on resolutions at meetings of the company;
(iii) to enjoy the profits of the company, if and when dividend is declared and
distributed; and (iv) to share in the surplus, if any, on liquidation. In the
case of Bacha F. Guzdar v. CIT [1955] 25 Comp Cas 1; AIR 1955 SC 74, the
position of a shareholder was explained . . .
A similar
question came up for consideration before a Division Bench of the Gujarat High
Court in the case of Jitendra R. Sukhadia v. Alembic Chemical Works Co. Ltd.
[1984] 64 Comp Cas 206. That was also a case of amalgamation. In that case, it
was held that the exchange ratio of the shares of the two companies, which were
being amalgamated, had to be stated along with the notice of the meeting. How
this exchange ratio was worked out. however, was not required to be stated in
the statement contemplated under section 393(1)(a)."
At one stage,
the company had offered to the objector to make arrangements for purchase of
the objector's shares at a price Rs. 5 higher than those prevailing on or
before the time when the scheme was initially proposed. However, the objector
declined to accept such offer.
I do not
think that the objector has made out any case for rejecting the sanctioning of
the scheme There will, therefore, be an order in terms of prayers (a) to (j) of
the petition of the petitioners dated November 10, 1994. There will be no order
as to costs, save and except that the petitioners will pay the costs of the
Central Government, assessed at 150 G. Ms.
All parties
concerned to act on the signed copy of the operative part of this judgment and
order on the usual undertaking.
[1975] 45 COMP. CAS. 574 (BOM)
HIGH COURT OF BOMBAY
v.
Madhav
L. Apte
S.K. DESAI, J.
SPECIAL CASE NO. 254 OF 1974
S.J.
Sorabjee and V.R. Chhatrapati for the Plaintiff.
A.B.
Diwan, K.S. Cooper and J.B. Chinai for the Defendant.
S.K.
Desai, J.—This
is a special case filed for the opinion of this court under the provisions of
order 36 of the Civil Procedure Code. Three questions have been asked at the
end of the special case ; but before referring to them or discussing them, the
facts which are not in dispute may be briefly stated.
The 1st
plaintiff to the special case is a sports and social club (hereinafter referred
to as the "Cricket Club" for the sake of brevity), registered as a company
limited by guarantee, having no share capital. It is incorporated under the
provisions of the Indian Companies Act, 1913, and today functions under the
provisions of the Companies Act, 1956. Plaintiffs Nos. 2 to 17 have been
described as members of the executive committee of the 1st plaintiff, and the
powers and functions of this executive committee are admittedly analogous to
those of the board of directors of a company under the Companies Act, 1956.
Articles
69 to 92 of the articles of association of the Cricket Club provide for the
executive committee and article 74 of these articles provides for the
retirement from office of one-third members of the executive committee at the
annual general meeting of the Cricket Club, excluding the nominated and
ex-officio members who are not subject to retirement under the articles. There
is provision in the said article to the effect that a member retiring at any
such meeting shall be eligible for re-election and and shall retain office as a
member of the executive committee until the close of the meeting at which he
retires.
On
3rd August, 1973, the Cricket Club received from 591 of its members, including
the defendants to the special case, a requisition, dated 3rd August, 1973 (hereinafter referred to as "the
requisition" for the sake of brevity). By the requisition the
requisitionists desired the convening of an extraordinary general meeting of
the Cricket Club to consider and, if thought fit, to amend its articles of association
by passing a resolution, which may be fully set out:
"Resolved that article
74 of the articles of association be amended as follows by adding the following
at the end of the words 'he retires':
Provided however that a
member shall not be eligible to stand for re-election to the office of the
executive committee if he has been a member of the executive committee for a
continuous period of six years.
Provided further that a
member who has been a member of the executive committee for a continuous period
of six years may seek election after the expiry of a period of three years from
the date of the six years' period as mentioned in this article.
For the purpose of this
article, a member of the executive committee who retires or otherwise ceases to
be a member of the committee at any time after being such a member for a
continuous period of five years shall be deemed to have been a member of the
executive committee for a continuous period of six years".
After receipt of the
requisition the same was considered by the executive committee of the Cricket
Club at its meeting held on 9th August, 1973, and after some discussion the
said committee resolved to obtain opinion thereon of counsel on the validity
and legality of the resolution proposed to be considered and passed at the
requisitioned meeting under the requisition. It appears that pursuant to the
said resolution of the executive committee, the attorneys for the Cricket Club
obtained opinion of two counsel who independently opined that the resolution,
for consideration of which the requisition had been received, would not be
valid in law and, further, that the requisition was not a valid requisition. On
the other hand, the defendants, presumably acting on behalf of the
requisitionists, obtained opinion of three other counsel who arrived at a
contrary conclusion. In view of the conflicting opinions expressed by counsel
on points on which their advice had been sought, the executive committee of the
Cricket Club and the requisitionists mutually agreed to submit a special case
and the present special case arises from the mutual agreement as aforesaid.
Very briefly stated,
according to the plaintiffs, the resolution proposed for consideration by the
requisition would be hit by the provisions of section 274 read with section 9
of the Companies Act, 1956, and any such amendment of the articles contemplated
would be invalid. Further, according to the executive committee, section 169(6)
only comes into operation on the deposit of a valid requisition and (lie
requisition proposing for consideration a resolution which would be illegal and
invalid if carried, would
not be a valid requisition within the contemplation of the said subsection.
According to them, therefore, the executive committee is not bound to call an
extraordinary general meeting, which has been described by the plaintiffs as an
"exercise in futility".
The
defendants, on the other hand, have contended that the said requisition is a
valid requisition on several different footings. According to them, in the
first place, the rule of construction by necessary implication which is a basic
premise of the conclusions regarding illegality and invalidity of the proposed
resolution does not apply in the present case. It is submitted that what has
been suggested by the proposed amendment to article 74 does not and cannot
amount to a disqualification for the office of the executive committee.
Secondly, it has been urged that the language of section 274 does not warrant
the invocation of the rule of construction or interpretation by necessarry
implication. Finally, it has been urged that in order to make a provision in
the articles of a company void by reason of the provisions contained in section
9 of the Companies Act, 1956, the provision must be repugnant to some express
provisions in the Companies Act, and that the provisions of section 9 would not
be attracted where something has to be read in any provision of the Companies
Act by applying the rule of necessary implication. These, very briefly stated,
are the rival contentions which were explained and justified in greater detail
during the course of arguments, which arguments I propose to deal with later on
in this judgment.
The
following three questions have been posed on which the opinion of the court is
sought:
"(a) Whether amendment of article 74 proposed by
the resolution contained in the requisition would be invalid as being repugnant
to section 274 of the Companies Act or any other provision of the said Act, or
whether the same would be valid ?
(b) Whether
the requisition is a valid requisition ?
(c) Whether the executive committee of the
plaintiffs, viz., plaintiffs Nos. 2 to 17, are bound and liable to call an
extraordinary general meeting of the
members of the plaintiffs to consider and, if thought fit, to pass the said
resolution as a special resolution by the requisite majority ?"
As
I see the position, the question posed in prayer (a) would require
consideration of the provisions of sections 9 and 274 of the Companies Act,
1956, and the questions posed in prayers (b) and (c) involve only the
consideration of section 165, although it may be indicated that these sections
perhaps cannot be considered in isolation and effect has to be given as far as
possible on a consideration of the scheme of the Companies Act in its entirety.
Section
274 of the Companies Act deals, as the marginal note indicates, with the
disqualification of directors. Sub-section (1) of the said section provides for
six disqualifying conditions, and sub-section (3) thereof goes on to provide as
follows :
"(3) A private
company which is not a subsidiary of a public company may, by its articles,
provide that a person shall be disqualified for appointment as a director on
any grounds in addition to those specified in subsection (7)".
According
to the plaintiffs, the doctrine of necessary implication or the rule of
construction by necessary implication is brought into play or attracted by the
wording of sub section (3). Before, however, I proceed to consider the rival
stands on this sub-section, reference may be made to an allied section of the
Companies Act, the concerned section being section 283 which provides for
vacation of office by a director. Under sub-section (1) of section 283 we have
provision of 12 situations in which the office of a director shall become
vacant, and sub-section (3) of the said section provides as follows :
"283. (3) A private company which is
not a subsidiary of a public company may, by its articles, provide, that the
office of director shall be vacated on any grounds in addition to those
specified in sub-section (1)".
I
have supplied certain underlining
to both the sub-sections, viz., section 274(3) and section 283(3), and it can
be seen that the underlined
portions in both the sub-sections are in identical phraseology.
During
the course of arguments both sides have referred me to the previous legislative
history and, therefore, at the outset, reference may be made to analogous
provisions under the Indian Companies Act, 1913.
The
Indian Companies Act, 1913, as originally enacted did not contain analogous
provisions. But in 1936 by the Indian Companies (Amendment) Act, XXII of 1936,
section 86-I was introduced. The marginal note of that section indicated that
it contained provision concerning vacation of office of directors. There was,
however, significant difference between the provisions of that section and the
two sections with which we are now dealing, and that was to be found in
sub-section (2) which reads as follows:
"86-I. (2) Nothing contained in
this section shall be deemed to preclude a company from providing by its
articles that the office of director shall be vacated on grounds additional to
those specified in this section".
Thus,
under an express provision of section 86-I, any company, private or public, was
empowered to provide by its articles additional grounds for vacation of office.
It cannot be denied that there is considerable difference
between such a provision and the provisions to be found in subsection (3) of
the two sections of the Companies Act, 1956, which we are considering, viz.,
sections 274 and 283.
During the course of
arguments I was referred to the report of the Company Law Committee, 1952
(Bhabha Committee) as also to certain statements to be found in the Statement
of Objects and Reasons and the Notes on Clauses to Bill No. 46 of 1953. Before
setting out the relevant extracts from the Bhabha Committee Report and from the
Notes on Clauses, I may refer to two Supreme Court decisions which have
indicated the principle to be applied and the course to be adopted when the
question of making such reference arises.
During the course of
arguments I was referred to Madanlal Fakirchand Dudhediya v. Shree Changdeo
Sugar Mills Ltd.,
where the majority judgment refers to certain amendments made in 1960 as a
result of the recommendation of the Committee appointed in that behalf, as also
to the extracts of the report of the Committee. The court was dealing with the
provisions of the very Act which we are dealing with, i.e., the Companies Act,
1956.
In a fairly recent decision
of the Supreme Court in State of Mysore v. R.V. Bidap the Supreme Court seems to have approved of a
passage from Crawjord on Statutory Construction, which is in the following
terms :
"The judicial opinion
on this point is certainly not quite uniform and there are American decisions
to the effect that the general history of a statute and the various steps
leading up to an enactment including amendments or modifications of the
original bill and reports of legislative committees can be looked at for
ascertaining the intention of the legislature where it is in doubt; but they
hold definitely that the legislative history is inadmissible when there is no
obscurity in the meaning of the statute".
Krishna Iyer J., speaking
for the court (at page 2558), in the above report proceeds to sound a rule of
caution that such extrinsic material, although admissible, should not be
regarded as decisive and that resort may be had to such sources with great
caution and only when incongruities and ambiguities are to be resolved.
Bearing in mind these words
of caution, I think reference may now be made to the extracts from the Bhabha
Committee's Report and the Notes on Clauses which were brought to my attention
during the course of arguments.
Paragraphs 92, 93 and 94 of
the Bhabha Committee's Report deal with its
recommendations vis-a-vis the existing section 86-I of the Indian Companies Act, 1913, and in paragraph 93 is to be found the
view of the said Committee which is to the
effect that the enabling provision of sub-section (2) should be restricted to private
companies excluding those which are subsidiaries of public companies. We are
not really concerned with the basis for the recommendations which is also to be
found explained in paragraph 93.
We
now turn to Bill No. 46 of 1953. The Statement of Objects and Reasons of that
Bill indicate that the Bill was largely based on the recommendations of the
Company Law Committee, modified in a few respects. Clause 252 of the said Bill
provided for disqualification of directors, the provision being analogous with
the present section 273 ; and clause 261 of the Bill contained the provision
concerning vacation of office by directors, the said clause being comparable to
the present section 283. Sub-clause (4) of section 252 had provisions identical
with sub-section (3) of the present section 274, and sub-clause (3) of clause
261 had provisions identical with sub-section (3) of section 283.
The
Notes on Clauses on clauses 252 and 261 may now be set out:
"252.
This lays down initial disqualifications corresponding to the disqualifications
which, under section 86-I of the existing Act, entail the vacation of office by
a director. Sub-clause (2) takes power to remove any disqualification arising
from conviction or from failure to pay calls. Sub-clause (4) corresponds to
section 86-I(2) of the existing Act. It is considered necessary to confine the
power of a company to add to the disqualifications imposed by the Bill to
private companies which are not subsidiaries of public companies.
261.
This is based on section 86-I of the existing Act. See paragraphs 92 and 93 of
the Company Law Committee's Report and the summary at page 265. Power has been
given to the company to remove the director by an ordinary resolution as in
section 184(1) of the English Act. Sub-clause (2) is a consequential provision,
which seems to be clearly necessary. Sub-clause (3) corresponds to sub-section
(2) of the existing section 86-I but confines the operation of the sub-section
to private companies which are not subsidiaries of public companies. Compare
clause 252(4) ante."
It may be
mentioned, as this aspect was emphasised during arguments by learned counsel
for the defendants, that in its report the Bhabha Committee had not considered
grounds of disqualification as distinguished from grounds of vacation of office
by a director ; and the recommendation to be found in paragraph 93 of the said
report was restricted to additional grounds of vacation, and its opinion was
that the public companies and private companies which are subsidiaries of
public companies ought not to be allowed to have articles of association
containing additional grounds of vacation of office by directors.
As stated earlier, the
three questions posed for the consideration of the court fall
into two parts ; the first dealing with the interpretation and construction of
section 274 primarily, and the second with the interpretation and construction
of section 169. As the latter point is, in my opinion, one which is fairly easy
to answer and does not admit of detailed arguments, I propose to deal with the
provisions of that section first and express my views on questions (b) and (c)
of the special case, which are based on the provisions of section 169. After
this is done, I propose to revert to the somewhat difficult question of
construction of section 274.
