Section 34

 

Incorporation/Registration of Company

[1947] 17 COMP. CAS. 21 (BOM.)

HIGH COURT OF BOMBAY

Satyavart Sidhantalankar

v.

Arya Samaj

BHAGWATI, J.

SUIT NO. 489 OF 1945

NOVEMBER 8, 1945

 

M.V. Desai, and V.K. Chhatrapati, for the Plaintiffs.

R.S. Billimoria, Sir Jamshedji Kanga, M.P. Amin, and K.M. Vakil, for the defendants.

JUDGMENT

Bhagwati, J.—The plaintiffs have filed this suit, being members of the Arya Samaj, Bombay, on behalf of themselves and all other members of the said society, which is a society registered under the Societies Registration Act, XXI of 1860, against the first defendant who is the president of the said society, as representing the society of the Arya Samaj, Bombay, and against defendants Nos. 2, 3 and 4 who are the members of the managing committee of the society on behalf of themselves and all the other members of the managing committee of the society, for a declaration that the resolutions dated October 8, 1944, passed at an extraordinary general meeting of the society are ultra vires and in fraud of the minority, for a declaration that the resolution dated January 21, 1945, passed at the general meeting of the said society is also null and void and for further and other reliefs. The resolutions dated October 8, 1944, enacted certain changes in the constitution of the said society and the plaintiffs allege that the said resolutions are void inter alia as being ultra vires the said society and constituting a fraud on the rights of the minority who voted against the said resolutions, and that the minority of the members of the said society was overborne by the vote of the majority who were acting in their own interests illegally, fraudulently and contrary to the interests and objects of the said society and the rights of the minority of the members of the society present at the meeting and voting against the resolutions. The resolution of January 21, 1945, sanctioned the agreement for sale of the Shenwewadi property belonging to the said society and the agreement for purchase of another property situate at Bangadwadi. The plaintiffs alleged inter alia that the resolution was passed by the majority in fraud of the rights of the minority and against the interests of the society. The plaintiffs further alleged that the managing committee of the said society were about to complete the sale of the property at Shenwewadi and purchase of the property at Bangadwadi and sought to restrain the defendants from completing the sale of Shenwewadi property and purchase of Bangadwadi property and from acting on the resolutions, dated October 8, 1944, and January 21, 1945, and carrying the same into effect, particularly from carrying out the sale of the Shenwewadi property and purchase of the Bangadwadi property.

At the hearing of the suit before me Mr. R.S. Billimoria for the first defendant raised inter alia the following issues:—

(1)        Whether the plaintiffs are entitled to maintain the suit without having obtained the sanction and consent of the society for the institution thereof.

(2)        Whether the society in this suit is both the plaintiff and the defendant and whether the suit as framed is maintainable.

(4-a)    Whether the allegations contained in paragraphs 4(b), 4(c) and 16 of the plaint amount to any averments of fraud.

(6)        Whether apart from the plea of the resolutions being ultra vires, the plaint deals with matters which relate to the internal management of the society.

(7)        If so, whether the Court will entertain the suit in respect of such matters.

Mr. M.P. Amin on behalf of defendants Nos. 2, 3 and 4 joined in the issues raised by Mr. R.S. Billimoria and raised further issues on behalf of defendants Nos. 2, 3 and 4 which were:—

        (1)            Whether the plaint discloses any cause of action against these defendants; and

        (2)            Whether these defendants are necessary parties to the suit.

Mr. R.S. Billimoria invited me first to decide issue No. (4-a), viz., whether the allegations contained in paragraphs 4(b), 4(c) and 16 of the plaint amount to any averments of fraud. He contended that it was an acknowledged rule of pleadings that the plaintiffs must set forth the particulars of the fraud which they allege and that it was not enough to use such general words as " fraud " or "fraudulently " as has been done by the plaintiff in the plaint. He relied upon the observations of Lord Selborne in Wallingford v. Mutual Society, where it has been observed:—

"With regard to fraud, if there be any principle which is perfectly well settled, it is that general allegations, however strong may be the words in which they are stated, are insufficient even to amount to an averment of fraud of which any Court ought to take notice."

These observations of Lord Selborne have been quoted with approval by their Lordships of the Privy Council in Gunga Narain Gupta v. Tiluckram Chowdhry and in Bal Gangadhar Tilak v. Shrinivas Pandit He also referred me to the later decision of the Privy Council reported in Bharat Dharma Syndicate v. Harish Chandra, where it was held that litigants who prefer charges of fraud or other improper conduct against persons should be compelled to place on record precise and specific details of those charges even if no objection is taken on behalf of the parties who are interested in disproving the accusations. Their Lordships went so far as to observe that in the case before them the petitioner ought not to have been allowed to proceed with his petition and to prove fraud unless and until he had upon such terms as the Court thought fit to impose amended his petition by including therein full particulars of the allegations which he intended to prove, and that such cases would be much simplified if this practice was strictly observed and insisted upon by the Court even if, as in the case before them, no objection was taken on behalf of the parties who were interested in disproving the accusations. Relying upon these authorities, Mr. R.S. Billimoria urged that the allegations contained in the plaint with regard to the fraud alleged to have been perpetrated by the majority of the members of the society upon the minority were not enough and could not be entertained by the Court as they stood.

Mr. M.V. Desai for the plaintiffs did not controvert these propositions of law which were advanced by Mr. R.S. Billimoria but submitted to the Court that no fraud as such was relied upon by the plaintiffs, the only contention of the plaintiffs being that their rights had been wrongfully or unlawfully affected and that the resolutions had been improperly procured. During the course of the argument I understood Mr. M. V. Desai to mean that his clients did not rely upon fraud as such but merely relied upon the wrongful and/or illegal manner in which the resolutions had beed passed by the majority of the members of the society and on that basis I then ruled that issue No. (4-a) did not survive.

After the case had been opened by Mr. M.V. Desai for some time Mr. R. S. Billimoria applied to the Court that issues Nos. (1), (2), (6) and (7) raised by him should be tried first. Mr. M.P. Amin joined in this application and further applied that his issues Nos. (1) and (2) also should be tried similarly. Mr. M.V. Desai stated that he had no objection to that course being adopted by the Court and I ordered accordingly that issues Nos. (1), (2), (6) and (7) raised by Mr. R.S. Billimoria and issues Nos. (1) and (2) raised by Mr. M.P. Amin should be tried in the first instance.

The issues Nos. (1) and (2) raised by Mr. R.S. Billimoria challenged the maintainability of the suit as framed. As I have already observed the Arya Samaj, Bombay, is a society registered under the Societies Registration Act, XXI of 1860, under the name of the Arya Samaj, Bombay, the memorandum and articles of association of the society were filed with the Registrar of the Joint Stock Companies and the society has been in existence since then and has been functioning as such since the date of its registration. The plaintiffs are admittedly in a minority, the majority of the members of the society being of a persuasion contrary to that of the plaintiffs. The plaintiffs, however, filed this suit in a representative capacity on behalf of themselves and all other members of the society, which would mean that all the members of the society and therefore the society itself is in the position of the plaintiffs. The first defendant is the president of the society and has been sued as representing the society, which means that the society is the defendant in this suit. Mr. R. S. Billimoria contended that the plaintiffs being an admitted minority of the members of the society could not by any stretch of imagination purport to represent all the members of the society and could not even by availing themselves of the procedure laid down in Order I, Rule 8, of the Civil Procedure Code, claim to file this suit as representing all the members of the society, the majority of the members of the society being admittedly against their persuasion. The society had not sanctioned the filing of this suit. No meeting of the society had been called for considering the advisability or otherwise of the institution of the suit. Mr. R.S. Billimoria stated and it was not disputed that if a meeting of the society were called for the purpose of considering whether the suit which had been instituted by the plaintiffs should be continued or not, the result of such a meeting would be a foregone conclusion and the overwhelming majority of the members of the society would pass a resolution disapproving of the further prosecution of the suit. The objection of Mr. R.S. Billimoria went still further in that he contended that the consent and the sanction of the society not having been obtained by the plaintiffs prior to the institution of this suit which they have filed in a representative capacity on behalf of themselves and all other members of the said society, it was not competent to the plaintiffs to file the suit as they had done. A further objection was raised by Mr. R.S. Billimoria that on the frame of the suit as it stood the society, were the plaintiffs as well as the defendants and therefore the suit as framed was not maintainable because it offended against the elementary rule of procedure that the same individual even in different capacities could not both be the plaintiff and the defendant.

In dealing with these issues raised by Mr. R. S. Billimoria it is necessary to ascertain what is the legal position of a society which is registered under the Societies Registration Act, XXI of 1860, The society is an association of individuals which is neither a corporation nor a partnership nor an individual which apart from statute are the only entities known to law as capable of suing or being sued. The society is an association of individuals which comes into existence with certain aims and objects. If it is not registered as a society under the Societies Registration Act, it would have the character of a club or other association which cannot sue or be sued except in the name of all members of the association or in the name of the secretary or other members of the governing body on their own behalf and on behalf of other members of the association under the provisions of Order 1, Rule 8, of the Civil Procedure Code. It would not be competent to a secretary or other members of the governing body of the club or association to sue or be sued alone in respect of matters in which the association is interested even though authority in that behalf has been conferred on them by all members of the association. A partnership-firm is also an association of individuals who have come together for carrying on business in partnership. Even in the case of a partnership it would not be competent to file a suit on behalf of or against a partnership as such but for the enactment of Order XXX of the Civil Procedure Code, which enables a suit to be filed by or against a partnership in the firm name. That is a statutory enactment which enables the firm name being used for the purpose of filing a suit by or against a partnership. The society of the character we have before us is, however, quite distinct from a partnership. It has nothing in common with a partnership. A corporation or a limited company which is incorporated under the Indian Companies Act has a corporate existence apart from the members constituting the same. A corporation has been defined as a collection of individuals united into one body under a special denomination having perpetual succession under an artificial form and vested by the policy of law with the capacity of acting in several respects as an individual, particularly of taking and granting properties, of contracting obligations and of suing and being sued, of enjoying privileges and immunities in common and of exercising a variety of political rights, more or less extensive, according to the design of its institution or the powers conferred upon it either at the time of its creation or at any subsequent period of its existence. [Kyd on Corporations, [1793], Vol. I, page 13]. (See Halsbury's Laws of England, Hailsham Edition, Vol. VIII, page 1, para. 1; Adler's Law Relating to Corporations, page 2; and Grant's Law of Corporation, page 4). The ideas inherent in the definition of a corporation are (1) that its identity is continuous, (2) that it is intangible, i.e., it is only in abstracto and rests only in intendment and consideration of law (Lord Coke), and (3) it is a thing distinct from its members. Grant in his Law of Corporation predicates a continuous identity, a name and a common seal as indispensable requisites to the creation of a corporation proper and states that besides the aggregate bodies whose legal character and attributes have been above discussed, there are various other aggregate bodies, partaking in some respects, and for some purposes, of the corporate character, but which nevertheless are not complete corporations for want of some of the essentials of corporations, and which therefore have been called quasi corporations. He gives as an illustration of the latter category "Churchwardens" who though empowered to hold goods, etc., in succession, for the church, etc., have not power to hold lands in succession, have not a common seal, and want other characteristics of complete incorporation. As regards the companies which are incorporated under the Indian Companies Act, Section 23 of the Indian Companies Act enacts that from the date of incorporation mentioned in the certificate of incorporation the subscribers of the memorandum, together with such other persons as may from time to time become members of the company, shall be a body corporate by the name contained in the memorandum, capable forthwith of exercising all the functions of an incorporated company, and having perpetual succession and a common seal, but with such liability on the part of the members to contribute to the assets of the company in the event of its being wound up as is mentioned in the Act. The corporations and the companies incorporated under the Indian Companies Act have thus conferred on them a legal entity which is capable of suing or being sued.

If, as stated above, associations of individuals are not capable of suing or being sued except by statutory provisions in that behalf as in the case of partnership firms, corporations or companies incorporated under the Indian Companies Act, could it be said that a society registered under the Societies Registration Act, XXI of 1860, becomes a legal entity such as can sue or be sued in the name in which it is registered? The Societies Registration Act, XXI of 1860, is an Act for the registration of literary, scientific and charitable societies, and the object of the Act as stated in the preamble is to make provision for improving the legal condition of societies established for the promotion of literature, science, or the fine arts, or for the diffusion of useful knowledge, or for charitable purposes. Under the provisions of the Act seven or more persons associated for any literary, scientific, or charitable purpose, or for any such purpose as is described in Section 20 of the Act may form themselves into a society under the Act by subscribing their names to a memorandum of association and filing the same with the Registrar of Joint Stock Companies. The memorandum of association is to contain the name of the society, the objects of the society and the names, addresses, and occupations of the governors, council, directors, committee or other governing body to whom, by the rules of the society, the management of its affairs is entrusted. A certified copy of the rules and regulations of the society has to be filed with the memorandum of association. The Registrar issues a certificate under his hand that the society is registered under the Act, upon such memorandum and certified copy being filed with him. The property belonging to the society may be vested in trustees, and if not so vested is deemed to be vested, for the time being, in the governing body of such society, and in all proceedings, civil and criminal, can be described as the property of the governing body of such society by their proper title. Provision is made for suits by and against societies in that the society may sue or be sued in the name of the president, chairman, or principal secretary, or trustees, as shall be determined by the rules and regulations of the society, and, in default of such determination, in the name of such person as shall be appointed by the governing body for the occasion. If, however, on application to the governing body no officer or person is nominated to be the defendant, it is competent for any person having a claim or demand against the society to sue the president or chairman or principal secretary or the trustees thereof. No suit or proceeding, however, is to abate or discontinue by reason of the person by or against whom such suit or proceedings shall have been brought or continued, dying or ceasing to fill the character in the name whereof he shall have sued or been sued, but the same suit or proceedings shall be continued in the name of or against the successor of such person. A judgment recovered against the person or officer named on behalf of the society is not to be put in force against the property movable or immovable or against the body of such person or officer, but against the property of the society. The society is given the power to recover any penalty accruing under the bye-laws by filing a necessary suit against the person liable to pay the same. The members are liable to be sued as strangers and the property of the society is liable to process for payment of the costs of unsuccessful litigation against such member. Members guilty of offences are punishable as strangers. Provision is made for the adjustment of their affairs, but no member of the society is entitled to receive any profit upon the dissolution of a society ; whatever surplus that remains after satisfaction of all its debts and liabilities is to go to some other society as may be determined by the votes of three-fifths of the members present personally or by proxy at the time of the dissolution, or, in default thereof, by the Court having jurisdiction in that behalf.

Do these provisions of the Societies Registration Act, XXI of 1860, constitute the society as registered with the Registrar of Joint Stock Companies a legal entity capable of suing or being sued? Has the society as registered with the Registrar of Joint Stock Companies a legal existence apart from the members constituting the same ? It is significant to observe that the members of the society are a fluctuating body. A member of the society is a person who having been admitted therein according to the rules and regulations thereof has paid the subscription or signed the roll of the members thereof and has not resigned according to the rules and regulations. The governing body of the society is the governors, council, directors, committees, trustees or other body to whom by the rules and regulations of the society the management of its affairs is entrusted. The members as well as the governing body are not always the same and that is the reason why it has been necessary to provide that no suit or proceeding in any civil Court shall abate or discontinue by reason of the person by or against whom such suit or proceedings may have been brought or continued dying or ceasing to fill the character in the name whereof he shall have sued or been sued, but the same suit or proceedings shall be continued in the name of or against the successor of such person. Even though the members of the society or the governing body fluctuate from time to time, the identity of the society is sought to be made continuous by reason of these provisions. The identity of the original members and their successors is one. The liability or obligation once binding on the society binds the successors even though they may not be expressly named, and in this the society savours of the character of a corporation. The resignation or the death of a member does not make any difference to the legal position of the society. The increase or decrease of the members of the society similarly does not make any difference to the position. A partnership under similar circumstances would come to an end, but not the society. The society continues to exist and to function as such until the dissolution thereof under the provisions of the Societies Registration Act. The properties of the society continue vested in the trustees or in the governing body irrespective of the fact that the members of the society for the time being are not the same as they were before nor will be the same thereafter. Could it under these circumstances be said that the society by reason of its registration with the Registrar of Joint Stock Companies becomes a legal entity apart from the members constituting the same ? I am of opinion that by reason of the provisions of the Societies Registration Act, once the society is registered with the Registrar of Joint Stock Companies by the filing of the memorandum and certified copy of the rules and regulations thereof with the Registrar and the Registrar has certified under his hand that the society is registered under the Act, the society enjoys the status of a legal entity apart from the members constituting the same and is capable of suing or being sued. It may, however, be urged that there are provisions in the Societies Registration Act which would go to show that suits by or against the society have got to be filed in a particular manner, viz., every society registered under the Act may sue or be sued in the name of the president, chairman, or principal secretary, or trustees, as shall be determined by the rules and regulations of the society, and, in default of such determination in the name of such person as shall be appointed by the governing body for the occasion ; provided that it shall be competent for any person having a claim or demand against the society to sue the president or chairman, or principal secretary or the trustees thereof, if on application to the governing body some other officer or person be not nominated to be the defendant. These provisions and the provisions for the non-abatement of suits and enforcement of judgments against the society would go to show that the society even though registered with the Registrar of Joint Stock Companies would not be able to sue or be sued in the name of the society but could sue or be sued only in the name of the president, chairman, or principal secretary or the trustees thereof or some other person or officer nominated to be the defendant by the society. These provisions, however, in my opinion, are not mandatory. They show a mode in which suits could be filed by or against the society. A similar situation arose in England under the provisions of the Trade Union Acts of 1871 and 1876. A trade union registered under the said Acts was sued in the case of Taff Vale Railway v. Amalgamated Society of Railway Servants. A summons was taken out on behalf of the trade union to strike out their names as defendants on the ground that they were neither a corporation nor individual and could not be sued in a quasi corporate or any other capacity. The summons came on for hearing before Farwell, J. The learned Judge stated that it was undoubtedly true that a trade union was neither a corporation nor an individual nor a partnership between a number of individuals but that was by no means conclusive of the case. He proceeded to observe (page 429) :—

"Now, although a corporation and an individual or individuals may be the only entity known to the common law who can sue or be sued, it is competent to the Legislature to give to an association of individuals which is neither a corporation nor a partnership nor an individual a capacity for owning property and acting by agents, and such capacity in the absence of express enactment to the contrary involves the necessary correlative of liability to the extent of such property for the acts and defaults of such agents. It is beside the mark to say of such an association that it is unknown to the common law. The Legislature has legalised it, and it must be dealt with by the Courts according to the intention of the Legislature."

He accordingly dismissed the summons. An appeal was filed against this decision of Farwell, J., and the decision of the Appeal Court is report ed in Tajj Vale Railway v. Amalgamated Society of Railway Servants. The Appeal Court held that a trade union, registered under the Trade Union Acts, 1871 and 1876, could not be sued under its registered name and reversed the decision of Farwell, J.A.L. Smith, M.R., observed (pages 173, 175, 176):—

"There can, in my judgment, be no doubt that at common law the defendants could not be sued in the name in which they are sued in this action, any more than a tradesman could sue a defendant in the name of a West-end club for goods supplied by him to that club, for the simple reason that the name of a club is not the name of a corporation nor of an individual nor of a partnership, which, apart from statute, are the only entities known to the law as being capable of being sued. In order, there fore, that this action can be maintained against the defendants in the name of 'The Amalgamated Society of Railway Servants,' there must be some statute enabling this to be done either by creating the society a corporation or enacting that it may be sued in its registered name; and this, as the learned Judge states—and in this I also agree—depends upon the true con struction of the Trade Union Acts of 1871 and 1876……….

When once one gets an entity not known to the law, and therefore incapable of being sued, in our judgment, to enable such an entity to be sued, an enactment must be found either express or implied enabling this to be done, and it is incorrect to say that such an entity can be sued unless there be found an express enactment to the contrary. Where in the Trade Union Acts is to be found any enactment, express or implied, that a trade union is to be sued in its registered name ? Express there is none, and it is clear that a trade union is not made a corporation, as the Acts above referred to shew is constantly the case with other societies, [e.g., Companies Act, 1862, Section 6, Building Society Act, 1874, Section 9, Industrial and Provident Societies Act, 1893, Section 21.] That the Legislature has omitted to enact this in the Trade Union Acts of 1871 and 1876 is clear;………….Moreover, by Section 9 of the Act of 1871 it is expressly enacted that the trustees of a trade union registered under the Act, or any other officer of the union who may be authorized to do so by the rules, may bring or defend any action in any Court of law touching the property of the trade union—a most remarkable section if, as is argued for the plaintiffs and held by the learned Judge, the purview of the Act is that a trade union can be sued in its registered name. If this were so, what is the good of this section expressly enabling the trustees or other officer of the union to sue or be sued in respect of property ? We can find nothing in the Acts wherefrom the inference is to be drawn that the Legislature has enacted that a trade union can be sued in it registered name; but by reason of the language of the Acts and what is omitted therefrom, if necessary, we should find the exact contrary."

An appeal was filed to the House of Lords from this decision of the Appeal Court and the decision of the House of Lords is reported in Taff Vale Railway v. Amalgamated Society of Railway Servants. The House of Lords reversed the decision of the Appeal Court and restored the decision of Farwell, J., and held that a trade union, registered under the Trade Union Acts, 1871 and 1876, can be sued in its registered name. I need not refer at length to the speeches of the noble Law Lords there. It is necessary only to refer to the speeches of Lord Brampton and Lord Lindley in this behalf. Lord Brampton observed (page 442):—

"I think that a legal entity was created under the Trade Union Act, 1871, by the registration of the society in its present name in the manner prescribed, and that the legal entity so created, though not perhaps in the strict sense a corporation, is nevertheless a newly created corporate body created by statute, distinct from the unincorporated trade union, consisting of many thousands of separate individuals, which no longer exists under any other name. The very omission from the statute of any provision authorizing and directing that it shall sue and be sued in any other name than that given to it by its registration appears to me to lead to no other reasonable conclusion than that in so creating it, it was intended by the Legislature that by that name and by no other it should be known, and that for all purposes that name should be used and applied to it in all legal proceedings unless there was any other provision which militated against such a construction, as, for instance, in the case of trustees, by Section 9 of the same Act, who hold real and personal property of the society."