Under the Indian Companies
Act, 1913, the provisions as regards calling of extraordinary general
meetings on requisition were to be found contained in section 78 of the said
Act. Under those provisions the directors of a company which has a share
capital were enjoined on the requisition of the holders of not less than
one-tenth of the issued share capital of the company, upon which all calls had
been paid, to call an extraordinary general meeting of the company. The scheme
was substantially similar to the scheme of section 169 of the Companies Act,
1956. Sub-section (2) of section 78 provided for the contents of the
requisition and the mode of its deposit ; and sub-sections (3) to (5) provided
for calling of a meeting by the requisitionists on failure by the directors to
cause a meeting to be called for after deposit of a requisition. In sub-section
(3) of section 78, however, the words used were "date of the requisition being
so deposited". Under section 169(6) of the Companies Act, 1956, one finds
a change in the terminology, the provision being that the requisitionists may
themselves call a meeting (subject to other provisions, with which we are not
concerned) if the board does not call a meeting "within twenty-one days
from the date of deposit of a valid requisition" (underlining
supplied). Now, it was urged by learned counsel for the plaintiffs that the
additional word "valid" indicated clearly that the requisition which
was made must be valid and lawful; in other words, that a requisition which was
for consideration of something which would be illegal or invalid could not per
se be considered to be a valid requisition, and if such requisition was
deposited with the directors of a company the directors were not required to
call a general meeting although the numerical requirement provided for in the
earlier part of the said section was satisfied. Now, it may be pointed out that
whereas under section 78 of the Indian Companies Act, 1913, the power to call
an extraordinary general meeting was restricted to companies having a share
capital, under section 169 of the Companies Act, 1956, such power can be
exercised by the members of the company having a share capital as also by
members of a company not having a share capital, and the requirements in the
latter case are to be found in clause (b) of sub-section (4). Other requirements
of a proper requisition have also been spelt
out in greater detail in section 169 ; and, in my opinion, it would be proper
to understand the word "valid" used in sub-section (6) of section 169
as having reference to the provisions of the earlier five sub-sections of that
section rather than indicating compliance with any other requirements or
provisions of the Companies Act. In other words, to put it shortly, all that is
required to be seen before the provisions of sub-section (6) of section 169
become applicable would be to consider whether the requisition deposited was in
accordance with the provisions of section 169 as to its contents, the number of
signatories and similar matters, and it would not be open to the board of
directors of a company to refuse to act on a requisition on the ground that,
although such requisition was in accordance with the requirements of section
169, it was otherwise invalid. This conclusion receives support when one
peruses subsection (5) of section 169, where also the use of the word
"valid" is perceived. The learned counsel for the plaintiffs
emphasised the mischief that in his opinion would be caused by an otherwise
invalid requisition being made which would put the company to considerable
financial loss for what he called would be an exercise in futility. On the
other hand, the question to be considered would be whether the board of
directors of a company can be allowed to ignore a requisition which complies
with all the requirements laid down in section 169 of the Companies Act, 1956,
on the ground that the object of the requisition was illegal or otherwise
invalid and, therefore, the requisition was not a valid requisition which
ground may ultimately be found to be unsustainable. In my view, the word or the
adjective "valid" in section 169 has no reference to the object of
the requisition but rather to the requirements in that section itself. If these
requirements indicated in the earlier part of the section are satisfied, then
the requisition deposited with the company must be regarded as a valid
requisition on which the directors of a company must act. If the directors fail
to act within the period specified by sub-section (6), then, in my opinion, the
requisitionists would be entitled to proceed under the later provisions of that
sub-section and the other sub-sections of section 169.
Before I proceed to express
my view on sub-section (3) of section 274, as ultimately the conclusion on
question (a) must turn on the correct interpretation of that sub-section, I may
proceed to dispose of one argument based on the provisions of section 9 of the
Companies Act, 1956, to which I have already referred whilst indicating briefly
the rival contentions.
Section 9 of the Companies
Act, 1956, reads as under :
"9. Save as otherwise
expressly provided in the Act—
(a) the provisions of this Act shall have effect notwithstanding
anything to the contrary contained in the memorandum or articles of a company, or in any agreement executed by it, or in any
resolution passed by the company in general meeting or by its board of
directors, whether the same be registered, executed or passed, as the case may
be, before or after the commencement of this Act; and
(b) any provision contained in the memorandum, articles, agreement or
resolution aforesaid shall, to the extent to which it is repugnant to the
provisions of this Act, become or be void, as the case may be".
It has been urged on behalf
of the defendants in the statement of case and it was also urged in the course
of arguments that section 9 would render articles or resolution invalid only if
there was conflict with an express provision under the Companies Act, 1956, and
unless there was such express provision no question of repugnancy could arise.
In other words, it was submitted that the terminology employed in section 9 was
such as to exclude any provision in the articles being rendered invalid by what
was not expressly provided in the Companies Act or in any of its provisions,
but which had to be read in the same provision by necessary implication. In my
opinion, this submission is not one which can be accepted. It is impossible to
read the expression "provisions of this Act" in section 9 as
indicative merely of the express provisions and exclude the meanings which have
to be read in the provisions of the Act by the rule of necessary implication.
In my view, any meaning which has to be read in any section of the Act by the
rule or principle of necessary implication is as much a provision of the Act as
something expressly provided. In this view of the matter any provision
contained in the memorandum, articles, agreement or resolution of a company
which is repugnant to any provision of the Act, whether such provision be
expressly found in any section or is to be read in the said section by
necessary implication, would be clearly void.
I may also dispose of,
since it is not a matter capable of any great elaboration, the argument that
what was intended by the requisitionists was not addition of a ground of
disqualification at all, but what was expressed in the argument as
non-qualification. The learned counsel for the defendants urged that the
several grounds of disqualification to be found in sub-section (1) of section
274 had an aspect of unfitness, defect or blemish connected therewith and what
was sought to be done by the proposed amendment of article 74 of the articles
of association of the Cricket Club had no such incidence inasmuch as it was
sought to be specifically provided that the person concerned may seek
re-election after the expiry of a period of three years from the date of the
six-year period as mentioned in the article (after amendment). In connection
with this branch of the argument I was referred to the meanings given to the
word "disqualification" and "disqualified" in dictionaries
such as Murray's and Random House
Dictionaries, as also to some judgments which were under the Representation of
the People Act, 1951. In my opinion, it is not possible to accept this
submission made by learned counsel for the defendants. Having considered the
various meanings in the dictionaries which were cited and which meanings are
unnecessary to set out in this judgment, the word "disqualified" used
in sub-section (3) of section 274 must be understood in its plain natural meaning,
which in the context would be "not qualified" and not in the limited
sense in which the learned counsel for the defendants has wished me to
understand it, viz., as restricted to some incapacity as a result of defect,
unfitness or blemish. A person may be unfit for a particular office not only by
reason of any defect or blemish but also because he is not qualified for that
office, and in that sense any requirement which non-qualifies a person,
although for a limited period of three years only, must be regarded as a
disqualification within the meaning of that expression. And a ground of
disqualification would be a ground to disqualify the person within the meaning
of sub-section (3) of section 274.
The question which remains
for consideration and to which an answer must now be given is whether there is
prohibition on public companies and private companies which are subsidiaries of
public companies against their adopting an article containing additional
grounds of disqualification other than those found in sub-section (1) of
section 274.
It is clear that the
provisions to be found in sub-section (3) of section 274 are not couched in a
happy or direct language. There would not have been any occasion to resort to
the doctrine of necessary implication if sub-section (3) of section 274 had
been framed as containing an express prohibition to operate directly against
the companies which were sought to be prohibited from having additional grounds
rather than in the form of an enabling provision, which, surely, is not an example
of good legislative draftsmanship. Merely by way of interest I had been
referred by learned counsel to observations of this court in D.B. Godbole v.
Kunwar Rajnath (?) where Chagla C.J. had occasion to refer
to certain other provisions of the Companies Act, 1956, which were similarly
couched in unhappy and imprecise language. It is with this handicap that I must
now proceed to give some meaning, if at all a meaning can be given, to the
provisions of sub-section (3) of section 274. Here, it may be stated that it is
not necessary for the court to give some meaning to a legislative provision
although it would be normal to presume that the legislature did intend to
provide for something when it enacted the sub-section. It can be that there was
some intention of the legislature, but that intention has not been given effect
to by reason of the unhappy or defective terminology employed in the
legislative provision. It is the terminology which has to be construed and
given effect to and not the intention of the
legislature which, one may assume, is indicated in the Notes on Clauses. It may
be mentioned here that it was submitted—and there is some force in the
argument—that the Notes on Clauses need not necessarily indicate the intention
of the legislature but merely explain what these draftsmen of the legislative
provision had in mind.
As stated earlier, the
question, very shortly put but which may require elaborate consideration, is
whether the apparently enabling provision in sub-section (3) of section 274 in
favour of private companies is required to be construed as a prohibition on
public companies and private companies which are subsidiaries of public
companies by the rule or principle of necessary implication.
It has been urged on behalf
of the plaintiffs that the provisions of subsection (3) of section 274,
although expressed in affirmative language, must be construed as having a
negative implication. In this connection I was referred to the observations to
be found in Crates on Statute Law, 7th edition, at pages 264 to 266. The entire
passage from Craies may be usefully set out:
"(v)
Inferences from affirmative language.—Statutory enactments, although expressed in affirmative language, are sometimes
treated as having a negative implied, and that their provisions, 'though', as
Lord O'Hagan said in R. v. All Saints, Wigan (Churchwardens) .
'affirmative in words, are not necessarily so, if they are absolute, explicit
and peremptory'. In Viner's Abr. Tit. Negative, A. PI. 2, the following rule is
laid down:
Every statute limiting
anything to be in one form, although it bespoke in the affirmative, yet
includes in itself a negative; and in Bacon's Abr. Tit. Statute G., the rule
given is that 'if an affirmative statute which is introductive of a new law
direct a thing to be done in a certain way, that thing shall not, even if there
be no negative words, be done in any other way'."
This rule is
borne out by the following cases :
"In Stradling v.
Morgan ,
the question was whether an action founded upon a statute could be commenced
elsewhere than before the justices of Glamorgan, at their sessions, for by the
laws in Wales Act, 1542, it was enacted that 'all actions founded upon any
statute shall be sued by original writ, to be obtained and sealed with the said
original seal returnable before the justices at their sessions, within the
limits of their authorities, in manner and form before declared'. It was
contended that these words had a negative meaning, that is to say, that the
statute appoints the place, order and form of such suits, and that the
plaintiff cannot sue in any other place or
form, and, therefore, that this action, founded upon a statute, which is
appointed to be returned before the justices of Glamorgan, at their sessions,
cannot be sued or returned, elsewhere or before any other justices. And so it
was decided by the court, and a verdict which had been found for the plaintiff
was set aside. In Amy Towsend's case ,
the question was whether the Statute of Uses, ss. 1, 2, which was expressed
affirmatively, contained an implied negative. By this statute it was enacted
that persons entitled to a use of lands should have the same estate, both
according to quantity and quality, in the lands as they had in the use. It was
argued that these words contained in themselves a negative, i.e., that the
cestui que use had an estate in no other quantity or quality than they had in
the use, and the reason given was that there is a diversity between a statute
which makes an ordinance by affirmative words touching a thing which was before
at the common law, and a statute which makes an ordinance by affirmative words
touching a thing which was not before at the common law, and that where, as
here, a statute appoints the manner of a thing which was not before at the
common law, then, although it be expressed in the affirmative, it implies a
negative. This argument the court adopted, and decided that the enactment must
be strictly adhered to. In Trott v. Hughes,
Lord Cranworth held that where rules, framed by virtue of a statute for the
regulation of benefit building societies, provided that any dispute which might
arise between the society and any of its members should be referred to and
decided by the directors of the society, the provision was equivalent to
enacting that no such dispute was to be made the subject of litigation in a
court of law, and consequently he dismissed a suit which arose out of such a
dispute. (This view was adopted in Municipal Permanent Investment Building
Society v. Kent ).
In Ex. p. Stephens ,
the question was whether a mere word or distinctive combination of letters was
a trade mark within the meaning of the Trade Marks Registration Act, 1875. By
section 10 of that Act it was enacted that a trade mark might consist of (among
other things) 'any special and distinctive word or words or combination of
figures or letters used as a trade mark before the passing of this Act'. It was
thus held that a word which had not been used as a trade mark before the
passing of the Act could not be used as a trade mark after the passing of the
Act. 'Otherwise' said Jessel M.R., 'it would be contravening the well-known
rule, that when there is a special affirmative power given which would not be
required because there is a general power, it is always read to import the
negative, and that nothing else can be done. Therefore, the power to use as a
trade mark a word used before the passing of the Act clearly negatives the
conclusion that a distinctive word can be so used if the word was not so used
before the passing of the Act'."
I was also referred in this
connection to Stroud's Judicial Dictionary (4th edition), at page 1739, where
the expression "necessary implication" and "necessary
intendment" are dealt with. I was also referred to several authorities
cited in Stroud's Judicial Dictionary for a clearer exposition of these two
expressions. It is obvious that the expression "necessary" means
something stronger than "possible" and the implication must be one
which is so strong and irresistible that the alternative is not one that would
appeal to a rational mind.
In
Cork County Council and Richard Burke v. Commissioners of Public Works in Eyre,
The Minister for Finance and the Attorney-General ,
there are observations as to the phrase
"necessary implication" which may be quoted :
"But what is
'necessary implication' in the construction of a statute ? I may cite the words
of Lord Eldon in Wilkinson v. Adam,
where, after stating that in construing a will, a particular intention must
appear by necessary implication upon the will itself, he continues : 'With
regard to that expression "necessary implication", I will repeat what
I have before stated from a Note of Lord Hardwick's judgment in Coriton v.
Hellier, that in construing a will, conjecture must not be taken for
implication, but necessary implication means not natural necessity, but so
strong a probability of intention, that an intention contrary to that which is
imputed to the testator cannot be supposed'".
In
William Hill and W.C. Simmons v. Alice Sarah Crook and Earnest William Crook,
the same passage from Wilkinson v. Adam
is set out with approval, and although the passage deals with the construction
of a will the sentiments expressed are, in my opinion, equally apposite in the
construction of a statute. The material passage (which has already been quoted
as part of a passage from an Irish case—supra) reads :
"In construing a will,
conjecture must not be taken for implication, but necessary implication means,
not natural necessity, but so strong a probability of intention that an
intention contrary to that which is imputed to the testator cannot be
supposed".
As stated earlier, in my
opinion, the passage would be quite appropriate and applicable to the facts in
our case, if for the word "testator" the word "legislature"
was substituted in the same.
On the other hand, on
behalf of the defendants, it was urged that the principle or rule of
interpretation by necessary implication ought not to be lightly applied in the
instant case, and the following principles of inter-pretation were submitted for the
consideration of the court. These principles may be briefly referred to :
(1) There is a presumption against the
alteration of well-settled law by implication and such a change should be
either by explicit or express words or only if such inference of alteration is
irresistible.
(2) If the matter is evenly balanced or
fairly arguable on either side, then that interpretation should be preferred
which would involve the least alteration of the existing law.
(3) If one of the two possible
constructions would lead to startling or bizzare results, or to any absurd or
harsh consequences, then that construction is one which ought not to be
preferred and is one which ought to be avoided.
(4) The intention of the legislature is
primarily to be gathered from the actual words used and not from any words not
to be found in the statute, but which are required to be added to make the
statute clear and to bring out the policy intention.
A
number of authorities were cited at the Bar in connection with these
propositions. These will be referred to, if necessary, when these submissions
are discussed in somewhat greater detail as I propose to do. The first two
propositions submitted by learned counsel for the defendants were obviously
based on the position of the previously existing law, viz., the Indian
Companies Act, 1913, as this was the law in existence prior to the Companies
Act, 1956. As seen earlier, under section 86-I, additional grounds (of vacation
of office by directors) could be adopted by all companies, and it was submitted
that if that was the state of the existing law, a change in that law ought not
to be lightly inferred unless the words of the statute were clear. In Murugiah
v. Jainuddin
the Privy Council has spoken approvingly of a passage in Maxwell's
Interpretation of Statutes (10th edition), at page 81, entitled
"presumption against implicit alteration of law". The said passage in
the Privy Council's judgment reads as follows:
"'One
of these presumptions is 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 implication, or, in other words, beyond the immediate
scope and object of the statute. In all general matters outside those limits
the law remains undisturbed. It is in 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 with irresistible
clearness.'
Their
Lordships agree that the law is correctly stated in the passage cited".
Similarly, in National
Assistance Board v. Wilkinson
it was stated :
"............but it
may be presumed that the legislature does not intend to make a substantial alteration in the law beyond what it
expressly declares".
Similar are the
observations to be found in George Wimpey & Co. Ltd. v. British Overseas
Airways Corporation.