Lord Lindley observed (pages 444, 445):—

"The Act does not in express terms say what use is to be made of the name under which the trade union is registered and by which it is known. But a trade union which is registered under the Act must have a name...It may acquire property, but, not being incorporated, recourse is had to the old well-known machinery of trustees for acquiring and holding such property, and for suing and being sued in respect of it (Sections 7, 8, 9). The property so held is, however, the property of the union: the union is the beneficial owner ... The Act appears to me to indicate with sufficient clearness that the registered name is one which may be used to denote the union as an unincorporated society in legal proceedings as well as for business and other purposes. The use of the name in legal proceedings imposes no duties and alters no rights: it is only a more convenient mode of proceeding than that which would have to be adopted if the name could not be used. I do not say that the use of the name is compulsory, but it is at least permissive……….….to avoid misconception, I will add that if a judgment or order in that form is for the payment of money it can, in my opinion, only be enforced against the property of the trade union, and that to reach such property it may be found necessary to sue the trustees."

Even though in the speech of Lord Brampton there are observations which would go to show that the provision, which we have enacted in Section 6 of the Societies Registration Act as regards suits by and against societies, is capable of being construed as the only mode in which suits by or against the societies could be brought, the observations of Lord Lindley which I have quoted above go to show that the registered name is one which may be used to denote the union as an unincorporated society in legal proceedings as well as for business and other purposes and that even though the use of the name is not compulsory it is at least permissive. I prefer to be guided by the observations of Lord Lindley which I have referred to above and hold that in spite of the provisions contained in Sections 6, 7 and 8 of the Societies Registration Act as regards suits by and against societies, non-abatement of suits and enforcement of judgment against the societies, which I have already referred to above, it is competent to the society to sue or be sued in the name of the society, to be sued in its registered name, the society on its registration under the Societies Registration Act having come into existence as a legal entity apart from the members constituting the same. If it were necessary to do so, I would adopt the terminology which has been adopted in this connection by Cozens-Hardy, M.R., in Osborne v. Amalgamated Society of Railway Servants, where he describes a registered trade union as a "species of quasi corporation." [See also note (q) in Halsbury's Laws of England, Hailsham Edition, Vol. VIII, page 2, "Registered Trade Union is not a Corporation but a legal entity governed by special rules," and also Halsbury's Laws of England, Hailsham Edition, Vol. XXXII, page 486, para. 776, "A registered trade union is not a corporation nor an individual nor a partnership ; but it becomes by registration a legal entity distinct from an unregistered trade union. Its registered name is to be used and applied in all legal proceedings, unless there is any provision inconsistent with such use."]

I am of opinion that the provisions contained in Sections 6, 7 and 8 of the Societies Registration Act are not inconsistent with the user of the registered name of the society in connection with legal proceedings. As Lord Lindley observed in Taff Vale Railway Company's case, "I do not say that the use of the name is compulsory but it is at least permissive."

If this is the true legal position of a society registered under the Societies Registration Act, the objection of Mr. R. S. Billimoria that the plaintiffs and the defendants are one and the same and that the suit as framed is not maintainable by reason of the society being the plaintiffs as well as the defendants disappears. The plaintiffs are suing on behalf of themselves and all the members of the society. The first defendant is the president of the society and represents the society. As I have already observed the society on its registration with the Registrar of Joint Stock Companies becomes a legal entity apart from its members; it would be therefore idle to contend that the society are the plaintiffs as well as the first defendant in this action. In my opinion, therefore, this objection of Mr. R.S. Billimoria fails.

The next question to consider is how far the plaintiffs are entitled to maintain this suit without having obtained the sanction and consent of the society for the institution thereof. In this connection it must be noted that the plaintiffs are an admitted minority. The affairs of the society are conducted by the majority which for the purposes of this argument may even be assumed to be an overwhelming majority. The resolutions which are sought to be challenged have been passed by that majority in the general meetings of the society convened for the purpose of passing the same. The complaint of the plaintiffs, however, is that in the matter of the passing of the said resolutions the majority has been guilty of oppressing or overbearing the minority and that the acts of the majority complained of are ultra vires the society, are a fraud on the minority, or that in any event, there is an absolute necessity to waive the rule as to the supremacy of the majority in order that there may not be a denial of justice. It is contended on behalf of the plaintiffs that the principles of the company law which are enunciated in the well-known decisions of Foss v. Harbottle and Mozley v. Alston and the well recognized exceptions thereto should be applied to this case and it should be held that the plaintiffs are entitled to institute this suit in the manner they have done and without obtaining the sanction and consent of the society before instituting the same. I accept this contention of the plaintiffs. The society is neither a corporation nor a limited company incorporated under the Indian Companies Act. It is a registered society of individuals which has acquired a legal status by reason of its registration with the Registrar of the Joint Stock Companies under the provisions of the Societies Registration Act. Every member of a corporation or an incorporated company joints the same on the basis that prima facie the majority of its members is entitled to exercise its powers and control its operations generally. The same would be the position in the case of unincorporated associations of individuals whether the same be registered under the Societies Registration Act or not. The rule of the majority is the normal basis of these associations. The members of these associations do join these associations whether incorporated or unincorporated, whether registered or unregistered, knowing full well that the affairs of these associations would be conducted normally by the vote of the majority of the members thereof. In the absence of any specific rules and regulations governing the conduct of these affairs, this would be the normal presumption, and no member who joins any association would be heard to contend to the contrary. If unanimity of opinion were needed for the passing of any proposition, it would have to be expressly provided for. In the absence of any such provision the normal state of affairs would be that the opinion of the majority would be binding on the whole association. In the present case, however, the matter does not rest merely with this presumption which I have enunciated above. It has been expressly enacted in the rules and regulations of this society, certified copy of which has been filed with the Registrar of Joint Stock Companies, that "all matters in the meetings and sub-committees of the Samaj will be decided according to the majority of votes of the members present at the meeting." This being the position, I have no doubt that the principles applicable to cases of corporations and companies incorporated under the Indian Companies Act would govern the relations between the members of this society inter se and the principles enunciated in the well-known cases of Foss v. Harbottle and Mozley v. Alston and the exceptions thereto would be applicable to the facts of this case. I am fortified in this conclusion of mine by the observations of Kania, J., in Krishnan v. Sundaram, where the learned Judge held that:—

"The position of a society registered under the Societies Registration Act (XXI of 1860) is like that of a club or a joint stock company……In my opinion the position of the members of this society is similar to that of shareholders of the company."

In that case the learned Judge applied the principles of the company law to the case of a society registered under the Societies Registration Act, the type of which I have before me. I am therefore of opinion that the principles governing the relations of members of joint stock companies, i.e., companies incorporated under the Indian Companies Act, are the principles which are applicable in the case of a society registered under the Societies Registration Act.

Applying those principles to the present case, it appears to me that the issues Nos. (1), (6) and (7) raised by Mr. R.S. Billimoria can be dealt with together. Whether the acts which are complained of are matters of internal management of the society or constitute acts which fall within the well recognized exceptions to the rules enunciated in the cases of Foss v. Harbottle and Mozley v. Alston would be the determinative factor in deciding not only issues Nos. (6) and (7) but also issue No. (1) raised by Mr. R.S. Billimoria. According to my reading of the authorities if the Court came to the conclusion that the acts complained of fall within the latter category, the plaintiffs would under those circumstances be entitled to institute a suit on behalf of themselves and all other members of the society except the defendants making the society and the defendants party defendants to this suit and it would not be necessary to obtain the previous sanction and consent of the society for the institution thereof, simply because the control of the affairs of the society is in the hands of the majority whose acts are complained of and it would be futile to attempt to obtain the sanction and consent of the society for the institution of the suit, it being an absolute certainty that no such sanction and consent would ever be available to the plaintiffs.

Two principles emerge clearly from the authorities and they are (1) that the Court will not interfere with the internal management of the companies acting within their powers and in fact has no jurisdiction to do so, and (2) that in order to redress a wrong done to a company or to recover money or damages alleged to be due to a company the action should prima facie be brought by the company itself. The leading cases on this subject are Foss v. Harbottle, Mozley v. Alston, and Lord v. Governor and Company of Copper Mines. In Foss v. Harbottle two members of an incorporated company filed a bill against the directors and others praying that the defendants might be compelled to make good the loss sustained by the company by reason of the fraudulent acts of such directors. The defendants demurred. The Court held that upon the facts stated the continued existence of the Board of Directors de facto must be intended, that the possibility of convening a general meeting of proprietors capable of controlling the acts of the existing Board was not excluded by the allegations of the bill, that in such circumstances there was nothing to prevent the company from obtaining redress in its corporate character in respect of the matters complained of, that therefore the plaintiffs could not sue in a form of pleading which assumed the practical dissolution of the corporation and that the demurrers must be allowed. The Court was further of opinion that the acts of the directors complained of were capable of confirmation by the majority of the members of the company and declined to interfere. In the course of his judgment Sir James Wigram, V.C, observed (pages 491, 494):—

"The first objection taken in the argument for the defendants was that the individual members of the corporation cannot in any case sue in the form in which this bill is framed. During the argument I intimated an opinion, to which, upon further consideration, I fully adhere, that the rule was much too broadly stated on behalf of the defendants. I think there are cases in which a suit might properly be so framed. Corporations like this, of a private nature, are in truth little more than private partnerships ; and in cases which may easily be suggested, it would be too much to hold, that a society of private persons associated together in undertakings, which, though certainly beneficial to the public, are nevertheless matters of private property, are to be deprived of their civil rights inter se, because in order to make their common objects attainable the Crown or the legislature may have conferred upon them the benefit of a corporate character. If a case should arise of injury to a corporation by some of its members, for which no adequate remedy remained, except that of a suit by individual corporators in their private characters, and asking in such character the protection of those rights to which in their corporate character they were entitled, I cannot but think that the principle so forcibly laid down by Lord Cottenham in Wallworth v. Holt and other cases, would apply, and the claims of justice would be found superior to any difficulties arising out of technical rules respecting the mode in which corporations are required to sue.

But, on the other hand, it must not be without reasons of a very cogent character that established rules of law and practice are to be departed from,—rules, which, though in a sense technical, are founded on general principles of justice and convenience, and the question is, whether a case is stated in this bill, entitling the plaintiffs, to sue in their private character.……..but the majority of the proprietors at a special general meeting assembled, independently of any general rules of law upon the subject, by the very terms of the incorporation in the present case, has power to bind the whole body, and every individual corporator must be taken to have come into the corporation upon the terms of being liable to be so bound. How then can this Court act in a suit constituted as this is, if it is to be assumed, for the purposes of the argument, that the powers of the body of the proprietors are still in existence, and may be lawfully exercised for a purpose like that I have suggested? Whilst the Court may be declaring the acts complained of to be void at the suit of the present plaintiffs, who in fact may be the only proprietors who disapprove of them, the governing body of proprietors may defeat the decree by lawfully resolving upon the confirmation of the very acts which are the subject of the suit. The very fact that the governing body of proprietors assembled at the special general meeting may so bind even a reluctant minority, is decisive to shew that the frame of this suit cannot be sustained whilst that body retains its functions."

In Mosley v. Alston, two members of an incorporated railway company filed a bill in their individual characters against the corporation and twelve other members, who were alleged to have usurped the office of directors and to be exercising the functions thereof, as a majority of the governing body, injuriously to the company's interests, and praying that the twelve might be restricted from acting as directors, and be ordered to deliver the company's common seal, property and books to six other persons, who were alleged to be the only duly constituted directors. Lord Cottenham, L.C, allowed a demurrer to the bill. In the first place, he pointed out that if there had been no other objection to the bill, the fact of its having been brought by shareholders, not on behalf of themselves and others but in their individual characters only, was fatal. Then he said that the more important objection was that the injury alleged was not to the plaintiffs personally but to the corporation, without any reason being assigned by the bill why the corporation did not put itself in motion to seek a remedy. After observing that Foss v. Harbottle was identical in principle with the case before him, Lord Cottenham said that the Vice-Chancellor's observations in that case applied with greater force to the present case because there (page 800):—

"The bill expressly alleges that a large majority of the shareholders are of the same opinion with them (the plaintiffs); and, if that be so, there is obviously nothing to prevent the company from filing a bill in its corporate character to remedy the evil complained of."

Finally he relied on the ground that it was without precedent for the Court to interfere "solely on the ground of the supposed invalidity of the title of persons claiming to be corporate officers."

In Lord v. Governor and Company of Copper Mines, demurrer of a bill by one of the shareholders of an incorporated mining company on behalf of himself and all other shareholders except the members of the governing body who were the defendants, impeaching several transactions of that body which it appeared had been sanctioned by majorities at general meetings of the shareholders and amongst which was a project to vest all the property of the company in trustees for the purpose of liquidating its affairs was allowed notwithstanding some vague and general charges of fraud and misconduct on the part of the defendants and an allegation that by the constitution of the company no one but the governing body could convene a general meeting the specific acts complained of not being clearly such as in the opinion of the Court it was incompetent to a majority of shareholders to sanction. Lord Cottenham, L.C., observed (page 751):—

"I find all the complaints made by the individual shareholders to consist of acts within the powers of the corporation, and all sanctioned by general meetings of the shareholders and no allegation raising any case for the interference of a Court of Equity with the exercise of such rights.

A Court of Equity could not assume jurisdiction in such a case, without opening its doors to all parties interested in corporations or joint stock companies or private partnerships, who, although a small minority of the body to which they belong, may wish to interfere in the conduct of the majority. This cannot be done, and the attempt to introduce such a remedy ought to be checked for the benefit of the community.

In Foss v. Harbottle Sir James Wigram acted on this principle, because the acts were capable of confirmation; and in Mozley v. Alston I expressed my strong approbation of Sir James Wigram's decision in that case.

These authorities lay down the general principles which I have above enunciated. These principles have been uniformly followed by the Courts in England and in India.

The principle that the Court will not interfere with the internal management of the companies acting within their rights and in fact has no jurisdiction to do so is based on the supremacy of the majority. As I have already observed in all corporations and companies incorporated under the Indian Companies Act the normal position is that the internal affairs of the corporations or the companies are managed by a vote of the majority ; and members join the corporations or the companies with full knowledge that the majority of the members are entitled to exercise the powers and control the operations generally. This power which has been conferred on the majority has, however, got to be exercised bona fide and the Court interferes only to prevent unfairness or oppression. But subject to that each member of the corporation or company may vote with regard to his individual interests though these interests may be peculiar to himself and not shared by the company. This is the limitation on the power conferred on the majority which has been laid down in the case of Goodfellow v. Nelson Line (Liverpool) Limited which has been approved by the Judicial Committee of the Privy Council in British America Nickel Corporation v. M. J.O' Brien. In the latter case Viscount Haldane observed (pages 371, 373):—

"There is, however, a restriction of such powers, when conferred on a majority of a special class in order to enable that majority to bind a minority. They must be exercised subject to a general principle, which is applicable to all authorities conferred on majorities of classes enabling them to bind minorities; namely, that the power given must be exercised for the purpose of benefiting the class as a whole, and not merely individual members only. Subject to this, the power may be unrestricted.

………But their Lordships do not think that there is any real difficulty in combining the principle that while usually a holder of shares or debentures may vote as his interest directs, he is subject to the further principle that where his vote is conferred on him as a member of a class he must conform to the interest of the class itself when seeking to exercise the power conferred on him in his capacity of being a member. The second principle is a negative one, one which puts a restriction on the completeness of freedom under the first, without excluding such freedom wholly."

In this connection I may as well refer to the case of Brown v. British Abrasive Wheel Co., where Astbury, J., discussed what constitutes the benefit of the company as a whole. In that case the company was in great need of further capital. The majority representing 98% of the shares were willing to provide this capital if they could buy up the two per cent. minority. Having failed to effect this by agreement, they proposed to pass an article enabling them to purchase the minority shares compulsorily on certain terms therein mentioned, but were willing to adopt any other mode of ascertaining the value that the Court thought fit. It was held in the circumstances that the proposed article was not just or equitable or for the benefit of the company as a whole, but was simply for the benefit of the majority. It was not therefore an article that the majority could force on the minority under Section 13 of the Companies (Consolidation) Act, 1908. Astbury, J., observed (pages 295, 296):—

"In Allen v. Gold Reefs of West Africa, Limited, the majority of the Court of Appeal sanctioned, as against the only holder of fully paid shares, a new article imposing a lien on fully paid shares. Lindley, M.R., said: 'The power thus conferred on companies to alter the regulations contained in their articles is limited only by the provisions contained in the statute and the conditions contained in the company's memorandum of association. Wide, however, as the language of Section 50 [now Section 13] is, the power conferred by it must, like all other powers, be exercised subject to those general principles of law and equity which are applicable to all powers conferred on majorities and enabling them to bind minorities. It must be exercised, not only in the manner required by law, but also bona fide for the benefit of the company as a whole, and it must not be exceeded.'

The question therefore is whether the enforcement of the proposed alteration on the minority is within the ordinary principles of justice and whether it is for the benefit of the company as a whole. It find it very difficult to follow how it can be just and equitable that a majority, on failing to purchase the shares of a minority by agreement, can take power to do so compulsorily.

...In default of further capital the company might have to go into liquidation. The plaintiff is willing to risk that...It is merely for the benefit of the majority. If passed, the majority may acquire all the shares and provide further capital. That would be for the benefit of the company as then constituted. But the proposed alteration is not for the present benefit of this company."

This discussion as to the power of the majority to bind the minority contains within itself the limitations on the power of the majority. Subject to those limitations, however, the powers of majority are supreme in matters of internal management of the company. As was observed by James, L.J., in MacDougall v. Gardiner:—

"I think it is of the utmost importance in all these companies that the rule which is well-known in this Court as the rule in Mozley v. Alston and Lord v. Copper Mines' Company and Foss v. Harbottle should be always adhered to; that is to say, that nothing connected with internal disputes between the shareholders is to be made the subject of a bill by some one shareholder on behalf of himself and others, unless there be something illegal, oppressive, or fraudulent—unless there is something ultra vires on the part of the company qua company, or on the part of the majority of the company, so that they are not fit persons to determine it; but that every litigation must be in the name of the company, if the company really desire it."

Mellish, L.J., also observed in the same case (page 24):—

"I think it is a matter of considerable importance rightly to determine this question, whether a suit ought to be brought in the name of the company or in the name of one of the shareholders on behalf of the others. It is riot at all a technical question, but it may make a very serious difference in the management of the affairs of the company. The difference is this:— Looking to the nature of these companies, looking at the way in which their articles are formed, and that they are not all lawyers who attend these meetings, nothing can be more likely than that there should be something more or less irregular done at them—some directors may have been irregularly appointed, some directors as irregularly turned out, or something or other may have been done which ought not to have been done according to the proper construction of the articles. Now, if that gives a right to every member of the company to file a bill to have the question decided, then if there happens to be one cantankerous member, or one member who loves litigation, everything of this kind Will be litigated; whereas, if the bill must be filed in the name of the company, then, unless there is a majority who really wish for litigation, the litigation will not go on. Therefore, holding that such suits must be brought in the name of the company does certainly greatly tend to stop litigation.

In my opinion, if the thing complained of is a thing which in substance the majority of the company are entitled to do, or if something has been done irregularly which the majority of the company are entitled to do regularly, or if something has been done illegally which the majority of the company are entitled to do legally, there can be no use in having a litigation about it, the ultimate end of which is only that a meeting has to be called, and then ultimately the majority gets its wishes. Is it not better that the rule should be adhered to that if it is a thing which the majority are the masters of, the majority in substance shall be entitled to have their will followed? If it is a matter of that nature, it only comes to this, that the majority are the only persons who can complain that a thing which they are entitled to do has been done irregularly; and that, as I understand it, is what has been decided by the cases of Mozley v. Alston and Foss v. Harbottle. In my opinion that is the rule that is to be maintained. Of course if the majority are abusing their powers, and are depriving the minority of their rights, that is an entirely different thing, and there the minority are entitled to come before this Court to maintain their rights; but if what is complained of is simply that something which the majority are entitled to do has been done or undone irregularly, then I think it is quite right that nobody should have a right to set that aside, or to institute a suit in Chancery about it, except the company itself."

This supremacy of the majority is therefore subject to the following exceptions which are laid down in the authorities, viz., (1) where the act complained of is ultra vires the company; (2) where the act complained of is a fraud on the minority; and (3) where there is absolute necessity to waive the rule in order that there may be no denial of justice. (Palmer's Company Precedents, Vol. I, page 1246). As was observed by Lord Davey in Burland v. Earle:—

"It is an elementary principle of the law relating to joint stock companies that the Court will not interfere with the internal management of companies acting within their powers, and in fact has no jurisdiction to do so. Again, it is clear law that in order to redress a wrong done to the company or to recover moneys or damages alleged to be due to the company, the action should prima facie be brought by the company itself. These cardinal principles are laid down in the well-known cases of Foss v. Harbottle and Mozley v. Alston and in numberous later cases which it is unnecessary to cite. But an exception is made to the second rule, where the persons against whom the relief is sought themselves hold and control the majority of the shares in the company, and will not permit an action to be brought in the name of the company. In that case the Courts allow the shareholders complaining to bring an action in their own names. This, however, is mere matter of procedure in order to give a remedy for a wrong which would otherwise escape redress, and it is obvious that in such an action the plaintiffs cannot have a larger right to relief than the company itself would have if it were plaintiff, and cannot complain of acts which are valid if done with the approval of the majority of the shareholders, or are capable of being confirmed by the majority. The cases in which the minority can maintain such an action are, therefore, confined to those in which the acts complained of are of a fraudulent character or beyond the powers of the company. A familiar example is where the majority are endeavouring directly or indirectly to appropriate to themselves money, property, or advantages which belong to the company, or in which the other shareholders are entitled to participate, as was alleged in the case of Menier v. Hooper's Telegraph Works. It should be added that no mere informality or irregularity which can be remedied by the majority will entitle the minority to sue, if the act when done regularly would be within the powers of the company and the intention of the majority of the shareholders is clear. This may be illustrated by the judgment of Mellish, L.J., in MacDougall v. Gardiner.