It was observed in that case by Lord Reid :
"This is, therefore,
an example of the not uncommon situation where language not calculated to deal
with an unforeseen case must nevertheless be so interpreted as to apply to it.
In such cases, it is, I think, right to hold that, if the arguments are fairly
evenly balanced, that interpretation should be chosen which involves the least alteration of the
existing law." (Underlining
supplied).
It may be mentioned at this
juncture that the Privy Council authority and Wilkinson's case and the passage from Maxwell have been referred
to with approval by our Supreme Court in M.K. Ranganathan v. Government of Madras .
Similar sentiments are to
be found expressed in Halsbury's Laws of England (third edition), volume 36,
para. 625. According to Halsbury:
"Statutes which limit
or extend common law rights must be expressed in clear unambiguous language ;
but, if the language is clear, there is no reason why such statutes should be
construed differently from other statutes. Except in so far as they are clearly
and unambiguously intended to do so, statutes should not be construed so as to
make any alteration in the common law or to change any established principle of
law, or to alter completely the character of the principal law contained in
statutes which they merely amend".
There is a similar passage
in Craies on Statute Law (7th edition) to be found on pages 112 and 121; it is,
however, not necessary to set it out.
In connection with these
principles of interpretation certain further submissions were made. It was
urged that the enabling provision in subsection (3) must not be regarded as
barring by implication the companies other than the companies mentioned in the
enabling provision. I was referred to the enabling provision contained in
section 86-I(2) of the Indian Companies Act, 1913, and it was argued that such
a provision was enacted for abundant caution and not because without it the
companies would have been precluded from having an additional ground of
vacation of office of directors by adopting suitable articles. In the same
vein, it was urged, the enabling provision to be found in sub-section (3) has
to be similarly construed, and there is no warrant
for reading any prohibition or bar in the said enabling provision.
In connection with the
Report of the Company Law Committee (the Bhabha Committee) it was obvious that
the said report only dealt with the grounds of vacation of office, and the said
Committee had not applied its mind to grounds of disqualification or the
desirability or otherwise of adding to such grounds. Bearing this in mind, it
was submitted that the interpretation of, or the inference sought to be drawn
from, sub-section (3) of section 274 ought not to be governed by the principle
of mischief sought to be avoided by the legislature. In connection with the
Notes on Clauses to be found in the Bill presented to Parliament and which
Notes have been referred to earlier, it was submitted that such notes may, at
the highest, represent the intention of the draftsmen of the legislative
measure and such intention must not be assumed to be the intention of the
legislature.
I was, therefore, taken
through the various articles of the Cricket Club and arguments were based on
these articles, in particular on articles 24(c) and 84(a). It was submitted
that if it was held that additional grounds of disqualification could not be
adopted by a club such as the Cricket Club, peculiar if not bizzare results
would follow. In this connection I need not refer to the several articles to
which reference was made at the Bar, save to state that the arguments proceeded
both on consideration of sub-section (3) of section 274 and of section 283. It
was contended that if these two sub-sections were construed to restrict the
right of public companies, including clubs such as the Cricket Club, some of
the provisions contained in these articles may be hit and this would lead to
unfortunate results. The submission was that unless the language of the
sub-sections was clear and the inference is irresistible, that inference which
was sought to be given to these sub-sections by the plaintiffs ought not to be
given, as in the case of the Cricket Club and similar institutions unfortunate
results might occur and some of the articles of such clubs and similar
institutions which may be desirable and even absolutely necessary might be
rendered invalid. In connection with this argument various illustrations were
given of different types of bodies which may require some
qualifications—special qualifications—for the members of their executive
committees. According to the submission, if these qualifications are regarded
as disqualifications, then, since such qualifications were absolutely necessary,
in the view of the learned counsel for the defendants the two sub-sections
ought not to be interpreted in a manner which would render such provisions or
such rules imposing such qualifications as invalid in law. Apart from the
specific articles of the Cricket Club which may require reconsideration, I
found some of the instances given to be far-fetched, and the contingency
submitted for the court's consideration by learned counsel for the defendants
did not appeal to me as a reasonable and probable contingency which ought to
affect the interpretation of the statutory provisions with which we are
concerned.
Similarly, arguments were
based on the principle to be found enunciated in sections 29, 31 and 36 of the
Companies Act, which statutory provisions would seem to indicate the rights of
the members of a company to adopt such articles as they wish to adopt, subject
to the general principle that the articles or changes in the existing articles
should be made bona fide. It was submitted—and there is considerable force in
the submission—that such power of the members ought not to be restricted or
deemed restricted unless such curtailment or restriction was provided for in
express language or such language from which only one irresistible inference
could be drawn. In other words, the argument was that by reason of the various
points which had been made, the attempt of the legislature to prevent the
mischief, even assuming there was such an attempt and that the mischief was one
which was sought to be prevented, had clearly misfired and it should be so held
by the court. Great stress was laid by learned counsel in this connection on
the terminology employed in sub-section (3) of sections 274 and 283. In the
first place, it was submitted that if the legislature had sought to restrict
the rights of the members to have additional grounds of disqualifications and
vacation of office, the proper way to provide for the same would have been by
addition of the words "and only if" in sub-section (1) and it was
pointed out that similar words are to be found in several other provisions of
the Companies Act, 1956 ; reference may be made only to sections 2(3), 2(4) and
6. Alternatively, it was submitted that if sub-section (3) was intended to
prevent additional grounds from being adopted by a public company, the language
of the sub-section ought to have clearly indicated that only the companies
mentioned in sub-section (3) were entitled to have the articles adding to the
grounds set out in sub-section (1). It is true that the two sections—and I
think the provisions of section 274 cannot be read in isolation from the
provisions to be found in section 283—are not artistically or even properly
drafted. There is much to be said in the submission made as to the language of
these sections by learned counsel for the defendants. I was not much impressed
by the argument at the Bar in connection with harsh or bizzare consequences.
But, on the other hand, arguments which were advanced based on the language of
the two sub-sections as also on the principles of interpretation to which
reference has been made earlier (particularly based on the principles dealing
with the change in the existing law which need not be lightly inferred) were
quite reasonable and fairly appealing.
As stated earlier, in my
opinion, the provisions contained in section 274 would be required to be
considered in juxtaposition with the provisions to be found in section 283, and
we have already seen how the phraseology employed in the two sub-sections with
which we are concerned (both being sub-section (3) to the two sections) is
identical.
In this connection
reference will now be required to be made to a judgment of this court on which
great reliance was placed by learned counsel for the plaintiffs. That was not a
final judgment but an order at an interlocutory stage. It did not deal with the
provisions of section 274 but proceeded upon a construction of section 283 of
the Companies Act, 1956. But nevertheless, in my opinion, it would have a great
bearing on the matter canvassed before me. Reference may immediately be made to
this judgment.
The said judgment was given
by Vimadalal J. on 10th October, 1968, in his order made on the plaintiffs'
Notice of Motion dated 30th August, 1968, in Suit No. 552 of 1968 (Atul Drug House Ltd. v. K.M.
Chandaria). The Notice of Motion taken out by
the plaintiffs in that suit (hereinafter referred to as "Atul Drug
House") was for an injunction restraining the 1st defendant, one
Chandaria, from acting as a director and/or managing director of the 1st
plaintiff-company, viz., Atul Drug House, and it was, inter alia, contended in
the motion that the 1st defendant had vacated his office as a director by
virtue of the provisions of article 163 of the articles of the said company. In
the order the said article has been fully set out, but we are only concerned
with the proviso, which is in the following words:
"Provided, however,
that such Director shall vacate office if and when the East African Match
Company Ltd., and/or its nominees, Messrs. Bhagwanji & Co., and/or Messrs.
Premchand Brothers Ltd., cease to hold less than two-thirds of the equity share
capital in the company. Shri Maganlal P. Chandaria referred to in article 142
shall be deemed to be the first director appointed by the East African Match
Company Ltd., in pursuance hereof".
The plaintiffs' case was
that the 2nd defendant, i.e., the East African Match Company Ltd., had ceased
to hold 66-2/3 per cent, of the issued share capital of Atul Drug House which
had resulted in Chandaria's vacation of office as a director. It was argued
before the learned judge that the provisions of article 163 relating to the
vacation of office of director nominated on behalf of the 2nd defendant was
contrary to the provisions contained in section 283 of the Companies Act, 1956,
and the said article was, therefore, void by reason of section 9(b) of the said
Act. As the said judgment and order clearly indicate, learned counsel on both
sides argued this point in great detail, and after considering the arguments
the learned judge expressed
his view in rather emphatic terms that the provisions of section 283(3) by
clear implication that a company other than a private company could not by its
articles provide for any other cases for determination of the office of a director
prior to its normal tenure in any case not provided for in section 283(1). In
this connection the relevant passage from the order may be fully set out:
"The
tenure of office of a director is determined in accordance with the provisions
of section 255(1) of the Companies Act or by the articles of the company
concerned. Section 255(2) provides only for the mode of appointment of
directors whose tenure does not fall within section 255(1) of the Companies Act
but is fixed by the articles of the company. It does not itself have anything
to do with the tenure of office of a director as such, as Mr. Thakkar has
sought to contend. Section 283(1) of the Companies Act lays down that the
office of a director 'shall become vacant' in certain contingencies listed
therein, and sub-section (3) of that section enacts that a private company
(which is not a subsidiary of a public company) could, however, by its articles
provide that the office of director shall be vacated on any grounds in addition
to those specified in sub-section (1). There can, in my opinion, be no doubt
that section 283 deals with the vacating of the office of a director before the
normal term of tenure of his appointment has expired, or in other words, that
it provides for the earlier determination of his tenure on the happening of the
events specified therein. It is the contention of Mr. Amin for the defendants
that it is not open to a public company like the 1st plaintiff-company to
provide, as it has sought to do by article 163 of its articles, for the earlier
determination of the office of a director in any case which does not fall
within section 283(1) of the Companies Act, and that it is only a private
company which is not a subsidiary of a public company that can by its articles
make any such provision by virtue of the express provision contained in
subsection (3) of section 283. In answer to that contention of Mr. Amin, it was
sought to be contended by Mr. Thakkar on behalf of the plaintiffs that section
283 is not exhaustive of all cases in which a director's office stands vacated
before its normal tenure, and that it was open to a company to provide by its
articles for other cases of the earlier determination of that office, and he
sought to refer to some of the other sections of the Act in support of that
argument. That argument of Mr. Thakkar is, in my opinion, clearly unsustainable
and Mr. Thakkar cannot be said to have even a prima facie case in regard to the
same in view of the provisions of section 283(3) which leave no room for doubt
and enact by clear implication that a company other than a private company
cannot by its articles provide for any other cases for the determination of the
office of a director prior to its normal tenure, in any case not provided for
in section 283(1). A reference to section 86-I
of the old Companies Act of 1913 lends emphatic support to this view in so far
as the provisions contained in subsection (2) of the said section 86. I
-permitted all companies, whether public or private, to provide by their articles
for the earlier determination of the office of a director in cases other than
those provided for in subsection (1) of the said section. It may be mentioned
that in the present Act there is a deliberate departure from the provisions of
sub-section (2) of the old section 86-I, in so far as under sub-section (3) of
section 283 it is permissible to private companies only to contain any
provision in their articles for the earlier determination of the office of
director in cases other than those provided for in sub-section (1) of section
283. Mr. Thakkar's argument that section 283(1) is not exhaustive must,
therefore, be rejected. The reference to the other sections of the Act cannot
help Mr. Thakkar for the simple reason that even if there are other provisions
in the Act itself which deal with the vacating of the office of director in
certain contingencies, that cannot possibly lead to the conclusion that such a
provision can be made in the articles of association notwithstanding the
provisions of section 283 of the Companies Act, particularly in view of
sub-section (3) thereof. In view of the provisions of section 9(b) of that Act,
any provision in the articles of a company shall be void to the extent to which
it is repugnant to any of the provisions of the Companies Act.
"There can, therefore,
be no doubt that if article 163 does provide for determination of the office of
director of the 1st plaintiff-company earlier than his normal tenure, it would
be void.....".
We are not really concerned
with the remaining observations in the order, though it is material to point
out that the learned judge in the said order made it quite clear that his views
as to the construction of article 163 were prima facie views, whereas no such
reservation was made in so far as his views on section 283(3) were concerned. I
am making this observation in view of the submission made by the learned
counsel for the defendants as to the weight to be given to the observations of
Vimadalal J. to be found in the relevant passage in the said order, which
passage has been fully set out by me.
The learned counsel for the
defendants submitted that these were the views at the Notice of Motion stage
and that the views or observations made at such interlocutory stage ought not
to be given that binding effect as the views expressed in a final judgment.
Now, even in an interlocutory proceeding, the court may be called upon or
required, for the purposes of passing an appropriate interlocutory order, to
construe a statutory provision or to apply the same to a given set of facts. At
that stage the observations made would, in my opinion, normally be regarded as
observations made on a proper and adequate consideration of the question,
unless the court were to qualify the
observations by saying that the court has had not the benefit of a full
argument or that the views expressed were only prima facie views subject to
reconsideration at a subsequent stage which is sometimes done by using the
phrase "as at present advised". Now, in the order the learned judge
has indicated quite clearly and categorically that his views as to construction
of article 163 were prima facie views and, therefore, the observations of
Vimadalal J. as to the construction of that article would have only limited
persuasive authority. The same would not be true about the views expressed by
the learned judge as to the implication of sub-section (3) of section 283 of
the Companies Act with which section he was concerned in the said judgment. It
has been indicated that the views expressed have been arrived at after full
arguments, and having had the benefit of such full arguments, the opinion of
the court is found expressed in rather emphatic terms, the court holding that
the argument of Mr. Thakkar that it was open to a public company to provide by
its articles for other cases of the earlier determination of the office of
director was "clearly unsustainable". In my opinion, it would not be
permissible nor proper to tone down the effect of these observations on the
somewhat specious plea that the observations were made during the course of a
judgment on a Notice of Motion and not in the course of a judgment after the
final determination of a suit. Bearing in mind the tenor of these observations
and the emphatic language in which these observations are couched, these
observations must be given the same weight as observations made in the course
of a final judgment.
It is certainly true that
these observations have been made with reference to sub-section (3) of section
283 and not with reference to subsection (3) of section 274. As far as section
283 is concerned, it has been submitted that the legislature had intended to
curb a mischief which was brought to its attention by the Bhabha Committee and
that in view of that circumstance it would be, perhaps, appropriate to give to
sub-section (3) of that section the necessary implication which Vimadalal J.
had chosen to give. On the other hand, it was emphasised that there was no
previous legislation dealing with the disqualifications of directors as such,
nor was there any recommendation in that behalf by the Bhabha Committee, so
that it would not be possible to say that sub-section (3) of section 274 was
enacted to prevent the type of mischief which might be presumed to be in the
contemplation of the legislature when it enacted sub-section (3) of section
283. In other words, I was asked, if I regarded the observations of Vimadalal
J. as having substantial persuasive authority to restrict them to sub-section
(3) of section 283 and not to follow them in a case where the construction of
sub-section (3) of section 274 was concerned. This approach was sought to be
supported on the basis of the reasoning which had been earlier referred to and set out, part of which, as I have
already expressed, cannot be considered to be devoid of substance, although
there is some part which has not appealed to me. The difficulty in adopting
this approach arises from the fact that the operative wordings of the two
subsections are identical. As indicated earlier, in my opinion, it would be
appropriate to consider these two sub-sections in juxtaposition and not in
isolation from one another. If that is done, it would not be proper nor
appropriate to give to sub-section (3) of section 283 the construction given to
it by Vimadalal J. and to deny to sub-section (3) of section 274 the same
construction. This line of interpretation to read in sub-section (3) of section
283 the prohibition of public companies by necessary implication and to deny
that prohibition to sub-section (3) of section 274 on the ground of the
reasoning suggested by learned counsel for the defendants would, in my opinion,
be a totally impermissible course. It is possible to argue—and argue quite
attractively and persuasively—that the language of subsection (3) of section
274, which is also the language of sub-section (3) of section 283, would not
warrant or justify the reading of the prohibition by the process of necessary
implication. This would amount to rejecting the line of reasoning which
appealed to Vimadalal J. and differing from him. The distinction which has been
suggested which can be made by me does not appeal to me, nor am I prepared,
although the arguments advanced have to be described as persuasive and not
unattractive, to persuade myself to the extent of differing from the
observations of Vimadalal J. In this view of the matter, I think I must hold
that sub-section (3) of section 274 by necessary implication prohibits public
companies and private companies which are subsidiaries of public companies from
adopting by their articles additional grounds of disqualification, i.e.,
grounds other than those specified by sub-section (1) of that section.