There is yet a third principle which is important for the decision of this case. Unless otherwise provided by the regulations of the company, a shareholder is not debarred from voting or using his voting power to carry a resolution by the circumstance of his having a particular interest in the subject-matter of the vote. This is shewn by the case before this Board of North-West Transportation Company v. Beatty. In that case the resolution of a general meeting to purchase a vessel at the vendor's price was held to be valid, notwithstanding that the vendor himself held the majority of the shares in the company, and the resolution was carried by his votes against the minority who complained."

This position is further emphasised by another decision of their Lordships of the Privy Council reported in Dominion Cotton Mills Company, Limited v. Amyot. In that case Lord Macnaghten observed (page 551):—

"The principles applicable to cases where a dissentient minority of shareholders in a company seek redress against the action of the majority of their associates are well-settled.... In order to succeed it is incumbent on the minority either to shew that the action of the majority is ultra vires or to prove that the majority have abused their powers and are depriving the minority of their rights. It would be pedantry to go through the line of decisions by which those principles have been established. But there is a passage in a recent judgment of this Board in the case of Burland v. Earle, which has the high authority of Lord Davey, so appose it to the circumstances of the present case, that it may be useful to cite it at length," and Lord Macnaghten cities the passage from the speech of Lord Davey which I have hereinabove referred to. These are really the principles which govern the actions which may be brought by a dissentient minority in respect of the acts of the majority which normally are the governing factors in the internal management of the companies.

The second principle that, in order to redress a wrong done to the company or to recover moneys or damages alleged to be due to the company, the action should prima facie be brought by the company itself, does not require much elaboration. It is a salutary rule the reason of which is to be found in the observations of Sir James Wigram, V.C., in Foss v. Harbottle and the observations of Mellish, L.J., in MacDougal v. Gardiner. This is, however, a general rule. As was observed by Sir George Jessel, M.R., in Russell v. Wakefield Waterworks Company:—

"But the general rule being that the cestui que trust must sue, and not the individual corporator who has only an ultimate beneficial interest, the only point remaining to be considered is, whether there are any exceptions to the general rule……….when you want to find the rule you must look to Foss v. Harbottle, where you will find the general rule is that which I have stated. But that is not a universal rule ; that is, it is a rule subject to exceptions, and the exceptions depend very much on the necessity of the case ; that is, the necessity for the Court doing justice."

After quoting the remarks of Sir James Wigram, V.C. in Foss v. Harbottle, Sir George Jessel, M.R., proceeded to observe (page 480):—

"That I take to be the correct law on the subject.

It remains to consider what are those exceptional cases in which, for the due attainment of justice, such a suit should be allowed. We are all familiar with one large class of cases which are certainly the first exception to the rule. They are cases in which an individual corporator sues the corporation to prevent the corporation either commencing or continuing the doing of something which is beyond the powers of the corporation. Such a bill, indeed, may be maintained by a single corporator, not suing on be half of himself and of others, as was settled in the House of Lords in the case of Simpson v. Westminster Palace Hotel Company………

...But that is not the only case. Any other case in which the claims of justice require it is within the exception.

Another instance occurred in the case of Atwool v. Merryweather in which the corporation was controlled by the evildoer, and would not allow its name to be used as plaintiff in the suit. It was said that justice required that the majority of the corporators should not appropriate to themselves the property of the minority, and then use their own votes at the general meeting of the corporation to prevent their being sued by the corporation, and consequently in a case of that kind the corporators who form part of the minority might file a bill on their own behalf to get back the property or money so illegally appropriated. It is not necessary that the corporation should absolutely refuse by vote at the general meeting, if it can be shewn either that the wrongdoer had command of the majority of the votes, so that it would be absurd to call the meeting ; or if it can be shewn that there has been a general meeting substantially approving of what has been done; or if it can be shewn from the acts of the corporation as a corporation, distinguished from the mere acts of the directors of it, that they have approved of what has been done, and have allowed a long time to elapse without interfering, so that they do not intend and are not willing to sue. In all those cases the same doctrine applies, and the individual corporator may maintain the suit. As I have said before, the rule is a general one, but it does not apply to a case where the interests of justice require the rule to be dispensed with. I do not intend by the observations I have made in any way to restrain the generality of the terms made use of by the learned Judge who decided the case of Foss v. Harbottle."

These observation of Sir George Jessel, M.R., go to show that the general principle as to the action having to be brought prima facie by the company itself in order to redress a wrong done to the company or to recover moneys or damages alleged to be due to the company, is subject to exceptions, which are well recognised. The position is thus summarized in Halsbury's Laws of England, Hailsham Edition, Vol. V, p. 408, para. 675:—

"To redress a wrong done to the company or to recover money or damages due to it the action must prima facie be brought by the company itself. Where, however, the persons against whom relief is sought hold and control the majority of the shares, and will not permit an action to be brought in the company's name, shareholders complaining may bring an action in their own names and on behalf of the others, and they may do so also where the effect of preventing them so suing would be to enable a company by an ordinary resolution to ratify an improperly passed special resolution. In such an action the plaintiffs have no larger right to relief than the company would have if plaintiff; they cannot complain of acts which are valid if done with the approval of the majority of shareholders, or are capable of being confirmed by the majority, and can only maintain their action when the acts complained of are of a fraudulent character or are ultra vires of the company, mere irregularity or informality which can be remedied by the majority being insufficient."

The reason for this exception is very forcibly brought out in the observations of Sir W.M. James, L.J., in Menier v. Hooper's Telegraph Works:—

"It is said, however, that this is not the right form of suit, because, according to the principles laid down in Foss v. Harbottle, and other similar cases, the Court ought to be very slow indeed in allowing a shareholder to file a bill, where the company is the proper plaintiff. This particular case seems to me precisely one of the exceptions referred to by Vice Chancellor Wood in Atwool v. Merryweather, a case in which the majority were the defendants, the wrongdoers, who were alleged to have put the minority's property into their pockets. In this case it is right and proper for a bill to be filed by one shareholder on behalf of himself and all the other shareholders."

and also in the observations of Lord Davey in Burland v. Earle above quoted. I may also refer to the observations of Lindley, M.R., in Alexander v. Automatic Telephone Company.

"It is necessary, however, to consider the form of the action, and the relief which can be given. The breach of duty to the company consists in depriving it of the use of the money which the directors ought to have paid up sooner than they did. I cannot regard the case as one of mere internal management which, according to Foss v. Harbottle and numerous other cases, the Court leaves the shareholders to settle amongst themselves. It was ascertained and admitted at the trial that, when this action was commenced, the defendants held such a preponderance of shares that they could not be controlled by the other shareholders. Under these circumstances an action by some shareholders on behalf of themselves and the others against the defendants is in accordance with the authorities, and is unobjectionable in form: see Menier v. Hooper's Telegraph Works. An action in this form is far preferable to an action in the name of the company, and then a fight as to the right to use its name. But this last mode of procedure is the only other open to a minority of shareholders in cases like the present."

As a matter of fact where the majority is overbearing the minority it was held in Mason v. Harris that it was not necessary that a meeting of shareholders should first be called before the bill could be filed by one shareholder on behalf of the others against the company. Jessel, M.R., observed there (page 107):—

"As a genera] rule the company must sue in respect of a claim of this nature, but general rules have their exceptions, and one exception to the rule requiring the company to be the plaintiff is, that where fraud is committed by persons who can command a majority of votes, the minority can sue. The reason is plain, as unless such an exception were allowed it would be in the power of a majority to defraud the minority with impunity."

These are thus the well-recognised exceptions to the second principle, viz., that in order to redress a wrong done to the company or to recover moneys or damages alleged to be due to the company, the action should prima facie be brought by the company itself.

I shall now turn to the facts of the present case, having regard to the principles enunciated above. The resolutions dated October 8, 1944, and January 21, 1945, which are complained of by the plaintiffs have been challenged inter alia on the ground that the same have been passed in fraud of the rights of the minority and against the interests of the said society. Even though when arguing issue No. (4-a) at the commencement Mr. M.V. Desai gave me to understand that he was not relying upon fraud as such in support of his contentions as regards the said resolutions, it became abundantly clear whilst arguments proceeded, that the statement which he made to me on the earlier occasion was due to some misapprehension. He made it clear that he was relying upon fraud alleged to have been perpetrated by the majority of the members of the society upon the minority consisting of the plaintiffs and several others in the matter of the passing of the said resolutions and expressed his willingness to furnish particulars of the fraud alleged in paragraphs 4(b), 4(c) and 16 of the plaint if the Court thought that the particulars of fraud contained in the plaint were insufficient. I shall, therefore, deal with this part of the case on the basis that the plaint contains averments of fraud against the majority of the members of the said society. If the majority of the members of the society were guilty of any act which was ultra vires the company or which was in fraud of the minority as has been alleged, it would not constitute merely an infringement of the rights of the minority but would within the meaning of the authorities I have discussed above be a wrong perpetrated by them on the society itself. In the exercise of their power the majority have got to look to the benefit of the society as a whole and not merely to the benefit of the individual members thereof who constitute the majority. The resolutions as passed must be for the benefit of not only the majority of the members who support the same but also the minority who are a dissentient minority and who obviously would be entitled to demonstrate before the Court that the said resolutions are in fraud of their rights. It would therefore be not merely a wrong perpetrated on the minority but the society as a whole which is an aggregate of members consisting of the majority as well as the minority. That being the position, the society would be the only person entitled to institute this suit. In so far, however, as the majority of the members of the society are in charge of the affairs of the society, and are also in a position to outvote the minority in any meeting of the society which may be called for the purpose, it would be impossible for the society to pass a resolution sanctioning the institution of this suit or the further continuance thereof, and it would be futile to expect the plaintiffs who are an admitted minority to obtain the sanction or consent of the society to institute this suit even though as I have already observed it is a suit for redressing a wrong done to the society. Under these circumstances, I am of opinion that the case as it stands at present is covered within the well-recognised exceptions to the rule in Foss v. Harbottle and Mozley v. Alston and the plaintiffs are entitled to maintain this suit in the form which they have done, viz., on behalf of themselves and all other members of the society.