In this view of the matter,
the questions are answered as follows :
Question (a):
In my opinion, the
amendment of article 74 proposed by the resolution contained in the requisition
would be invalid as being repugnant to section 274 of the Companies Act, 1956.
No other provision of the said Act has been brought to my attention which would
render such resolution invalid.
Questions
(b) & (c):
Inasmuch as it has been
conceded that the requisition satisfied the procedural and numerical'
requirements postulated by section 169 of the Companies Act, 1956, the
requisition must be considered to be a valid requisition within the meaning of
sub-section (6) of section 169. Accordingly, the executive committee of the
Cricket Club would appear to be bound and liable to call the meeting as
provided by the said section. I do not wish to express
any opinion as to the course to be adopted by the requisitionists or by the
chairman of such meeting at the meeting. This course would depend upon the
answer to question (a) which I have indicated earlier.
Mr. Chinai applies for
costs.
It is agreed that the
defendants' costs, quantified at Rs. 3,000, will be paid by the 1st
plaintiff-club. Order accordingly.
[1961] 31 COMP. CAS. 125 (CAL.)
Biswanath Prasad Khaitan
v.
New Central Jute Mills Co. Ltd.
RAY, J.
JUNE 27, 1960
RAY, J. - This is a suit for an injunction
restraining the defendants from holding the extraordinary general meeting of
March 31,1960, and also from implementing or giving effect to any resolution
which may be passed at the meeting and for a further declaration that the
resolutions mentioned in paragraph 12 of the plaint are illegal, void and ultra
vires the articles of association and the Companies Act, 1956.
New Central
Jute Mills Company Ltd. is a company incorporated under the Indian Companies
Act, 1913. The share capital of the company, according to the plaintiff,
consists of subscribed 33,000 7 per cent. Cumulative preference shares of Rs.
100 each fully called up and 12,82,500 ordinary shares of Rs. 10 each fully
called up. The company states that the ordinary shares are 17,10,000 and not as
alleged by the plaintiff. The company at its annual general meeting on January
15,1960, wherein the balance-sheet and profit and loss account for the year
ending March 31, 1959 were passed, elected directors and a dividend of Rs. 1.
50nP. per share (that is 15 per cent). was declared and paid for the said year.
By a notice dated March 7,1960 an extraordinary general meeting of the company
was convened to be held on March 31,1960, to declare further dividends in
respect of the year ending March 31,1959. The proposed resolution is set out in
paragraph 12 of the plaint. It reads :
“Resolved
that a further dividend in respect of the year ended March 31,1959, be and is
hereby declared out of the general reserve No. 1 at the rate of Rs. 1. 50 nP.
per share (i.e. 15 per cent. without deduction of income-tax) on ordinary
shares payable to the shareholders whose names stand registered in the books of
the company on March 31,1960.”
In paragraph
14 of the plaint the plaintiff challenges the notice as illegal and ultra vires
on several grounds. The main grounds are :
“(i) The
dividends can be declared only at the annual general meeting.
(ii) The extraordinary general meeting has no
power of sanctioning any dividend.
(iii) The final dividend in respect of the year ended March 31,1959,
was declared in the meeting dated January 15,1960 and at the said meeting the
shareholders finally approved and passed the dividends recommended.
(iv) The balance-sheet ending March 31, 1959 was duly passed at the
annual general meeting dated January 15,1960 and that it is not competent for
the company and/or its directors and/or the management to declare a fresh
dividend in addition to those already declared and or to change the figures
already stated in the balance sheet.
(v) The powers of the company in respect of the declaration of dividend
cannot be used for speculative transactions and that the convening of the
extraordinary general meeting and the attempt to declare the said dividend are
in furtherance of the fraudulent objects of forcing up the market value of the
shares; and
(vi) The only body competent to recommend dividend for the year ended
March 31,1959 was the board of directors prior to the general meeting dated
January 15,1960 and the only body competent to sanction such dividend was the
shareholders as on the date of the general meeting dated January 15,1960 and
finally the explanatory statement given with the notice was misleading and
incorrect and not in conformity with the provisions of law and the material
facts answering the proposed resolution have not been stated in the explanatory
statement”.
On behalf of
the company there is an affidavit of Shyamlal Agarwal affirmed on APril 1,1960.
That affidavit was treated as written statement. In paragraph 12 of the
affidavit it is stated that a sum of Rs. 1,07,80,000 representing accumulated
profits as on March 31,1959, were available to the company and the board of
directors at the meeting held on March 7,1960 considered the provisions of the
Income-tax Act regarding development rebate and the provisions of the tax
proposals of the Central Government and decided and recommended to the
shareholders to declare a further dividend to be paid to all the shareholders
(holders of original as well as newly issued ordinary shares) and to declare the
same in respect of the year ending March 31,1959. It is further stated in the
affidavit that under the provisions of the Income-tax Act, the company is
allowed deduction on account of what is known as development rebate, provided
an amount equivalent to 75 per cent, of the development rebate to be actually
allowed for that year is to be debited to the profit and loss account and
credited to a reserve account which cannot be utilised by the assessee for a
period of ten years fro distribution by way of dividend. The facts relating to
the accumulated reserve, the setting up of the chemical plant in Varanasi, and
the provisions regarding development rebate, it is alleged in the affidavit,
are matters well-known to the shareholders and it is obvious to them that the
step which has been taken by the directors is in the interest of the company
and of the shareholders. The allegations made in the plaint are denied in the
affidavit.
The only
question canvassed in this suit was whether it was competent to declare further
dividend at the extraordinary meeting held on March 31, 1960. It is necessary
to set out some of the articles. Table A of the Act is not to apply. Articles
82 to 86 relate to general meetings :
“ 82.
General meeting shall be held once at least in every calendars year at such
time, not being more than fifteen months after the holding of the last
preceding general meeting , and at such place as may be determined by the
directors.
83. The
general meetings referred to in the last preceding article shall be called
ordinary meetings; all other meetings of the company shall be called
extraordinary meeting .”
Proceedings at general meeting are dealt with in articles 87 to 97 :
“ 87 . The
business of any ordinary meeting shall be to receive and consider the profit
and loss account, the balance-sheet and the reports of the directors and of the
auditors, to elect directors, auditors and other officers in the place of those
retiring by rotation , or otherwise , to declare dividends and to transact any
other business which under these presents ought to be transacted at an ordinary
meeting. All other business transacted at an ordinary meeting and all business
transacted at an extraordinary meeting shall be deemed special.”
Dividends are death with in articles 153 to 168 :
“153 .
Subject to the rights of members entitled to shares (if any) with preferential
or special rights attached thereto the profits of the company which it shall
from time to time be determined to divide in respect of any year or other
period shall be applied in the payment of a dividend on the ordinary shares of
the company but so that a partly paid-up share shall only entire the holder
with respect thereto to such a proportion of the distribution upon a fully
paid-up share as the amount paid therein bears to the nominal amount of such
share and so that where capital is paid up in advance of calls upon the footing
that the same shall carry interest such capital shall not, whilst, carrying
interest, confer a right to participate in profits.
154. The
company in general meeting may declare a dividend to be paid to the members
according to their rights and interest in the profits and may fix the time for
payment.
155. No
larger dividend shall be declared than is recommended be the directors, but the
company in general meeting may declare a smaller dividend.
156. No
dividend shall be payable except out of the profits of the company of the year
or any other undistributed profits , and no dividend shall carry interest as
against the company.
157. The
declaration of the directors as to the amount of the net profits of the company
shall be conclusive.
158. The
directors may from time to time pay to the members such interim dividends as in
their judgment the position of the company justifies.”
Accounts and
balance-sheets are dealt with in articles 172 to 175.
“172.(1)At all ordinary meeting the directors shall lay before the
company a balance-sheet and profit and loss account made up to a date not
earlier than the date of the meeting by more than nine months, or if the
company is carrying on business or has interest outside British India by more
than twelve months, subject in either case to the right of the registrar to
extend the period for any special reason by a period not exceeding three months
under section 131 (1) of the Act.
(2) The said balance-sheet
shall be in the form marked ‘F’ in the Third Schedule to the Act, or as near
thereto, as circumstances admit.
(3) The profit and loss
account shall, in addition to the matters referred to in sub-section (3) of
section 132 of the Act show , arranged under the most convenient heads , the
amounts of gross income, distinguishing the several sources from which it has
been derived , and the amount of gross expenditure , distinguishing the expenses
of the establishment salaries and other like matters. Every item of expenditure
fairly chargeable against they year’s income shall be brought into account, so
that a just balance of profit and loss may be laid before the meeting , and ,
in cases where any item of expenditure which may in fairness be distributed
over several years has been incurred in any one year the whole amount of such
item shall be stated, with the addition of the reasons why only a portion of
such expenditure is charged against the income of the year.
Provided
always that the provisions of this article shall be deemed to require that a
statement of the reasons why , of the whole amount of any item of expenditure
which may in fairness be distributed over several years, only a portion thereof
is charged against the income of the year , shall be shown in the profits and
loss account, unless the company in general meeting shall determine otherwise.
(4) The auditors’ report (to be
prepared in accordance with the provisions of article 179 (2) hereof) shall be
attached to the balance-sheet and profit and loss account or there shall be
inserted at the foot thereof a reference to the report, and the report shall be
read before the company in general meeting and shall be open to inspection by any
shareholder.”
Counsel on
behalf of the plaintiff contended first that the power to declare dividend was
subject to and was dependent on limitation contained in. the Act and /or in the
articles and on the observance of certain formalities envisaged therein. The
formalities, counsel contended, were annual general meeting , a balance-sheet
for a period of not over nine months from the date of the meeting and placing
of the balance-sheet at the meeting , a report of he directors and
recommendations of dividend and a provision in the balance-sheet of an amount
towards dividend. The counsel contend that non-observance of any of the
formalities would render it beyond the power of the company to declare
dividend. It was secondly , contended that on a declaration of final dividend
there was an exhaustion of powers under the articles and there could be no more
declaration of dividend. Counsel for the plaintiff made it clear that there
could be interim dividend and a final dividend and in no event could there be a
further dividend after the declaration of the final dividend for the year.
Thirdly, it was contended that the explanatory statement with regard to the
impugned meeting was not correct and did not set out all material facts and
reading the notice it would not appear that the company was declaring the
dividend for the purpose alleged in the affidavit of Shyamala Agarwal.
Fourthly, the counsel contended that the board which declared dividend for the
year ending March 31, 1959, had ceased to exist and the new board was
incompetent to declare dividend for the same year. A person who might have been
on the board of the previous year and of the following year would not have the
same character of director and the power of directors to declare dividend would
be of the directors constituting the board for the relevant year.
Counsel for
the plaintiff invited my attention to articles 82 and 83 to show as to what
general and extraordinary meeting were and to article 87 as to what would be
the business of ordinary meetings. Article 87 states that the business of an
ordinary meeting shall be, inter alia , to receive and consider the profit and
loss account, the balance-sheet and to declare dividends. Article 153 states
how profits shall be divisible and it refers to the years as a unit and article
154 states that the company, in general meeting , may declare a dividend to be
paid to the members and article 157 states that the declaration of the
directors as to the amount of the net profit of the company shall be conclusive
. Article 155 states that no larger dividend shall be declared than is
recommended by the directors, but the company, in general meeting, may declare
a smaller dividend. Article 172 refers to the accounting period . Counsel for
the plaintiff invited my attention to the provisions appearing in the Companies
Act, 1956 , in Schedule VI Part II, clause 3 (xiv) in support of the
proposition that the profit and loss account shall set out the aggregate amount
of the dividends paid and proposed and stating whether such amounts are subject
to deduction of income-tax or not.
Counsel for
the plaintiff contended that on a construction of the articles the company had
no power to declare further dividend and further that the company had no power
to declare dividends at an extraordinary meeting.
Reliance was
place by counsel for the plaintiff on a decisions in Nicholson v. Rhodesai
Trading Co., for the contention that dividends could not be declared at an
extraordinary general meeting. That appears to be the only reported decisions
on the point. Their decisions is referred to in Buckley on Companies Act, 13th
Edition , at page 895 , foot-note (n). That is an authority for the proposition
that under the form of articles obtainable in Nicholson’s case , the
declaration of dividends could take place only at on ordinary general meeting
at which the accounts were laid before the company. Nicholson’s case, is
referred to in Palmer’s Company Precedents , 15th Edition ,at page 719, in the
comments of the author under article 119 which relates to the declaration of
dividend by the company at general meetings. In the 17th Edition of Palmer’s
Company Precedents that decisions has not been referred to . Nicholson’s case
is cited in Halsbury’s Laws of England, 3rd Edition , Volume 6, paragraph 788 ,
at page 402 , foot-note (p) as an authority for the proposition that a final
dividend can, as a general rule, only be sanctioned at the annual meeting ,
when the accounts are presented to it, and the articles usually contain a
specific provision to 1948, is referred to as the provision in that behalf.
Article 154 of the company in the present case is in essence the same as
article 114 in Table A of the English Act, namely , that the company, in a
general meeting, may declare a dividend. The declaration of dividend under
article 114 in Table A has been construed in Palmer’s Company Law, 20th
Edition, at page 624 , as part of the ordinary business of the annual general
meeting. The articles in the present case make a distinction between the nature
and scope of ordinary general and extraordinary meeting and the declaring of
dividends Persians to the ordinary general meetings.
In the
decision in Nicholson’s case the company was incorporated on April 15, 1895.
The second annual general meeting of the company was held on August 21, 1896.
At that time owing to the disturbed state of Rhodesia, where the company’s
business was carried on, account of the trading of the company had not been
received , and the only accounts submitted to the meeting related to transactions
in England, and were not audited. The directors of the company had issued a
report tot he shareholders, and by notice endorsed on the report, called on
extraordinary general meeting of the company for February 11, 1897, for the
purposes (1) to receive and consider the annual statement of account and
balance-sheet and the reports of the directories and auditors thereon; (2) to
sanction the declaration of a dividend ; (3) to consider , and if thought fit
to pass a resolution altering the articles of association of the company so as
to have the annual general meeting held in January or February instead of July
or August in each year. In Nicholson’s case (1) [1897] 1 Ch,. 434 counsel for
the plaintiff contended that it was not competent for the company to sanction
the dividends except at the ordinary general meeting of the company, which must
be held under the articles as they stood , in July or August.