I may observe that for the purposes of this decision of mine I am not discussing any further the nature of the fraud which is alleged to have been perpetrated by the majority on the plaintiffs and the other members who constitute the minority of the members of the society. The fraud alleged is not particularised with such detail as it should have been done and it is necessary that the plaintiffs should furnish to the defendants the particulars of the fraud alleged by them in paras. 4(b), 4(c) and 16 of the plaint. I may none the less refer to the observations of Marten, J., in

Vadilal v. Maneklal:—

"Where fraud is alleged, and where consequently it is alleged that the suit is within one of the recognised exceptions to the principles laid down in Foss v. Harbottle, it will, I think, in general be found that the case is allowed to go to trial to ascertain the facts before it is finally determined whether the action of the majority can in fact bind the minority. This is because until the facts are ascertained with some distinctness, it is difficult to say what is the precise action of the majority, and whether it only amounts on the one hand to those matters of internal management where the majority of the shareholders can rightly impose their will upon the minority, or whether on the other hand it is one of those cases in which the assets of the company are being improperly distributed by an attempt to pay them into the pockets of the majority of shareholders of the company or their friends at the expense of the minority."

The only thing which remains to be considered as regards the frame of the suit is whether the plaintiffs would be entitled to bring this suit on behalf of themselves and all other members of the society when defendants Nos. 2, 3 and 4, even though they are sued in their capacity as members of the managing committee of the society, are also members of the society. Defendants Nos. 2, 3 and 4 are sued in a representative capacity as members of the managing committee of the society which consists of 33 members. These 33 members therefore are within the category of defendants and by reason of the description of the plaintiffs in the title of the plaint would also be included within the category of the plaintiffs. It is, therefore, contended that the same persons cannot be plaintiffs as well as defendants even though they might be impleaded in the suit in different capacities. I am of opinion that the objection is good to the extent that it goes. It is a well-recognised elementary rule of procedure that the same individual even in different capacities cannot be both a plaintiff and a defendant, and this principle has been followed by our Court in Rustomji v. Sheth Purshotamdas, Dadabhoy Framjee v. Cowasji Dorabji, Ratanbai v. Narayandas and Chandulal v. Keshavlal. This rule is, however, subject to exceptions in equity in cases where it would be possible to ascertain the rights and liabilities of the parties in the event of all the parties being present before the Court either in the group of plaintiffs or defendants. Procedure as has been well said is but the hand-maiden of justice and no rules of procedure as such can be allowed to thwart the ends of justice. As a matter of fact the Courts in Chancery allowed various exceptions to this mere rule of procedure. One finds in Mitford (Lord Redesdale) on The Pleadings in Chancery, 5th edition [1847], at page 414, instances where suits were allowed to be filed even though the defendants were also included in the category of the plaintiffs, as for example:—

"Where a suit is instituted for the payment of a sum of money, in the nature of a debt, due to the whole body of the shareholders of a company, the suit may be instituted by one of the shareholders on behalf of himself and all the other shareholders. And in such a case, although the payment may be claimed from the directors, who are made defendants for that purpose, it is correct not to except them out of the number of shareholders on whose behalf the bill is expressed to be filed ; because they are not sued as shareholders, but as directors, and, in their character of shareholders, they would be entitled to participate in the fruits of the suit: Mocatto v. Ingilby. And in like manner where two or more shareholders in a numerous joint-stock company sue on behalf of themselves and all other shareholders, and one of the shareholders has acted as the agent of the company, the plaintiffs may sue on his behalf in his character as shareholder, although they may make him a defendant in his character of agent: Taylor v. Salmon."

The above-mentioned passage goes to show that the Courts in Chancery did not allow the ends of justice to be thwarted by being trammelled by the rules of procedure like this in proper cases. The Courts in India are not merely Courts of Law but are also Courts of Equity. Order XXX, rule 9, of the Civil Procedure Code has enacted an equitable exception to the elementary rule of procedure which I have stated above, in that it allows suits between a firm and one or more of the partners therein and suits between firms having one or more partners in common to be filed. In proper cases the Courts would, in spite of that elementary rule of procedure, have the power to deal out justice between the parties even disregarding the elementary rule of procedure which requires that the same individual even in different capacities cannot be both a plaintiff and a defendant. If it were necessary I would, following the passage from Mitford which I have quoted above, hold that defendants Nos. 2, 3 and 4 in their representative capacity as members of the managing committee of the society are made defendants in a capacity different from that of the members of the society who are within the description of the plaintiffs, and there is no defect in the frame of the suit by reason of their having been included in the category of the plaintiffs as members of the society claiming relief against the defendants in their capacity as the members of the managing committee thereof. The defect such as this in the frame of the suit by reason of the 33 members of the managing committee of the society being included in the category of the plaintiffs as members of the society can however be remedied by allowing to the plaintiffs an amendment by describing the plaintiffs in the title of the plaint as members of the Arya Samaj, Bombay, on behalf of themselves and all other members of the Arya Samaj, Bombay, being a society registered under the Societies Registration Act, XXI of 1860, except the defendants. In that event whatever objection there is to the frame of the suit based on the same parties being plaintiffs as well as defendants to the suit would disappear.

There now remain to be considered the two issues which have been raised by Mr. M.P. Amin on behalf of defendants Nos. 2, 3 and 4, viz., whether the plaint discloses any cause of action against them and whether they are necessary parties to the suit. In this connection it may be observed that in para. 1 of the plaint they have been described as "some of the members of the managing committee of the said society," and are stated there to have been sued on behalf of themselves and all members of the managing committee of the society. In para. 16 of the plaint it is alleged that the managing committee are about to complete the sale of the Shenwewadi property and purchase of the Bangadwadi property, and in para. 17 of the plaint the plaintiffs have submitted that defendants Nos. 2 to 4 should be restrained from completing the said sale of Shenwewadi property and purchase of Bangadwadi property and from acting on the said resolution dated October 8, 1944, and carrying the same into effect. The prayer (c) of the plaint is based on these allegations against defendants Nos. 2, 3 and 4. When one turns to the written statement of defendants Nos. 2 to 4, they merely aver that the plaint discloses no cause of action against them and that they are unnecessarily made parties to the suit. There is no denial of the allegations which have been made in para. 16 of the plaint that the managing committee is about to complete the sale of the Shenwewadi property and purchase of the Bangadwadi property. In the absence of a specific denial in that behalf, I would be entitled to assume that the allegations in that behalf are admitted by defendants Nos. 2, 3 and 4. Mr. M.P. Amin, however, pointed out para. 2 of the written statement of the defendants Nos. 2 to 4 where they joined in all and singular the defences raised by the 1st defendant in his written statement as their own. When one turns to the written statement of the 1st defendant the only traverse which he has made of the allegations in para. 16 of the plaint is contained in the last sentence of para. 21 thereof which runs:—

"This defendant admits that the society is about to complete the sale of Shenwewadi property and the purchase of the property at Bangadwadi and the same will be completed in a few days."

This statement even though it has been adopted in its entirety by defendants Nos. 2, 3 and 4 in their written statement, does not, in my opinion, amount to a traverse of the allegations contained in para. 16 of the plaint that the managing committee are about to complete the sale of the Shenwewadi property and the purchase of the Bangadwadi property. Under these circumstances, I do not see how defendants Nos. 2, 3 and 4 can contend that the plaint discloses no cause of action against them. If it cannot be contended that the plaint does not disclose any cause of action against them, it can certainly not be contended that they are not necessary parties to the suit. On this preliminary objection therefore I am not prepared to hold that the plaint discloses no cause of action against defendants Nos. 2, 3 and 4 or that they are not necessary parties to the suit.

In the result I answer the issues which have been argued before me in the first instance as under:—

Issues raised by Mr. R.S. Billimoria.

            (1)        In the affirmative.

            (2)        The plaintiffs to be at liberty to amend the plaint by describing themselves as members of the Arya Samaj, Bombay, on behalf of them selves and all other members of the Arya Samaj, Bombay, being a society registered under the Societies Registration Act, XXI of 1860, except the defendants.

The suit as framed would then be maintainable.

(6) In the negative. (7) In the negative.

Issues raised by Mr. M.P. Amin.

(1) In the affirmative. (2) In the affirmative.

As regards issue No. (4-a) it is clear that the defendants are entitled to the particulars of the fraud which has been pleaded by the plaintiffs, and I cannot allow the suit to proceed in the absence of such particulars furnished by the plaintiffs. Mr. M.V. Desai strenuously urged that the various allegations which had been made by the plaintiffs in the plaint were sufficient to constitute fraud and that there were sufficient particulars of fraud available in the plaint itself. A careful perusal of the relevant paragraphs of the plaint, however, reveals that there are no sufficient particulars of fraud which could be culled out from the various allegations contained therein and that on the vary statement of the case made by Mr. M.V. Desai in his opening there were various facts which were relied upon by him as constituting fraud which did not find their place in the various paragraphs of the plaint relied upon by him for the purpose. I have therefore come to the conclusion that the plaintiffs are bound to furnish to the defendants the particulars of the fraud which they want to rely upon in support of their contentions set out in the plaint. I accordingly order that the plaintiffs do make an affidavit giving particulars of the fraud alleged by them in paras. 4(b), 4(c) and 16 of the plaint and furnish a copy thereof to the defendants' attorneys within fourteen days. The defendants will be at liberty to plead to the same and file a supplemental written statement or written statements as they might be advised within fourteen days of such affidavit of particulars made by the plaintiffs.

The cost of the issues disposed of by me above and the cost of the supplemental written statement or written statements will be reserved.

 

[1988] 64 COMP. CAS. 151 (SC)

SUPREME COURT OF INDIA

T. J. Stephen

v.

Parle Bottling Co. (P.) Ltd.

RANGANATH MISRA AND M. M. DUTT, JJ.

CRIMINAL APPEAL NO. 175 OF 1988

MARCH 22, 1988

 

 Kuldeep Singh, Miss A. Subhashini, Mrs. Sushma Suri and B. Parthasarathy for the Appellants.

C. L. Sareen, O. K. Khuller, R. C. Kohli and Mrs. H. Wahi Advocates for the Respondents.

JUDGMENT

Special leave granted.

This appeal is by special leave. The appellant, who is the Deputy Chief Controller of Imports and Exports, filed a complaint in the Court of the Chief Metropolitan Magistrate, Bombay, alleging commission of an offence under section 5 of the Imports and Exports (Control) Act, 1947, by respondents Nos. 1 and 2. The said case was got transferred to the court of the Additional Chief Metropolitan Magistrate, 38th Court, Ballard Estate, Bombay, and was numbered as 82/S of 1983. Respondent No. 1 is a private limited company with its registered office at Bombay and respondent No. 2 is its managing director. To this complaint, clause (a) of the first proviso to section 200 of the Code of Criminal Procedure was applicable. Therefore, cognizance was taken of the offence alleged without examining the appellant. On January 17, 1983, an application was filed on behalf of the two accused persons for recall of the summonses and dismissal of the complaint. On May 12, 1983, the learned Magistrate dismissed the petition. The order of the learned Magistrate was assailed before the High Court and on September 2, 1983, the High Court dismissed it. When the matter was brought to this court by filing an application for special leave on December 12, 1983, this court dismissed the leave application. The case was set down for trial after charges were framed. An application was made to the trial court at this stage to discharge the managing director, respondent No. 2 in exercise of inherent powers by contending that the company was prepared to admit its guilt and may be appropriately penalised and the managing director against whom there was no allegation of any criminal conduct should be discharged. The learned Magistrate by a reasoned order dated February 17, 1986, dismissed the application and directed that the trial should proceed against both. That order was assailed by the respondents before the Bombay High Court by filing a criminal writ petition. The High Court, by its order dated July 10, 1986 which is impugned in this appeal, held:

"On perusal of the averments, it is seen that at the time the learned trial judge issued/processed against the petitioners accused, the Department and the State had merely filed a complaint case along with list of witnesses and documents. None of the statements of witnesses or copies of documents were produced before the trial judge. The complainant's verification statement is also not recorded. As such, the order of issuance of process is clearly a result of non-application of mind by the trial judge. Such order would mean that merely on filing a complaint the process could be issued. It would be unjust to the accused if process is issued against him by the Magistrate without first satisfying himself about the nature of the case and whether there exist sufficient grounds for proceeding with the case. Since this is not done, then in the instant case, the process issued against petitioner No. 2 (managing director) is liable to be quashed on this ground alone. Without short-circuiting the other grounds, it must be pointed out that perusal of the complaint and in particular page 23 of the complaint shows that the prosecution intends to charge petitioner No. 2 as the principal offender along with petitioner No. 1-company. That is not possible for the simple reason that offence under section 5 of the Imports and Exports (Control) Act is done principally by the licensee (company in this case) and/or by the a better to the offence. There are no allegations in the complaint that petitioner No. 2 either aided or abetted in the contravention of licence conditions by the petitioner No. 1-company. As such, on this ground also the process issued against petitioner No. 2 is liable to be and is quashed and set aside".

The criticism advanced by the learned judge against the trying Magistrate is wholly untenable and is perhaps applicable to the learned judge. If reference had been made to section 200, first proviso, clause (a), of the Code of Criminal Procedure, what has been advanced as the most impressive ground for quashing the proceedings against respondent No. 2 could not at all have been accepted. The learned judge obviously has not cared to look into the procedural law applicable to the factual situation before him. The learned judge also lost sight of the fact that similar objections had once been raised and this High Court had refused to entertain the same and the order of the High Court had been upheld here by dismissing the special leave petition. The portion we have extracted from the order of the High Court, suggests that the learned judge wanted to draw a distinction between then and now by saying that the records of investigation had not then been available. Records of investigation are not evidence in this case and a complaint could not be quashed by referring to the investigation records particularly when the petition of the complainant did allege facts which prima facie show commission of an offence. The learned judge did note the fact that the licensee was a company but lost sight of the fact that a company by itself could not act. Obviously, the company has to act through someone. In the petition of the complainant, there was a clear allegation that the managing director had committed the offence acting on behalf of the licensee. If the complainant's petition had been properly scrutinized, the second ground advanced in the impugned order for quashing the proceedings against the managing director could not have been utilised in the impugned order. Both ,the grounds are wholly untenable and, therefore, the order of the High Court has got to be reversed. We allow the appeal and vacate the order of the High Court.

Once the order of the High Court is vacated, the order of the learned Magistrate would revive and the prosecution as directed by the learned Magistrate has now to continue. The petition of the complainant at page 21 of the paper-book shows that the offence was committed between 1967 and 1969 which is some 20 years back. While we have no sympathy for respondent No. 2 and we are clearly of the opinion that he has no equity in his favour and the delay after the complaint had been filed has been mostly on account of his mala fide move, we do not think it would be in the interest of justice to allow a prosecution to start 20 years after the offence has been committed. If we could convict respondent No. 2 in accordance with law, we would have been prepared to do so taking the facts of the case and the conduct of the respondent into consideration, but that would not be possible within the framework of the law of procedure. We, therefore, do not propose to allow the learned Magistrate to proceed with the trial of the, case at this belated stage.

We accordingly direct the case to be closed against respondent No. 2 without further delay. Ordinarily, in a criminal case of this type, there would have been no order for costs. But, keeping in view the background of the case, the manner in which respondent No. 2 has behaved and the fact that he is squarely responsible for delaying the proceedings by reiterating the same contention twice over, we are of the definite opinion that respondent No. 2 should be made to suffer exemplary costs. We accordingly direct that he shall be called upon to pay a sum of Rs. 10,000 by way of costs and the said amount is to be deposited in the trial court within one month hence, failing which the trial court shall have a direction to recover the same as fine and pay the amount to the complainant. Compliance shall be reported to the registry of this court.

High Court of Delhi

Ray Cylinders & Containers

v.

Hindustan General Industries Ltd.

Mohd. Shamim, J.

Suit No. 129 of 1984

August 21, 1998

 

Section 3, read with section 5, of the Companies Act, 1956 and Order XIV of Code of Civil Procedure, 1908 - Company - Definition of - Plaintiff-Company sought to recover certain sum including interest, alleged to have been paid to defendants by way of advance against supply of certain machines on quotations submitted by defendant No. 1 (Company) - Defendant No. 1 contested suit on various grounds, while defendant Nos. 2 and 3 (Directors) separately resisted plaintiff’s claim - Whether a company is a corporate body with a separate existence inasmuch as it is an artificial person with a perpetual succession and, thus, where permission was granted as per resolution of plaintiff-company to file a suit against company (defendant No. 1), it would be wrong to treat it as permission to sue directors - Held, yes - Whether where directors of company have entered into agreement for sale of shares, company not being privy to contract, it would be impermissible to treat company as being bound under contract - Held, yes

Facts

The plaintiff-Company, through the instant suit, through its managing director RK, sought to recover certain sum, including interest, stated to have been deposited with the defendants (company and its directors) by way of advance for the price of certain ma­chines to be supplied by them including a deep-drying press. The plaintiff had entered into a contract with the defendant No. 1, for supply of machines on ‘no-profit-no-loss’ basis and had, therefore, advanced certain sum against the revised quotation submitted by the defendant No. 1. Defendant No. 1 had entered into a contract with SEC, for the manufacture of the said deep drying press and supplied to them in connection therewith material worth Rs. 91,482.96. They also paid a sum of Rs. 60,000 to the SEC. In this way, a sum of Rs. 1,51,482.96 was paid to SEC. The plain­tiff made various payments to defendant No. 1 to the tune of Rs. 4,05,000.

The contract alluded to above also found a mention in the agree­ment dated 24-1-1981, regarding sale of shares in between the defendants and MR & RR. The said agreement was signed by defendant Nos. 2 and 3 also. Out of the machines which were to be supplied to the plaintiff by defendant No. 1, one circuit cutting machine was bought by defendant No. 1 from Bombay and the same was delivered to the plaintiff. Defendant No. 1 in this way paid to the plaintiff a certain sum by way of price of the said machine there­by leaving a balance of Rs. 2,30,017.04 outstanding against the defendants. Defendant No. 1 was thus liable to pay the said amount to the plaintiff along with interest at the rate of 18 per cent per annum from 20-12-1980, till the date of the institution of the suit, amounting to Rs. 1,24,200. The plaintiffs thus claimed a sum of Rs. 3,54,217.04 from the defendants.

The defendants contested the suit, inter alia, on the grounds: (1) that ‘RK’ was neither the managing director of the plaintiff-company nor was he authorised to institute the present suit; (2) that the suit was barred by time; (3) that they never re­ceived the entire payments claimed to have been made by the plaintiff nor did they receive any advance from the plaintiff; (4) that defendant Nos. 2 and 3 became directors only after they purchased shares from shareholders subsequent to the signing of the agreement and, therefore, they were not bound by the said agreement; and (5) that, in fact, the plaintiff was liable to pay to defendant No. 1 a sum of Rs. 58,500, i.e., value of the circuit cutting machine and the deep drying press as reduced by the amount of advance paid by the plaintiff. Both the defendant Nos. 2 and 3 separately resisted the plaintiff’s claim on the ground that there was no privity of contract in between the plaintiff and defendant Nos. 2 and 3; that they did not give any undertaking either for the liability of the amount or for secur­ing supply of any machinery to the plaintiff; and that the agree­ment dated 24-1-1981 between ‘MR’ and ‘RR’ and defendant Nos. 2 and 3 regarding sale of shares to the latter, did not stipu­late any such conditions so as to bind them to make any payment to the plaintiff.

Held

The resolution of the board of directors of the plaintiff-company was the pivot round which the entire controversy with regard to the present issues revolved. A close scrutiny of the said document revealed that the board of directors while passing the said resolution authorised ‘RK’ to file a suit against defendant No. 1 only. There was no mention therein that a suit be also instituted against defendant Nos. 2 and 3. Admittedly, defendant No. 1 was not a partnership firm. It was a corporate body with a separate existence inasmuch as it was an artificial person with a perpetual succession. It was not like a firm whose existence could not be visualised in the absence of its partners. Thus, it would be a sheer travesty to contend that the permission which was granted against defendant No. 1 could also be treated as permission against defendant Nos. 2 and 3 as well. Thus, the present suit was not a properly instituted suit against defendant Nos. 2 and 3.

Admittedly, the agreement dated 24-1-1981 was an agreement in between ‘MR’ and ‘RR’ as the vendors on their own behalf and on behalf of their friends, etc., other than directors and associates and defendant Nos. 2 and 3 as the vendees, ac­cording to which the former sold majority of their shares in favour of the latter. Thus, the said agreement was in their individual capacity and if there was any breach of the agreement, the same would give rise to a cause of action in favour of ‘MR’ and ‘RR’ to bring forward a suit from defendant Nos. 2 and 3. The plaintiff admittedly was a legal entity. It was not a party to the impugned contract. Hence, the plaintiff would not be entitled to claim any amount through the present suit against defendant Nos. 2 and 3.

Moreover, clause (vi) of the agreement simply envisaged that in case the vendors were required to pay anything to the authorities mentioned therein the said liability was to be met by defendant Nos. 2 and 3. Admittedly, the plaintiff were not being required to pay anything to the abovesaid authorities. Thus, the same could not be claimed from defendant Nos. 2 and 3. Moreover, the present suit could by no stretch of imagination be treated as a suit for breach of the contract. Consequently, no action was maintainable under law as per the terms of the said clause against defendant Nos. 2 and 3. There was thus no privity of contract between the plaintiff and defendant Nos. 2 and 3.

As regards the limitation, admittedly, the present suit had been filed for recovery of the balance amount which was paid as ad­vance for the purchase of certain goods. Hence, the proper arti­cle which will govern the period of limitation in the present case would be article 13 of the Limitation Act. It envisages ‘for the balance of money advanced in payment of goods to be delivered the period of limitation would start running from the date on which the goods ought to have been delivered’. The plaintiff placed the order of the defendant No. 1, vide their letter dated 2-11-1979. The said order was for the supply of as many as six machines. One of the said machines was a deep drying press of 300 mt. capacity which was the bone of contention in between the parties. One of the stipulations of the said order was that the machines were to be supplied within three months from the date of the order. Thus, the said machines were to be supplied by 2-2-1980. If the period of limitation was to be computed from the said date, then the suit should have been filed on or before 2-2-1983. There was no dispute with regard to the placement of the said order on the said date. Thus, the period of limitation in the present case would commence running from 2-2-1980 and it came to an end on 2-2-1983. The present suit was filed on 20-1-1984. Hence, the suit was barred by time.