Counsel for
the defendant in that case contended that sanction of dividend for the past
period was under the peculiar circumstances special business and, therefore,
could be passed at an extraordinary meeting. On a construction of the articles
it was held in Nicholson’s case, that final dividends could not be sanctioned
except at an annual general meeting. Mr. Advocate-General appearing on behalf
of the company contended that in Nicholson’s case there was no article
comparable to article 154 of the present case and, therefore, the decision does
not apply here. Mr. Advocate-General also invited my attention to the report at
page 439 where NORTH J. said as follows :
“ If the
directors could obtain the sanction of a dividend in the way proposed, without
submitting the accounts required by the articles , by calling an extraordinary
meeting , it would be giving the go by to the provisions made for the
provisions made for the protection of the shareholders. I am of opinion,
therefore, that a dividend cannot be sanctioned, it would be necessary to
follow the requirements of the articles and lay before the company the matters
required to be so laid before them by the articles.”
Mr.
Advocate-General contended first , that in Nicholson’s case the accounts were
not audited and, therefore, the declaration of dividend was ultra vires or
illegal and, secondly, that the observation of NORTH J . indicated that there
could be a declaration of dividend at an extra ordinary meeting if the articles
so permitted thirdly it was contended that in Nicholson’s case there was no
article similar to article 154 in the present case and , therefore , dividends
could be declared at extraordinary meetings.
On a
construction of the articles in the present case I am unable to accept the
contention of the defendant that there can be a declaration of dividend at an
extraordinary meeting . First , the declaration of further dividend is nowhere
laid down in the articles. It is beyond the power of the company. What has been
permitted by the articles is declaration of interim dividend and final
dividend. The declaration of dividend on March 31, 1960, is indisputably not
interim dividend. As to the meaning of the word “ further”, if it could be
contended that further meant something beyond a final dividend I am of opinion
that the articles forbid such a power of such construction. Secondly, I am of
opinion on the construction of the articles that the declaration of dividend is
a matter pertaining to the board for the relevant year. The recommendation is
to be made by the board for that particular year. The accounts were before the
board and they made a recommendation for declaration of dividend at the meeting
held on January 15, 1960. The declaration of further dividend by the board of
directors is not the recommendation by the board of directors of the relevant
year and, therefore , on a construction of the articles I am of opinion that
the declaration of dividend is beyond the powers of the new directors and is
ultra vires the powers of the company . Thirdly, articles 82,83,87 in the
present case indicate that declaration of dividend is a business of the
ordinary meeting. In Nicholson’s case there was similar articles. The business
of the ordinary meeting is under article 87 to declare dividend. Article 154
does not empower the declaration of dividend at an extra ordinary meeting .
Article 154 reiterates that the company in general meeting may declare a
dividend to be paid to the members according to their rights and interest in
the profits and may fix the time for the purpose. Article 154 is similar to
regulation 85 in Table A of the Companies Act, 1956 , and article 114 in Table
A of the Companies Act, 1948 , of England . The declaration of dividend at the
general meeting under the articles in the present case is to be made at the
ordinary general meeting, namely , the annual general meeting . Articles 154,
155 and 87 fortify that conclusion. Further, section 166 , 186 , 210 , 211 ,
217 and provisions in Schedule VI Part II, clause 3 (xiv) of the Act indicate
that the declaration of dividend is a business of annual general meeting . Clause
3 (xiv) in Schedule VI states that the profit and loss account is to set out
the aggregate amount of dividends paid and proposed. It is, therefore, manifest
that interim dividends and dividends proposed at the annual general meeting
exhaust the dividends for the year. Section 173 of the Companies Act, 1956,
which is comparable to article 52 in Table A of the English Act, makes
declaration of dividend a business of the ordinary general meeting. For all
these reasons I am of opinion that there is no power under the articles in the
present case to declare further dividend at an extraordinary meeting.
In view of my
finding that the articles forbid a declaration of further dividend the question
whether there was an explanatory statement to the notice is of less importance.
In view of the arguments of the counsel 1 propose in short to discuss the rival
contentions. Mr. Sen , counsel on behalf of the plaintiff, did not contend that
it was a ‘tricky’ notice but that the notice was misleading and did not
correctly set out the facts. He relied on the decisions in Tiessen v. Henderson
Billie , Oriental Telephone & Electric Co. & Kaye v. Croydon Tramways
Co. in support of the propositions that the notice did not fairly disclose the
purpose for which it was called and, secondly, that the notice of extraordinary
meeting should be one to enable the shareholder to determine if he out to
attend it. In other words, counsel, for the plaintiff contended that the test
would be whether the real fact was place before the shareholders . Thirdly ,
counsel for the plaintiff contended that there was no full and frank disclosure
of fact on which the shareholders were asked to vote. Mr. Advocate-General
relied on the unreported decisions of the appeal court in appeals from Original
Decree Nos. 142 and 143 of 1953 where all these cases were considered. Two
broad principles can be extracted form the authorities . First , that notice
must be fairly and intelligently framed and it must not be misleading or
equivocal. A benevolent construction cannot be applied. Secondly, some matters
must be brought pointedly to the attention of the share holders , for example,
where the directors are interested in a contract at or matter which is to be
submitted to a meeting for confirmation or approval , it appears to be
desirable and in certain cases absolutely necessary to disclose the fact in the
notice convincing the meeting or in some accompanying circular. In the present
case counsel for the plaintiff did not allege “ trickery” or fraud but he did
contend that the notice was misleading in the sense that the facts set out in
the affidavit affirmed by Shyamla Agarwal were not there. I agree with the
contention of counsel for the plaintiff . I cannot help observing that if the
company really wanted to put up before the share holders what the company
stated in the affidavit of Shyamala Agarwal there was nothing to prevent them
from saying so. The test laid down by KEKEWICH J. is that ‘ the main I am
protecting is not the distant but the absent shareholder .’ Mr. Advocate
-General contended that the notice could not be characterized as misleading the
shareholders . In the present case the facts disclosed in the affidavit of
Shyamla Agarwal, in my opinion , should have been disclosed before the
shareholders. On this ground also I am of opinion that the plaintiff is
entitled to succeed. I, therefore, make an order declaring that the resolution
passed at the extraordinary general meeting on March 31, 1960 appearing in P.D.
5, D.D. 6 and also set out in the paint in paragraph 12 declaring further
dividend in respect of the year ending 31st March, 1959 is illegal, void and
ultra vires the articles of association and the Companies Act. There will be an
injection restraining the defendants, its servants and agents from implementing
or giving effect the said resolution. Apart from this question no other
question was canvassed at the trial. The plaintiff is entitled to the costs in
this suit Certified for two counsel.
[1992]
75 COMP CAS 198 (MAD.)
HIGH COURT OF MADRAS
B. Sivaraman
v.
Egmore Benefit Society Ltd.
ARUMUGHAM J.
Original
Application No. 288 of 1991 and Applications Nos. 2597 and 2598 of 1991 in
Civil Suit No. 420 of 1991 and Original Application No. 289 of 1991 and
Applications Nos. 2595 and 2596 of 1991 in Civil Suit No. 421 of 1991
APRIL 29, 1992
V.
Subramaniam, G. Subramaniam, M. Uttam Reddy, C. Harikrishnan and S.
Subbulakshmi for the Applicants.
Arumugham,
J.—The
applicants/plaintiffs have filed this application under Order 14, rule 8 of the
Original Side Rules, read with Order 39, rules 1 and 2 of the Civil Procedure
Code, against the respondent/first defendant, seeking an order of interim
injunction restraining the respondent from holding any extraordinary general
body meeting either on April 2, 1991, or any other date, in pursuance of notice
dated March 7, 1991, on the subject noted in the notice dated March 7, 1991,
pending disposal of the above suit.
The
short facts which are culled out from the affidavit, filed in support of the application,
are as follows:
The
applicants/plaintiffs herein are the shareholders of the respondent/first
defendant company which is more than 100 years old, having been incorporated
under the Companies Act and that the applicants had been elected as directors
of the respondent at the annual general body meeting held on December 24, 1990,
and that since then onwards, they are functioning as the directors of the first
respondent company and that defendants Nos. 2 to 5 in the suit were the
directors of the respondent company, earlier to the election held on December
24, 1990, and they were to retire by rotation by the abovesaid 120th annual
general body meeting and that accordingly, defendants Nos. 2 to 4 stood for
being re elected as directors of the first defendant company as well as to fill
up the vacancy caused by the retirement of one of the directors by name V.
Karthikeyan. Defendants Nos. 4 to 13 in the suit are the requisitionists who
had requisitioned an extraordinary general meeting of the first respondent and
notice had been given for the holding of an extraordinary general meeting on
April 2, 1991. The main business of the respondent is to accept deposits and
grant loans on jewels and other approved securities and it is governed by its
memorandum and articles of association, registered under the Companies Act for
the administration of the respondent itself and that as such, the authorised
capital of the company is Rs. 5,00,000 consisting of 5,00,000 shares of Re. 1
each with the paid-up capital of Rs. 1,48,906, each share being Re. 1.
According to the memorandum and articles of association of the respondent, it
has a board of directors consisting of 12, among whom l/3rd are to retire at
every general body meeting of the first respondent by rotation and that the
said retiring directors are eligible for re-election under the memorandum and
articles of association and that from the l/3rd number of directors, four
retiring by rotation as also a vacancy on the retirement of one Mr. V.
Karthikeyan in whose place the fifth applicant has been elected.
Pursuant
to the notice issued on November 8,1990, by the respondent for its annual
general body meeting that was to take place on December 24, 1990, and in which
one of the subjects proposed in the said meeting was to elect directors in the
place of defendants Nos. 2 to 5 and one Karthikeyan who was co-opted during the
year in the place of Thiru Tarapore who resigned in June, 1990, and thereby
caused a vacancy and that as such, it was stated in the said notice that the
above person has offered himself for reappointment and, consequently, the
applicants herein were nominated as the directors of the respondent and that
such notification was also published in the Indian Express dated December 14,
1990, and that after having deposited the requisite sums as per section 257 of
the Companies Act, the first respondent has received the nomination from the
applicants and that, accordingly, the advertisement was given on December 14,
1990, as abovereferred. Thus, the applicant's name had been proposed in the
place of all the directors which was one of the items in the agenda to be
discussed in the annual general body meeting of the respondent to be held on
December 24, 1990.
Accordingly,
all the applicants were nominated for being elected to the post of retiring
directors as well as for the post of one director which had fallen vacant in
the annual general body meeting of the respondent, held on December 24, 1990,
and the election of directors was taken up on voting by show of hands, the
plaintiffs/applicants were declared had elected as directors, as the chairman
directed a poll suo motu to be conducted on the same date, the poll was
conducted and the consequent counting was taken up on December 26, 1991, and
the results were announced on December 29,1991, wherein all the applicants were
declared to be duly elected. Consequently, resolutions were passed to that
effect and the same were entered in the minutes book of the company as
contemplated by law. While that was so, on January 2,1991, the applicants were
duly intimated about their having been elected as directors and, accordingly,
they had given their consent letters and the necessary returns to the Registrar
of Companies on January 7, 1991, have been filed since then, the applicants had
been acting as directors till this date. Frustrated at this, defendants Nos. 4
and 5 in the suit having lost the election held, had been writing certain
letters to the first respondent stating falsely that they had mustered some
support to call for an extraordinary general body meeting on April 2, 1991, and
for which a notice has been given for holding such an extraordinary general
body meeting dated March 7, 1991.
In
the context of a valid election having been conducted and the applicants were elected
duly as provided by law and that the resolution has been entered into the books
of the respondent as provided under the provisions of the Companies Act, the
resolution itself has become final and cannot be questioned and it cannot be
held as null and void by a subsequent resolution and if at all the
requisitionists are interested, they could seek the remedy under section 284 of
the Companies Act. Based on these grounds, it was averred by the applicants
that the extraordinary general body meeting is illegal and in fact void as
evident from the explanatory statement given by the first respondent in the
notice itself. Apprehending that their rights are being prejudiced by the
proposed extraordinary general meeting to be held on April 2, 1991, or on any other
subsequent dates, an order of ad interim injunction is being sought for against
the respondent.
On
moving the above application urgently on March 26, 1991, this court on finding
a prima facie case in favour of the applicants, granted the and interim injunction
against the respondent and thereby restrained the respondent from convening the
extraordinary general body meeting to be held on April 2, 1991, or on any other
subsequent date.
The
fourth respondent in the suit, though not a party to this application, has
filed a counter-affidavit to the above application in his individual capacity
or as a member in which it was contended, inter alia, while admitting the
averments made in paragraphs 2 and 3 of the affidavit filed by the applicant,
that the president who was the chairman of the meeting held on December 24,
1990, had announced a poll only in accordance with the demand by this
respondent and others. With regard to the carrying out of the resolutions which
were entered in the books of the company, it was the contention of this
respondent that the resolution proposing the reappointment of this fourth
respondent as the director, must be deemed to have been passed as there were no
votes given against the resolution by persons present in person or by proxy at
the meeting held on December 24, 1990, and that thereafter, there was no
vacancy for proposing any resolution for the appointment of a director in his
place and that as such, the resolutions declared to have been passed are void
under the provisions of sections 169 and 263 of the Companies Act.
It
was the substratum of the main contention of the defendant that this defendant
and others had to requisition a general meeting as the scrutineers appointed
for the poll had manipulated the poll result and the chairman and the board of
directors had accepted the poll result without taking into account the
objections taken by this defendant and other retiring directors. The said
requisition is in accordance with section 169 of the Companies Act and in
accordance with the articles of association of the company and they had called
for an extraordinary general body meeting held on April 2, 1991. In short, the
alleged resolutions entered in the books of the respondent are void by virtue
of the provisions of the company law and that, therefore, no proceedings are
necessary for the removal of any of the directors and that since the
requisition given for calling the extraordinary general body meeting has been
provided by the provisions of company law, the demand for calling the
extraordinary general body meeting by these respondents and another were deemed
to be held valid in law and that initiating the proceedings and obtaining the
interim order is quite against the interest of this defendant and that,
therefore, the respondent prays that in the interest of justice, the applicants
should not be allowed to function as directors in the context of the interim
injunction granted already. To the above extent, this respondent prays for the
modification of the order of interim injunction passed, by restraining the
applicants from in any manner acting as directors of the respondent, pending
disposal of the suit.
The
fifth defendant, Yamuna Reddy, in the suit also filed a counter-affidavit to
the above application in which she simply followed and endorsed the contentions
raised on behalf of the fourth defendant and prayed for the modification of the
ad interim injunction order passed against the first respondent and restraining
the applicant from acting as the director of the first respondent company.
The
first plaintiff, Thiru B. Sivaraman, has filed a reply affidavit to the
counter-affidavit filed by defendants Nos. 4 and 5 wherein he has denied each
and every one of the contentions raised by defendants Nos. 4 and 5, but at the
same time, reiterated his contentions made in the plaint itself.
Upon
the abovesaid pleadings, the question that arises for consideration is the
following:
"Whether
the applicants/plaintiffs have established a prima facie case to sustain the
order of interim injunction passed on March 26,1991, as absolute, till the
disposal of the suit?"
Applications
Nos. 2597 and 2598 of 1991:
Both
defendants Nos. 4 and 5 in the suit have filed the abovesaid Applications Nos.
2597 and 2598 of 1991, under Order 14, rule 8 of the Original Side Rules and
Order 39, rule 4 and section 151 of the Civil Procedure Code, for modification
of the order passed by this court in Original Application No. 288 of 1991 on
March 26, 1991, by restraining the applicants from in any manner acting as the
directors, on the result of the poll conducted at the 120th annual general body
meeting held on December 24, 1990, on the same ground they had raised in the
respective separate counter-affidavit filed in O.A. No. 288 of 1991. As I have
already briefed the main contentions raised in the counter-affidavit filed in
O.A. No. 288 of 1991, there exists no need to traverse each and every one of
the same.
Under
the above circumstances, the only question which arises for consideration is as
follows:
"Whether
the applicants in the above Applications Nos. 2597 and 2598 of 1991 have
established a prima facie case to seek the indulgence of this court to modify
the order of ad interim injunction passed on March 26, 1991?"
O.A
No. 289 of 1991 in C.S. No. 421 of 1991:
The
applicants/plaintiffs have filed this application under Order 14, rule 8 of the
Civil Procedure Code, read with Order 39, rules 1 and 2 and section 151 of the
Civil Procedure Code, against the respondents for an order of interim
injunction and thereby restraining the respondents, their men and agents from
in any manner conducting the extraordinary general body meeting on April 2,
1991, or any other date for. considering the subjects proposed in the notice
dated March 7, 1991, pending disposal of the suit.
The
short facts as culled out from the affidavit filed in support of the above
application are as follows:
The
applicants being the shareholders of the first respondent company which is one
incorporated under the Companies Act carrying on business of accepting deposits
and advancing loans for a long time as per the memorandum and articles of
association had attended the annual general body meeting of the first
respondent company in which respondents Nos. 2 to 4 sought re-election as
directors, but were not elected and that, in their place, new persons were
appointed as directors and that had been given effect to and they are
functioning as directors of the first respondent company and while that was so,
the applicants herein had come to see an advertisement caused in a Tamil news
daily, Dinamani dated March 11, 1991, that an extraordinary general body
meeting of the first respondent has been convened on April 2, 1991; and that
when they made enquiries, they were told by respondents Nos. 2 to 5 that they have
challenged the validity of the poll conducted in the extraordinary general body
meeting held on December 24, 1990, and that since the first respondent had not
agreed with the contention of respondents Nos. 2 to 5, they had given a notice
for holding an extraordinary general body meeting of the first respondent and
that the subjects proposed for the agenda are to declare the poll conducted on
December 24, 1990, void and for electing respondents Nos. 2 to 5 as directors
of the first respondent company.
On
the basis of these allegations, the applicants have averred that the proposed
action of respondents Nos. 2 to 5 is illegal, non est and cannot be permitted.
Since the applicants are affected by the proposal of respondents Nos. 2 to 5
individually and also as the shareholders of the first respondent and in order
to prevent the illegality, they had instituted the suit for declaration and
injunction and that, therefore, with a view to avoid any confusion to be
created in the proposed extraordinary general body meeting by respondents Nos.
2 to 5, the applicants want that the said respondents Nos. 2 to 5 are to be
restrained from convening the extraordinary general body meeting proposed to be
held on April 2, 1991, by means of an injunction as prayed for.
On
moving the said application urgently, in filing the suit in C.S. No. 421 of
1991, having identified with the prima facie case inherent with the applicant,
this court has granted the ad interim injunction against respondents Nos. 2 to
5 on March 26, 1991.
The
fourth respondent, Thiru P. Obul Reddy, has filed a counter-affidavit in which
he contends, inter alia, while admitting the poll of the first respondent
conducted at the 120th annual general body meeting held on December 24, 1990,
that the resolution proposing re-appointment of this respondent as a director
must be deemed to have been passed in accordance with section 189 of the
Companies Act, as there were no votes cast against the resolution by the
persons present or by proxy at the said meeting and that thereafter, there was
no vacancy for proposing any resolution for the appointment of a director in
his place and that as such, the resolutions declared to have been passed by the
respondents are void, under the provisions of the Companies Act.
While
admitting the averments made in para 3 of the affidavit, he contends further
that the scrutineers appointed for conducting the poll had since manipulated
the poll themselves and that the chairman of the meeting and the board of
directors had accepted the poll results without taking into account the
objection taken by these respondents and other retiring directors, the said
results claimed by the applicants effecting the appointment of new persons are
not valid in law and binding on him and that, therefore, this respondent wants
not only the application to be dismissed but also for vacating the order of
interim injunction passed in O.A. No. 289 of 1991.
The
fifth respondent, Thirumathi Yamuna Reddy, also filed a counter-affidavit
wherein she has followed the same contentions raised by the fourth defendant,
Thiru P. Obul Reddy, and endorsed the same views in praying for dismissing and
vacating the interim order passed already.
Dr.
N.V. Krishna, who has sworn the affidavit filed in support of the above application,
has filed a reply-affidavit, wherein he has specifically denied and repudiated
everyone of the contentions made by respondents Nos. 4 and 5 in their
counter-affidavit and also reiterated his stand which was narrated in his
affidavit filed in support of the above application.
Upon
the above pleadings, the only question which arises for consideration is as
follows.
"Whether
the applicants have established a prima facie case, warranting the indulgence
of this court to sustain the order of interim injunction passed on March
26,1991, as absolute against the respondents?"
Applications
Nos. 2595 of 1991 and 2596, of 1991:
On
the basis of the contentions raised in the counter-affidavit by respondents Nos.
4 and 5 in Original Application No. 289 of 1991 who are the applicants in the
above respective applications, it is prayed for vacating the ad interim
injunction passed against the first respondent on March 26, 1991, on the same
grounds. Therefore, there exists no need for me to traverse each and every one
of the averments and the counter-affidavit once again for the purpose of the
above applications.
The
only question that arises for consideration, is as follows:
"Whether
the applicants/respondents Nos. 4 and 5 have made out a case to vacate the
order of interim injunction passed on March 26,1991, as prayed for in
Application No. 289 of 1991?"
As
the questions involved in all the above applications are identical and one and
the same, relating to the election of the first respondent as claimed by the
applicant and controverted by the respondent, I have proposed to dispose of all
these applications, together by common considerations.
The
relief claimed in the suit in C.S. No. 420 of 1991 is for a declaration that
the notice dated March 7, 1991, issued by the first defendant/respondent for
holding an extraordinary general meeting on April 2, 1991, is illegal, void and
non est in law and not binding on the plaintiffs/applicants and for a permanent
injunction restraining the first respondent and their men from holding an
extraordinary general meeting either on April 2, 1991, or on subsequent dates
pursuant to the notice dated March 7, 1991, issued by the first respondent.
This suit was filed by Mr. B. Sivaraman and four others who are the newly
elected directors of the first respondent and identical reliefs were asked for
in C.S. No. 421 of 1991 by Dr. N.V. Krishna, P.S. Ananthakrishnan and S.
Muruganandan in their capacity as shareholders of the. first respondent
company. The reliefs claimed in all the above applications are also identical
with each other and involve a common question of law and facts to be
considered. The fact that the first respondent company has been incorporated on
20th January, 1882, and that the applicants and the respondents are the
shareholders of the company and that to elect the directors in order to fill up
the vacancy that arose, the 120th annual general meeting was held on December
24, 1990, and that at which carrying on with other subject-matters as per
agenda, it was decided that the applicants were to be elected as directors and
that, for the said purpose, the chairman has ordered the poll and, accordingly,
there was a contest for the election of five directors of the first respondent
company and that as such, the poll was conducted and concluded, are all
admitted. This was preceded by the annual general body meeting of the first
respondent held on December 24, 1990, as scheduled at Swamy Sankaradoss Kalai
Arangam, at No. 153, Habibullah Road, Madras 600 017, and it was presided over
by Mr. K.D. Parekh, who announced that the meeting had been attended by 810
members in person and that there were 9,727 proxies lodged with the first
respondent and that on explaining the procedure to be followed for conducting
the elections to be directed by the chairman, counsel for the first respondent,
Thiru T. Raghavan, stated that every motion was to be voted individually,
firstly, by show of hands and then on poll, if directed by the chairman, and the
poll was ordered to be conducted by the chairman on the same date and it was
scrutinized by Messrs. D.G. Masilamani and S. Jayaraman and with the approval
of all the members present, the chairman directed that the members holding
proxy be allowed to use one poll paper for casting votes for themselves and on
behalf of the proxies. It was the case of the applicants that after the poll
was conducted on the same date, counting had taken place on 26th December,
1990, after all the ballot boxes were duly sealed and kept under safe custody
and that after scrutiny, the result of the poll was announced on December 29,
1990, declaring that all the applicants herein were declared as directors of
the first respondent which factum was duly recorded in the minutes book,
maintained for the general meeting of the first respondent and was signed by
the chairman. Then the newly elected applicants-directors had assumed office
and their consent was given in Forms Nos. 29 and 32, after having been duly
filled up by the first respondent and filed with the Registrar of Companies,
Madras, for intimating about the change in the composition of the board of
directors of the first respondent. Basing on the abovesaid facts, it was the
contention of the applicants in proving that as per the provisions of company
law and the memorandum and articles of association of the first respondent, the
vacancy arising out of the retirement of the four directors by rotation and one
vacancy caused by the resignation and death of one director, it was decided in
the annual general meeting held on December 24, 1990, under the chairmanship of
Thiru K.D. Parekh, while transacting several other businesses notified in the
agenda by show of hands, that the five applicants should be elected for the
five vacancies as directors of the board of the first respondent and on an
explanatory mode or procedure to be followed by the first respondent, all the
members were present and the poll was conducted as ordered by the chairman and
counting had taken place on December 26,1990, and after due scrutiny by the
respondents, result of the poll was announced on December 29, 1990, and in and
by which, all the five applicants were elected as the directors of the board of
the first respondent which fact has been duly
recorded in the minutes book of the first respondent, maintained for the
general meeting as signed by the chairman and in implementing thereof, Forms
Nos. 29 and 32 were also prepared with the consent of the newly elected
directors, viz., the applicants and the Registrar of Companies was intimated of
the change in the composition of the board of directors and that in which the
respondents who contested for election had been defeated and that, therefore,
everything has been duly and lawfully carried out and there were no laches or
infirmities during the completion of the said process and that in pursuance
thereof, the administration of the first respondent is being carried on.
All the documents filed
along with the plaint numbering exhibits A-1 to A-25 have been relied on by the
applicants to substantiate their case abovereferred to. I may refer to the said
documents for the purpose of appreciating the facts involved in this
application. Exhibit A-1 is the printed book of the memorandum and articles of
association of the first respondent; exhibit A-2 is the printed copy of the
annual report of the first respondent for the 120th annual general body meeting
for the year 1989-90; exhibit A-3 is the copy of the notice published in the
newspaper, as contemplated under section 257(1A) of the Companies Act on behalf
of the first respondent exhibit A-4 is the photostat copy of the proceedings of
the 120th annual general body meeting held on December 24, 1990, at 9.30 a.m.
at Swami Sankaradoss Kalai Arangam, No. 153, Habibullah Road, T. Nagar, Madras
600 017, signed by the chairman on January 22, 1991. These documents assume
every significance in this case in the sense that the whole procedure which had
taken place on the annual general meeting held on December 24, 1990, has been narrated
as contemplated by law and these documents provide a clear answer to the
contentions raised on behalf of the respondents herein; exhibits A-5 to A-9 are
the copies of letters addressed by the chairman of the annual general meeting
to all the applicants herein on January 2, 1991, intimating them that they have
been duly elected as the directors of the first respondent company; exhibits
A-10 to A-15 are the copies of the necessary forms filled up by the first
respondent-company as contemplated by the company law and sent to the Registrar
of Companies for legal intimation; exhibits A-16 to A-23 are the copies of
exchange of letters and reply letters among counsel for the applicant, the
first respondent and other respondents, reiterating their contention made in
the affidavits and the counter-affidavits. Exhibit A-24 dated March 4, 1991, is
the explanatory statement given by Thiru T. Raghavan, counsel for the first
respondent; and, lastly, exhibit A-25 is the printed notice dated March 7,1991,
sent by the secretary of
the first respondent, calling for the extraordinary general meeting, issued
under section 169 of the Companies Act, to be held on April 2, 1991, to discuss
and carry out the resolutions pertaining to the result of the poll and the
consequent resolutions passed on the appointment of the applicants as directors
at the 120th annual general body meeting of the company announced on December
29, 1990, to be declared as void and that in their places, Thiru C.A.
Ramakrishnan, Thiru N. Seshachalam, Thiru P. Obul Reddy and Thirumathi Yamuna
Reddy have to be declared as directors and this notice forms the basis for the
filing of the above suit and applications by the applicants.
The
plaintiff in C.S. No. 421 of 1991 also filed the printed memorandum and articles
of association covered under exhibit A-1; the printed annual report of the
120th annual general body meeting of the first respondent for the year 1989-90
was also filed by the plaintiffs and marked as exhibit A-2; exhibit A-3 dated
December 24, 1990, is the same copy of the proceedings of the 120th annual
general meeting of the shareholders, which was marked in the other suit;
exhibit A-4 is the copy of the report sent by scrutineers by name Messrs. S.
Jayaraman and D.G. Masilamani on December 26, 1990, to the chairman of the
meeting which assumes every importance and occupies a very predominant role in
the instant case about which I will discuss later; exhibit A-5 is the public
notice caused to be published in the English newspaper about the calling of the
extraordinary general meeting along with the explanatory statement by the
secretary of the first respondent as required under section 173 of the
Companies Act; exhibit A-6 is the copy of the same impugned notice marked as
exhibit A-2 5 in the other suit. The abovesaid documents which were relied on
by the plaintiffs in both the suits and the applicants in all the original
applications are more or less identical and one and the same.
A
careful perusal of exhibit A-4 in C.S. No. 420-of 1991, the copy of the
proceedings of the 120th annual general meeting of the shareholders of the
first respondent held on December 24,1990, at 9.30 a.m. at Swamy Sankaradoss
Kalai Arangam at No. 153, Habibullah Road, T. Nagar, Madras 600 017, signed by
the chairman of the said meeting provides a complete and clear answer to all
the disputes raised by the respondents herein. The other clinching document
available in this case marked as exhibit A-4 in C.S. No. 421 of 1991, is the
copy of the report of the scrutineers who scrutinized the poll result by name
Messrs. D. Jayaraman and D.G. Masilamani, dated December 26, 1990. Exhibits A-5
to A-10 and A-11 to A-15 in C.S. No. 420 of 1991 clearly demonstrate the fact
that consequent on the appointment of the applicants as directors on the basis
of exhibit A-4 in C.S. No. 421 of 1991, the same was duly intimated to all the
applicants by the chairman and the prescribed forms were filled up and sent to
the Registrar of Companies as provided by law and thus the resolutions passed
in the said annual general meeting and the subsequent resolutions were all duly
entered in the minutes book of the first respondent as provided under section
173 of the Companies Act. Exhibit A-4 filed in C.S. No. 421 of 1991, viz., the
report of the scrutineers, clinches the fact that the total votes polled on
that date are 68,582 and the number of invalid votes are 3,235 and deducting
the same, the valid votes polled on that date are 65,347. Then it was
categorised that among the said total, the number of votes polled in person are
33,501 and by proxy 35,081; itemising the votes polled for the respective
candidates who stood for contest, firstly, between Thiru C.A. Ramakrishnan and
the first applicant, Thiru B. Sivaraman, it seems that the first applicant, Thiru
B. Sivaraman, obtained 34,557 votes and Thiru C.A. Ramakrishnan obtained 30,783
votes, that, secondly, among the two candidates, Thiru N. Seshachalam and Thiru
T.T. Selvam, the second applicant, Thiru T.T. Selvam, obtained 35,074 votes as
against 30,260 votes obtained by Thiru N. Seshachalam; that between Thiru P.
Obul Reddy and Thiru R.S. Jeevarathinam, Thiru P. Obul Reddy obtained 29,661
votes as against 35,683 votes obtained by Thiru R.S. Jeevarathinam, the third
applicant; that between Tmt. Yamuna Reddy and Thiru M.A. Mohanakrishnan, Thiru
M.A. Mohanakrishnan, the fourth applicant, secured 34,557 votes as against Tmt.
Yamuna Reddy who secured 30,790 and that the fifth applicant, Thiru C.R.
Vedachalam, alone contested and for whom among the shareholders of the first
respondent company who have participated in the poll on that date cast their
votes in favour of Thiru C.R. Vedachalam numbering 36,743 and against him
28,088 votes.
It
has to be seen that on the basis of the votes secured on that date, the applicants
were declared as elected and the rival contestants, viz., the fourth and the
fifth defendants, were declared as defeated.
It
was the main plank of attack brought on behalf of respondents Nos. 4 and 5,
Thiru P. Obul Reddy and Tmt. Yamuna Reddy, that since there were no votes
polled against their candidature and they obtained considerable votes, they
should be deemed and declared as elected. Reiterating the contentions, Thiru G.
Subramaniam, counsel for the contesting respondents, strenuously argued before
me that since there were no votes polled against their clients and as they
secured a large number of votes, they are to be declared as elected in the said
annual general meeting and that the said aspect has not been considered either
by the scrutineers or by the chairman of the said meeting and the said election
claimed to have been conducted on December 26, 1990, has to be set aside and
that only with the said object, exhibit A-25 in C.S. No. 420 of 1991 and
exhibit A-6 in C.S. No. 421 of ,1991, the notice calling for the extraordinary
general meeting of the first respondent was being requisitioned by all the
members of the first respondent at the behest of the contesting respondents who
were defeated. Having perused very meticulously the report of the scrutineers
covered under exhibit A-4 filed in C.S. No. 421 of 1991, I feel totally unable
to subscribe any view in favour of the contentions of the contesting
respondents or the arguments advanced on their behalf by Thiru G. Subramanian,
learned counsel. There is a fallacy in his arguments that since there were no
votes polled against the candidates, viz., Thiru C.A. Ramakrishnan, Thiru N.
Seshachalam, Thiru P. Obul Reddy and Smt. Yamuna Reddy, they are to be declared
as elected. After a careful scrutiny of the said report, I am able to see that
for the vacancy of the directorship, there were two contestants by name Thiru
C.A. Ramakrishnan and Thiru B. Sivaraman between whom the latter has secured
more votes, that is, 34,557, than the former who secured 30,783; that between
Thiru N. Seshachalam, and Thiru T.T. Selvam, the latter has secured more votes,
i.e., 35,074 than the former who secured 30,260; that between Thiru P. Obul
Reddy and Thiru R.S. Jeevarathinam, the latter has sequred more votes, that is,
35,683 than the former who secured 29,661; and that between Tmt. Yamuna Reddy
and Thiru M.A. Mohanakrishnan, the latter has secured more votes, that is
34,557 than the former who secured 30,790 and that as such, the contestants who
have secured more votes than their rivals were declared as duly elected. The
votes were polled in person and by proxy and the total number of votes polled
are 65,347 and the voters by casting the votes preferred the said applicants to
the contesting respondents. In the cases of two persons contesting the
election, it is he who secured more votes who was declared as duly elected, but
in the case of a contest for one post of directorship, the question of votes
polled against the candidates does not arise, as was contended by learned
senior counsel. For example, Thiru C.R. Vedachalam, the fifth applicant herein,
is the only one candidate who stood for contesting the election for
directorship and among the total number of votes both in person and proxy,
36,743 votes were polled in his favour and 28,088 were polled against him. That
virtually means, 28,088 were against him but the majority of 36,743 votes were
polled in his favour which are more than the votes polled against him and he
was declared as elected. I would like to make it clear that in such of the
directorship posts, if there is a contest among two or more candidates, whoever
secures the majority of votes among the contesting candidates is the only one
criterion and that alone has to be taken into consideration for declaring him
elected. But, in the case of only one person seeking approval of his being
elected, then alone the question of polling the votes for and against him comes
into the picture. In the context of the above position, I may reject the
contentions raised on behalf of respondents Nos. 4 and 5 that since there were
no votes against them, they should be declared to be elected as directors. In
my firm view, their contentions seem to be absolutely meaningless and no legal
sanctity can be attached to that and cannot be sustained for any moment.
Then
another attack was brought on behalf of the respondents that the scrutineers
appointed during the annual general meeting, in filing the report, have
mishandled and committed so many malpractices in declaring the applicants as
elected and they have not adopted the normal procedure and mode and that,
therefore, their contentions cannot be accepted. To substantiate this written
plea, there were no arguments advanced by counsel on behalf of the respondents.
Even so, there was no material or iota of evidence made available to suspect
the report filed by the scrutineers, covered under exhibit A-4. The
counter-affidavit filed by respondents Nos. 4 and 5 contains no iota of
materials to substantiate the plea of misdeeds, malpractices and mishandling in
the votes polled in preparing a report by the scrutineers. Therefore, I may
straightaway reject their contention as not at all maintainable either in law
or on facts.
But
a careful and meticulous perusal of the report filed by the scrutineers with
all the details and the proceedings of the report of the annual general meeting
held on December 24, 1990, proves that it is a vital document which clearly
demonstrates the fact that the poll conducted during the 120th annual general
meeting of the first respondent and completed by electing the fifth applicant
herein, as was rightly and justifiably contended by Thiru V.S. Subramaniam,
learned counsel appearing for the applicant in C.S. No. 420 of 1991 and Thiru
C. Harikrishnan, learned counsel appearing for the plaintiff in C.S. No. 421 of
1991, that the election has been conducted and held lawfully and in keeping
with the legal norms as contemplated by law and procedure being followed by the
respondents, as advised by their legal adviser and as such, the said aspect was
proved and recognised by the resolutions passed and entered in the minutes book
which was duly intimated to the Registrar of Companies as contemplated by law.
All the above facts have been clearly fortified by the minutes of the annual
general body meeting held on December 24, 1990, prepared by the chairman of the
first respondent company.
On
a careful perusal of the entire documents relied on behalf of the
applicants/plaintiffs in both the suits, I am fully satisfied to hold that
there are no infirmities or laches or any malpractices committed by the
scrutineers on behalf of the applicants/plaintiffs in conducting the elections
and electing of the applicants herein as abovereferred. Accordingly, the
recomposition of the board of directors on the basis of the election results
was duly intimated to the Registrar of Companies, as contemplated under the
provisions of the Companies Act, after having entered the said resolutions in
the minutes book of the annual general meeting of the first respondent company.
At this juncture, it will be worth referring to sections 193 to 195 of the
Companies Act, 1956, as amended up-to-date.
"193.
(1) 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.
(1A)
Each page of every such book shall be initialled or signed and the last page of
the record of proceedings of each meeting in such books shall be dated and
signed—
(a) in the case of minutes of proceedings of a
meeting of the board or of a committee thereof, by the chairman of the said
meeting or the chairman of the next succeeding meeting;
(b) in the case of minutes of proceedings of a
general meeting, by the chairman of the same meeting within the aforesaid
period of thirty days or in the event of the death or inability of that
chairman within that period, by a director duly authorised by the board for the
purpose".
It
is relevant to advert to section 194 of the Act which reads as follows:
"Minutes
of meetings kept in accordance with the provisions of section 193 shall be
evidence of the proceedings recorded therein".
This
section is followed by section 195 which occupies a significant role and the
same is as follows:
"Where
minutes of the proceedings of any general meeting of the company or of any meeting
of its board of directors or of a committee of the board (have been kept in
accordance with the provisions of section 193), then, until 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
appointments of directors or liquidators made at the meeting shall be deemed to
be valid".
Thus,
a cursory perusal of this section 195 regarding the presumption to be drawn
where minutes of the company duly drawn and signed, clearly proves that the
presumption arising in this section is a rebuttable one by adducing contrary
evidence; that if a proper minutes book is kept and proceedings of meetings are
duly recorded, it shall be deemed that the meeting has been duly called, held
and all proceedings thereat have duly taken place and the consequent
appointment of director or directors has been validly made. If the minutes are
not recorded or signed within the prescribed period, then it is to be presumed
that it is not properly kept and it will not be receivable in evidence.
Keeping
the above legal norm provided in section 195, based on sections 193 and 194 of
the Companies Act to the facts of the present one, with reference to exhibit
A-4, the proceedings of the minutes, covering the 120th annual general body
meeting of the first respondent held on December 24, 1990, at a place called
Swami Sankaradoss Kalai Arangam, T. Nagar, Madras, from 9.30 a.m. till the
evening, as was signed by its chairman, Thiru K.D. Parekh, duly passed and
entered in the minutes book, it is manifest that the same squarely comes within
the legal limbs of the above provisions of law.
The
legal presumption arising out of this minutes as was entered in the books of
the annual general body meeting of the company by its chairman and which was
duly intimated to the Registrar of Companies, as contemplated under section 264
of the Companies Act, clearly and totally is in favour of the applicants herein
and unless and until the contrary is proved by respondents Nos. 4 and 5, the
meeting held on December 24, 1990, shall be deemed to be duly called and held
and all the proceedings shall be held as having duly taken place and in
particular, the election of all these applicants as directors of the board of
directors of the first respondent shall be valid one. However, the onus cast on
the person who challenges the resolution or the entering of the minutes on the
ground of malpractice or misdeed is only upon the contesting respondents Nos. 4
and 5 as has been clearly provided by this section and though the respondents
had attempted to cast aspersions or a challenge against the lawful contention
of the election of the applicants, they have virtually and deliberately failed
to prove even a semblance of proof as contemplated by this section.
Under
the circumstances, I am fully satisfied to hold that in conducting the annual
general body meeting of the first respondent on December 24, 1990, as claimed
and contended on behalf of the applicants/plaintiffs, is valid, lawful and
completed without any iota of laches or infirmities or irregularities
whatsoever and that with regard to the same in the context of the duly recorded
minutes in the books of the first respondent as duly intimated to the Registrar
of Companies, as provided under sections 177, 178, 179, 184 and 264 of the
Companies Act, it has been clearly made out that the applicants have
established a strong prima facie case against the respondents herein.
I
have carefully perused the memorandum and articles of association of the first
respondent which is available in the printed book form covered under exhibit
A-l in both the above original applications. The memorandum and articles of
association of the first respondent do not contain any article providing the
mode upon which the elections to the board of directors to fill up the
vacancies are to be conducted. In the absence of any specific articles or
provision, what is the mode of election to be followed in electing the
directors or the managing directors of the company, viz., the first respondent.
It is the case of the plaintiff that on the date of the annual general body
meeting held on December 24, 1990, all the five applicants were declared as the
real contestants by show of hands. The chairman who presided over the meeting
then ordered the poll and, consequently, the legal adviser of the first
respondent, viz., learned counsel, Thiru T. Raghavan, explained the various
procedures and modes to be followed in conducting the poll for electing the
five directors of the board of the first respondent company to all the
shareholders and members of the first respondent, who were on the eve of the
election and thus everyone was apprised of the mode and that at the meeting,
the contesting respondents Nos. 4 and 5 as well as the other defeated
candidates were also present. It has to be seen that it is not the case of the
respondent that they were not aware of the mode of election followed by the
chairman of the annual general meeting or the manner in which the poll was
conducted on the subsequent dates. It is the undisputed case among the parties
that pursuant to the decision taken in the annual general meeting held on
December 24, 1990, by appointing the scrutineers, the poll was conducted on
December 26, 1990, and that following the poll, the scrutineers had taken
charge and they completed their job and the chairman announced the result of
the poll on December 29, 1990. Therefore, with regard to the mode of poll
conducted by the first respondent company in electing the five directors, there
is no dispute among the parties herein. What the respondent contended was that
the scrutineers appointed for the purpose of completing the poll have committed
malpractices, misdeeds and so many nefarious activities in declaring all the
present applicants as the successful candidates. But for which, as I have
already observed, the proceedings of the minutes of the annual general meeting
held on December 24, 1990, and the report of the scrutineers, with the
subsequent documents, exhibits A-6 to A-15 would clearly provide a fitting
reply and answer for the same. It, therefore, follows that the contesting
respondents were not able to point out a single infirmity in the results of the
poll conducted by the first respondent on December 24, 1990, and announced on
December 29, 1990. They have miserably failed to do so and except a mere
self-serving and ipse dixit of the claim, there is no semblance or iota of
evidence made available before this court to substantiate the contentions of
the respondents herein. Their contentions with regard to the above said aspect
of poll is vitiated by fraud and so on, remains as a solitary aspect as not
having been brought to prove to any extent. On the other hand, by adducing
documentary evidence and written pleadings, the applicants had candidly
established a strong prima facie case in their favour against the respondent
and about the mode of conducting the elections and the result of the same,
consisting of every legal formalities had been performed in doing so. In this
context, the arguments advanced on behalf of the plaintiffs in both the suits
by Thiru V.S. Subramaniam and Thiru Harikrishnan, learned counsel for the
applicants in both the suits, are to be countenanced in their entirety and,
accordingly, I accept the same.
Then
comes the question of the legal aspects of the requisition given by the
respondents and their group, viz., the defeated shareholders and their
supporters calling for a requisition to the first respondent company to convene
the extraordinary general meeting of the shareholders of the first respondent,
covered under exhibits A-6 and A-25, in both the above suits. A casual look at
the notice dated March 7, 1991, abovereferred to clinches the fact that this
notice has been given under section 169 of the Companies Act, 1956, for the
purposes of convening the extraordinary general meeting to consider the
business set out in the agenda by means of carrying out the resolution, viz.,
(i) to declare that the result of the poll on the resolutions on the
appointment of directors held on 24th December, 1990, at the 120th annual
general meeting of the company and announced on 29th December, 1990, and (ii)
to declare that Thiruvalargal C.A. Ramakrishnan, N. Seshachalam, P. Obul Reddy
and Smt. Yamuna Reddy, the defeated candidates, as the directors of the
company. This notice has been given in compliance with the legal terms provided
under section 169 of the Companies Act. On receipt of this notice on February
18, 1991, the first respondent company sought legal opinion and gave an
explanatory statement. It was on the basis of this notice that the proposed
calling for the extraordinary general meeting of the first respondent by the
requisitionists of this notice has been stayed by the order of this court, on
moving the abovesaid applications, urgently.
Thiru
G. Subramaniam, the learned senior counsel appearing for the respondent,
contends by relying on this section, viz., section 169 of the Companies Act,
that the requisitionists had complied with all the legal norms and ingredients
in sending this notice to the first respondent calling for the extraordinary
general meeting of the first respondent by virtue of the provision of this
section and that the requirement provided in this section amounts to a mandatory
one, the first respondent cannot evade the calling of the extraordinary general
body meeting or refuse to comply with the demand made therein for the reason
that this section is an exhaustive one and provided every remedy to such of the
shareholders who may have every grievance over the mode of functioning of the
directors of a company and that, therefore, the prayer asked for by the
contesting respondents in the respective applications in both the suits, can
safely be granted.
At
this juncture, it may become useful to refer to section 169 of the Companies
Act, which is extracted as hereunder, though not in full, but with the relevant
clauses alone:
"169.Calling of extraordinary general meeting.—(1) The
board of directors of a company shall, on the requisition of such number of
members of the company as is specified in sub-section (4), forthwith proceed
duly to call an extraordinary general meeting of the company.
(2) The
requisition shall set out the matters for the consideration of which the
meeting is to be called, shall be signed by the requisitonists, and shall be
deposited at the registered office of the company.
(3) The
requisition may consist of several documents in like form, each signed by one
or more requisitionists".
Then
the relevant clause for the purpose of this case is sub-clause (6) which reads
as follows:
"If
the board does not, within twenty-one days from the date of the deposit of a
valid requisition in regard to any matters, proceed duly to call a meeting for
the consideration of those matters on a day not later than forty-five days from
the date of the deposit of the requisition, the meeting may be called—
(a) by
the requisitionists themselves,
(b) in the case of a company, having a share
capital, by such of the requisitionists as represent either a majority in value
of the "paid- up share capital held by all of them or not less than
one-tenth of such of the paid-up share capital of the company as is referred to
in clause (a) of sub-section (4), whichever is less, "...
Sub-section
(7)(a) has some relevance to be referred to which is as follows:
" (a) shall
be called in the same manner, as nearly as possible, as that in which meetings
are to be called by the board; but
(b) shall not
be held after the expiration of three months from the date of the deposit of
the requisition,"
Thus,
it has been made clear that if the respondent company received a notice from
the required number of shareholders, under this section, that they intended to
move resolutions for. the removal of the applicants who were the directors and
also to move resolutions for appointment of other persons as directors, then it
was for the company to circulate the notice to all the directors and that upon
doing so, the company should call for an extraordinary general meeting for the
purpose of carrying on the business specified in the said notice and in the
event of not convening the extraordinary general meeting, it was provided in
this section that the requisitionists may by themselves convene the
extraordinary general meeting after and within the stipulated time and carry
out the resolution.
It
has to be seen that a legal obligation is placed on a company to convene the
extraordinary general meeting on the receipt of a valid notice under section
169 of the Companies Act, and the convening of an extraordinary general meeting
is mandatory. If that is so, then the contesting respondents along with their
supporters may subsequently add and carry the resolutions as clearly specified
in the notice, exhibit A-25, in this case and that in such position, the duly
elected directors, viz., the applicants herein, are to be removed which no law
would recognize and it follows to that extent, the mandatory provisions and
requirement provided under section 169 of the Companies Act are to be followed
by the first respondent company.
In
the context of the specific purpose and object, the respondents had called for
the extraordinary general meeting, taking shelter under section 169 of the
Companies Act in exhibit A-25, the notice dated March 7, 1991, to remove all
the applicants herein who were duly elected in a poll conducted in accordance
with the procedure and accepted mode, and announced that there were no laches
of any kind in appointing the requisitionists themselves, as directors, in their
place. This anomaly may provide a good ground to stop the normal and regular
administration of the first respondent company, under the shelter of section
169 of the Companies Act.
Nevertheless,
I may observe in the above context that what subsection (6) of section 169 of
the Act provides is that the requisitionists may themselves call a meeting, if
the board does not call a meeting within 21 days from the date of deposit of a
valid requisition. The word "valid" provided in this sub-section clearly
indicates that the requisition which was made must be valid and lawful. In
other words, such a requisition was for consideration of a resolution which
would amount per se to a valid requisition; otherwise, it would clearly mean
that the directors were not required to call a meeting. May be true that the
word "valid", adopted in this section, has no reference to the object
of the requisition but rather to the requirements in that section itself.
Therefore, it is clear that what is required to be seen is whether the
requisition deposited with the first respondent was in accordance with the
provisions of this section, as to its contents and other aspects. But, if it is
considered to be valid, then the directors of the company shall not refuse to
act on the requisition, but if the object for which the requisition was made is
not for carrying out a valid purpose, then it may provide a speculation or a
deadlock in this context. It is only at this juncture, that the applicants had
approached this court for their redressal, by means of granting interim
injunction and that accordingly, on finding a prima facie case, this court had
granted the order and the same is in force.
Here
is a case in which it has been candidly established that the election of the
applicants/plaintiffs was lawfully and legally conducted pursuant to all the
legal formalities and lawful modes accepted and adopted and entered in the
minutes book of the company and followed by duly intimating to the Registrar of
Companies in compliance with all the legal formalities which would virtually
mean that the resolution carried in the annual general meeting held, has been
fully implemented and accordingly, all the applicants and plaintiffs have been
working constituting the board of directors of the first respondent and
discharging their duties in carrying out the administration of the first
respondent.
Then
the question that remains to be solved is what is the remedy open to the
applicants herein in the context of a notice lawfully complying with the
ingredients contemplated under section 169 of the Companies Act given by the
respondent herein contemplating their removal and appointing the respondents
and their men as directors of the company, under the pretext of the majority?
If I answer this question, that the applicant has no remedy, then, I am afraid
that I shall be guilty of not rendering justice to the parties and I shall be
guilty of encouraging the respondents in dislodging the due and lawful election
conducted by the first respondent. A careful perusal of almost all the relevant
provisions contained in the company law clinches the fact that no specific
provision has been provided in the said Act projecting a remedy to the
aggrieved person like the applicants in the instant case. But, in the context
of the present position, I am of the firm view that this court can interfere in
a matter of this kind and provide a legal remedy to the aggrieved person, viz.,
the applicants herein, because I find that there is no provision, barring the
jurisdiction of the civil court in matters where relief is sought for in
respect of the personal rights of the shareholders, directors and so on, such
denial of their right of voting or attending the general meeting and so on. It
has to be seen further that the ordinary civil courts are not deprived of their
jurisdiction to decide the rights of parties except where the Companies Act
expressly excludes it such as in matters relating to winding up. It is,
therefore, clear that in the present context, section 9 of the Code of Civil Procedure
can be made applicable to cases of this nature, except where the jurisdiction
of the civil court is expressly excluded. It would follow that the civil court
has jurisdiction in respect of matters "falling within the jurisdiction of
this court, having jurisdiction under the Companies Act which would mean that
the power or jurisdiction of the civil court operates only in respect of
matters falling within the Companies Act. It is also the accepted norm that as
a rule, except in matters for which the Companies Act itself provides remedies,
the civil court may have jurisdiction over all other matters of civil nature.
In
this context, it has become useful for me to refer at this stage to section 9
of the Code of Civil Procedure which is as follows:
"9. Courts to
try all civil suits unless barred.—The courts shall (subject to the provisions
herein contained) have jurisdiction to try all suits of a civil nature
excepting suits of which their cognizance is either expressly or impliedly
barred.
Explanation
I.—A suit in which the right to property or to an office is contested is a suit
of a civil nature, notwithstanding that such right may depend entirely on the
decision of questions as to religious rites or ceremonies.
Explanation
II.—For the purposes of this section, it is immaterial whether or not any fees
are attached to the office referred to in Explanation I or whether or not such
office is attached to a particular place".
A
mere reading of this section visualises the fact that in so far as the
jurisdiction of the civil court is concerned, there shall be a presumption in
favour of its jurisdiction and to have it otherwise, the exclusion of the
jurisdiction of the civil court is not to be readily inferred and that such
exclusive jurisdiction must be explicitly expressed or merely implied. It,
therefore, follows that there must be a clear provision of law available
ousting the jurisdiction of the civil court which must be strictly considered
and that the onus for the same lies on the party who claims the ousting of the
jurisdiction.
Importing
the said legal norm and the presumption I find that there is no difficulty in
holding that the civil court shall take cognizance of every matter, because it possesses
jurisdiction to do so under the purview of section 9 of the Code of Civil
Procedure and not because of anything contained in the Companies Act. Having
followed the above legal norm, I am able to gauge that the personal right
conferred in favour of all the applicants herein, viz., the directorship of the
board of directors of the first respondent company is at stake by the
contemplated convening of an extraordinary general meeting as specifically
provided under the notice given by virtue of section 169 of the Companies Act,
covered under exhibits A-6 and A-25 in both the suits, the personal right and
interest of the applicants will be dissipated, if allowed.
Having
considered the established factual aspects of the case, I am so clear in my
mind to hold that the respondents are not entitled to give notice pursuant to
the legal ingredients provided under section 169 of the Companies Act to call
for an extraordinary general meeting of the first respondent for the purpose
specified in the said notice for which, they are not legally entitled to do so.
The reason being is that it may be true that after the election was over, the
defeated candidates, viz., the respondents and their supporters may be able to
muster huge strength by adopting one mode or other obviously known to
themselves and that in consequence thereof, the respondents would have been
able to comply with the legal requirements provided under section 169 of the
Companies Act in calling for an extraordinary general meeting. But that
strength of the respondent cannot be allowed to obliterate or remove the
personal remedy provided to all the applicants herein by dislodging themselves
from their directorship who were duly elected under the due process, mode and
law. There is no law to recognize such kind of covert act now being adopted by
the respondents. It does not mean that the respondents are remedyless, but what
they could say at the present circumstances is that since they are not entitled
to, in my view, to convene the extra-ordinary general meeting for the purpose
of removing the directors from the directorship of the first respondent, but to
declare them as self-styled directors of the first respondent. At best, in my
firm view, the respondents can wait till the next vacancy arises either by rotation
or otherwise in the board of directors of the first respondent and that before
the same occurs, they are not entitled to convene the extraordinary general
meeting for the purpose mentioned in the notice covered under exhibits A-6 and
A-25 in the respective suits and for which there is no law recognising the
activities of the respondent in dislodging the applicants from their duly
elected board of directors and declare themselves as directors of the first
respondent company which may at the extreme amount to a self-styled one. In the
context of the pleadings raised in the affidavit as well as the pleadings
narrated in the plaint and by the documentary evidence relied on on behalf of
the applicants/plaintiff in both the cases, Thiru Harikrishnan and Thiru V.S.
Subramanian, learned counsel appearing for the applicants/plaintiffs, would
strenuously and justifiably contend that if the order of ad interim injunction
granted already is not made absolute or vacated, then it would confer every
right or strength to the respondents to virtually stop the entire
administration of the first respondent by dislodging the applicants from their
duly elected directorship position and the respondents would occupy the said
position, which would cause every hindrance and irreparable loss and prejudice
to the applicants herein and that further, on such contingency, the entire
provisions of the company law would be defeated. There is every force in the
argument of learned counsel for the plaintiffs. Per contra, learned counsel,
Thiru G. Subramaniam, was not able to counter the arguments advanced on behalf
of the applicants.
One
of the contentions raised on behalf of the respondents was that by virtue of
the combined effect of sections 169 and 263 of the Companies Act, by carrying
out a single resolution for the appointment of all the applicants herein as
directors of the board of the first respondent, they are necessarily to be
removed, but since the very resolution entered in the books of the first
respondent itself is not valid under the above sections of law. Having
considered the gamut of sections 169 read with section 263 of the Companies Act
to the facts of the instant case, I am so clear in my mind that the above
contentions of the respondents cannot be sustained for any purpose for the
simple reason that all the applicants herein have not been appointed by
carrying out a single resolution held on December 24, 1990. But this is a case
where all the five applicants were declared to be the nominees for the election
by show of hands and consequently, the chairman of the annual general meeting
ordered the poll and in pursuance thereof the poll was conducted in accordance
with the mode announced by the legal adviser of the first respondent and
explained in the open meeting as evident from the explanatory statement given
by the first respondent and scrutineers were appointed by the chairman as
provided by law and they have submitted their report on the basis of which the
chairman has declared and announced the result of the poll by getting the
consent of the applicants, complied with the legal requirements as provided
under section 264 of the Companies Act. In the context of the above compliance
with all the legal ingredients and formalities by the applicants as I have
referred to, I feel totally unable to accept the contention raised in the
counter-affidavit as well as the arguments advanced by learned counsel, Thiru
G. Subramanian on behalf of the respondents that the election was vitiated by
fraud.
Then
learned counsel, Thiru V.S. Subramanian and Thiru Harikrishnan, appearing for
the plaintiff in both the suits have cited the following text books and
case-laws in support of the contentions and arguments advanced on behalf of the
applicants.
(1) Gold Company, In re [1874-1880] All ER
(reprint) 957 at 964; [1879] 11 Ch 701 (Ch D),
(2) Palmer's
Company Law, 22nd edition, at page 530,
(3) Sections 193, 195, 177, 179, 257,
195 and 505 of the Companies Act,
(4) Shackleton on Meetings (Company
Law), 6th edition (1977), at pages 198 and 199,
(5) Holmes v. Keyes (Lord) [1958] 28
Comp Cas 414; [1958] 2 All ER 129 (CA), and
(6) Shaw
v. Tati Concessions Ltd. [1913] 1 Ch 292.
Per
contra, relying on sections 169, 177, 178, 179 and 184 of the Companies Act,
Thiru G. Subramaniam, appearing for the respondent, added the following
case-laws in support of the arguments advanced by him on behalf of the
respondents:
(1) Isle of Wight Railway Company v.
Tahourdin [1884] 25 Ch 320, 334 (Ch D),
(2) Cricket Club of India Ltd. v. Madhav
L. Apte [1975] 45 Comp Cas 574 (Bom) at pages 584, 585,
(3) Pennington's
Company Law, fifth edition, at page 724,
(4) Life Insurance Corporation of India
v. Escorts Limited [1986] 59 Comp Cas 548; [1986] 1 SCJ 38,
(5) State
of Uttar Pradesh v. Singhara Singh, AIR 1964 SC 358.
(6) Raghunath Swarup Mathur v. Dr.
Raghuraj Bahadur Mathur [1967] 37 Comp Cas 304; AIR 1967 All 145,
(7) K.P.M
Aboobucker v. K. Kunhamoo, AIR 1958 Mad 287, and l astly,
(8) Hakhitan
Law of Meetings at page 115.
I
have carefully perused the above text books on company law and the case-laws
cited above, in the context of the proved and established factual aspects of
the instant case. Though I have absolutely no discontent with the legal ratios
held out in the above case-laws as well as the text books pertaining to the
rights of the shareholders of a company and the various modes to be adopted in
appointing and removing the directors and conducting the elections and so on,
since they were on different facts not at all germane to the present case, the
ratio held therein may not render any help or assistance to the respective
parties in this case. Therefore, under the circumstances, I feel that it is
totally not necessary to traverse or import or refer to any of the citations
individually one by one in this case.
On
the basis of the pleadings and the arguments advanced on behalf of the parties
by the respective learned counsel, I have fully considered the same to the very
depth of the matter and I am so clear in my mind to hold that the plaintiffs in
both the suits, viz., the applicants, being the elected directors of the first
respondent duly elected as the shareholders of the first respondent company
have established a strong prima facie case in their favour against the
respondents and that there was no iota of evidence even to the extent of
semblance of prima facie are not available on behalf of the respondents and
that, therefore, I am fully satisfied to accept the case advanced on behalf of
the applicants herein. In the result, I feel totally unable to accept any of
the arguments advanced on behalf of the respondents herein, nor their
contentions raised in the affidavit.
In
the result, I answer point No. 1 in both the Original Applications Nos. 288 and
289 of 1991, in favour of the applicants/plaintiffs and with regard to the
points in Applications Nos. 2597 and 2598 of 1991 and 2595 and 2596 of 1991, I
answer the same against the applicants, viz., the contesting respondents.
Accordingly,
I hereby allow the Original Applications Nos. 288 and 289 of 1991. The order of
interim injunction passed on March 26, 1991, is hereby made absolute till the
disposal of the suit, as contemplated by Order 39 of the Civil Procedure Code
and sections 36 and 37 of the Specific Relief Act. Accordingly, both the above
applications are allowed with no order as to costs.
Applications Nos. 2595, 2596, 2597 and 2598 of 1991 filed by the respondents/defendants Nos. 4 and 5 fail and, accordingly, the same are dismissed with no order as to costs.