The agreement dated 24-1-1981 between the parties was with regard to the sale and purchase of shares. Defendant Nos. 2 and 3 vide the said agreement agreed to purchase majority of shares held in defendant No. 1 from its erstwhile Chairman and M.D. and other shareholders, i.e., ‘MR’ and ‘RR’. Thus, the said agreement had got absolutely nothing to do with the supply of the machinery. Moreover, even if the period of three years was computed from the last payment made to defendant No. 1 by the plaintiff still the present suit was not within time inasmuch as the same was filed on 20-1-1984.

The plaintiff then tried to seek sustenance from a letter dated 23-1-1981, from ‘RR’ who was then acting as the managing director of defendant No. 1 acknowledging the dues of Rs. 3,81,500 to the plaintiff from the defendant. On a deeper scrutiny and read in the light of the subsequent events, the said letter had been fabricated by the plaintiff in collusion with ‘RR’ son of ‘MR’ who was the managing director of the defendant No. 1 during those days. Thus, viewed from any angle, it was hopelessly barred by limitation.

The plaintiff then contended that according to the said agree­ment, the impugned machinery was to be purchased by the plaintiff on ‘no-profit-no-loss’ basis. Defendant No. 1, being a company was in no way connected with the said agreement.

In fact, it had got absolutely nothing to do with the same. Hence, the mention therin that the machinery was to be supplied on ‘no profit no loss’ basis did not lead one anywhere. It was a recital which had got no meaning and had got no bearing. The said agreement was by ‘MR’ and ‘RR’ in their individual capacity and thus could not have bound defendant No. 1. The obligations which arose out of the said agreement and which defendant Nos. 2 and 3 undertook to perform for the benefit of ‘MR’ and ‘RR’ were their personal obligations. The said obligations could not be so stretched as to bring within their domain defendant No. 1. If there was any grievance of ‘MR’ and ‘RR’ for the non-performance of any of the covenants they could seek no doubt a redressal of the said grievance against defendant  Nos. 2 and 3. However, they could do so in their personal capacity. In view of the above, the said agreement was of no avail to the plaintiff.

Moreover, the plaintiff, vide their letter dated 2-11-1979, accepted the offer made by defendant No. 1 for the supply of machines. The terms and conditions enumerated therein could not be changed subsequently to the detriment of defendant No. 1 through the agreement dated 24-1-1981, which was pure and simple an agreement for the sale and purchase of shares of defendant No. 1.

Defendant No. 1 company neither passed any resolution to the effect to supply machinery on ‘no-profit no-loss’ basis nor could it have passed any resolution to its detriment at the meeting of the board of directors. Furthermore, defendant Nos. 2 and 3 could not have participated in any such meeting in which they were interested in view of the clear cut provisions of section 300.

Admittedly, defendant Nos. 2 and 3 wanted to purchase the majori­ty of the shares of defendant No. 1. Thus, with the said end in view they must have entered into an agreement dated 24-1-1981, on certain terms and conditions with ‘MR’ and ‘RR’. However, the said terms and conditions by no stretch of imagination would be deemed to be binding on defendant No. 1 particularly when the said terms and conditions were to the detriment of defendant No. 1. Thus, defendant No. 1 never agreed to supply the machinery on ‘no profit no loss’ basis to the plaintiff.

Thus, the plaintiff had miserably failed to prove the terms and conditions on which the impugned machine was to be supplied.

The agreement dated 24-1-1981 was of no avail to the plaintiff in order to show and prove that the impugned machine was to be supplied on ‘no profit no loss’ basis. Hence, the plaintiffs were not entitled to the recovery of the sum claimed from the defend­ant. It was also not entitled to any interest. The suit was, accordingly, dismissed.

S.N. Gupta and Ashish Mishra for the Plaintiff. Ishwar Sahai, Atul Shankar and Jaisi Ram Goyal for the Respondent.

Judgment

1.   The plaintiff through the present suit wants to recover a sum of Rs. 3,54,217.04 including interest amounting to Rs. 1,24,200 alleged to have been deposited with the defendants by way of advance price of certain machines, including a 300 tonne deep drying press.

2.   The case of the plaintiff briefly stated is as under : that the plaintiffs are a limited liability company, Shri R.K. Bhalla is the managing director of the said company and is, as such compe­tent to bring forward the present suit and to sign and verify the plaint. He has also otherwise been authorised to file the present suit through a resolution dated 14-1-1984.

3.   Defendant No. 1 had entered into a contract with the plaintiff for the supply of certain machines, including a 300 tonne deep drying press on ‘no profit no loss’ basis. The plaintiff in connection therewith deposited with defendant No. 1 a sum of Rs. 4,05,000 by way of advance. Defendant No. 1 had oral discussions with the plaintiff on 26-10-1979, and in pursuance thereof sub­mitted a quotation for L.P.G. cylinder plant/machinery. The said quotation was further followed by a letter dated 2-8-1980, as a revised quotation. The same was accepted by the plaintiff.

4.   Defendant No. 1 had entered into a contract with Swadeshi Engg. Co., Mayapuri, New Delhi, for the manufacture of the said deep drying press and supplied to them in connection therewith materi­al worth Rs. 91,482.96. They also paid a sum of Rs. 60,000 to the said Swadeshi Engg. Co. In this way, a sum of Rs. 1,51,482.96 was paid to Swadeshi Engg. Co. The plaintiff made various payments to defendant No. 1 to the tune of Rs. 4,05,000, details whereof are as under :

 

 

(Rs.)

2-11-1979

 

30,000

23-11-1979

Cheque No. 283902 NBI

15,000

28-11-1979

Cheque No. 283903 NBI

20,000

28-11-1979

Cheque No. 3905

30,000

2-1-1980

Cheque No. 3908

30,000

6-5-1980

Cash

20,000

7-5-1980

Cheque No. 3910

20,000

8-5-1980

Cash

20,000

12/19-5-1980

Cash 12/5

50,000

19-5-1980

Cash 19/5

20,000

23-5-1980

Cheque No. 3911

10,000

10-8-1980

Cash

35,000

10-11-1980

Cash for Elec. bill

17,000

9-12-1980

Cheque No. 3914

1,00,000

 

 

4,17,000

Less : received cash on 13-11-1980

 

12,000

 

 

4,05,000

5.   The contract alluded to above also finds a mention in the agreement dated 24-1-1981, in between the defendants and Shri M. R. Bhalla and Shri R. R. Bhalla, residents of 51, Anand Lok, New Delhi. The said agreement was signed by defendant Nos. 2 and 3 also. Out of the machines which were to be supplied to the plain­tiff by defendant No. 1, one circuit cutting machine was bought by defendant No. 1 from Bombay valued at Rs. 23,500 and the same was delivered to the plaintiff. Defendant No. 1 in this way paid to the plaintiff a sum of Rs. 1,51,482.92 and Rs. 23,500 by way of price of the said machine thereby leaving a balance of Rs. 2,30,017.04 outstanding against the defendants. Defendant No. 1 is thus liable to pay the said amount to the plaintiff along with interest at the rate of 18 per cent per annum from 20-12-1980, till the date of the institution of the suit, amounting to Rs. 1,24,200. The plaintiffs thus claim a sum of Rs. 3,54,217.04 from the defendants.

6.   All the defendants are jointly and severally liable to pay the said amount to the plaintiff. Defendant Nos. 2 and 3 had under­taken to secure the supply of the said machinery for the plain­tiff on behalf of defendant No. 1. Thus, they are also liable for the said amount. The plaintiff had already taken delivery of the said deep drying press from Swadeshi Engg. Co. after spending a considerable amount. It was the obligation of defendant No. 1 to secure the same from Swadeshi Engg. Co. and to supply the same to the plaintiff. The said Swadeshi Engg. Co. did not give delivery of the said machine to defendant No. 1 as they failed to make necessary payment by way of price of the same. Since the defend­ants have failed to make payment to the plaintiff of the various amounts paid to them by way of advance in connection with the supply of the said machine, hence arose the necessity for the institution of the present suit.

7.   The defendants have put in contest, inter alia, on the follow­ing grounds: that Shri R.K. Bhalla is neither the managing direc­tor of the plaintiff-company nor is he authorised to institute the present suit and to sign and verify the plaint. The suit is barred by time.

8.   Defendant No. 1 had written a letter dated 26-10-1979, to the plaintiff giving therein quotations for supply of different types of machines to the plaintiff. The plaintiff by their letter dated 2-11-1979, accepted the said offer. The delivery period for the said machine was three months from the date of acceptance of the said order.

Defendant No. 1 never received from the plaintiff the payments mentioned, vide para 3 of the plaint. The books of account of defendant No. 1 show a sum of Rs. 3,15,000 to have been received by way of advance from the plaintiff while the cost of the said deep drying press was Rs. 3,50,000 excluding excise duty and other statutory levies. It is also wrong and false that the machine was to be supplied by defendant No. 1 to the plaintiff on ‘no profit no loss’ basis. There is no record of defendant No. 1 with regard to the receipt of the letter dated 21-8-1980. It is wrong and false that the plaintiff paid a sum of Rs. 4,05,000 to defendant No. 1 by way of advance. In fact, they paid only a sum of Rs. 3,15,000. Shri M.R. Bhalla and Shri R.R. Bhalla and var­ious other shareholders of defendant No. 1 sold their shares to defendant Nos. 2 and 3 and other different persons. Defendant Nos. 2 and 3 became directors of defendant No. 1 after the pur­chase of the said shares and subsequent to the signing of the agreement dated 24-1-1981. Defendant No. 1 was not a party to the said agreement. Consequently, defendant No. 1 are not bound by the said agreement. It is wrong and false that a sum of Rs. 2,30,017.04 is due from defendant No. 1 to the plaintiff. Howev­er, it is true that the plaintiff supplied a circuit cutting machine valued at Rs. 23,500 and a deep drying press of the value of Rs. 3,50,000. Thus, the total value of the machinery supplied to the plaintiff was more than the amount paid by the plaintiff to defendant No. 1. Defendant No. 1 received from the plaintiff a sum of Rs. 3,15,000. Hence, the plaintiff are liable to pay to defendant No. 1 a sum of Rs. 58,500. In this way nothing is due to the plaintiff from defendant No. 1. Hence, there is no ques­tion of payment of interest by defendant No. 1 to the plaintiff. The suit is thus liable to be dismissed.

9.   Defendant Nos. 2 and 3 have resisted the claim of the plain­tiff through their separate written statements. According to them, there is no privity of contract in between the plaintiff and defendant Nos. 2 and 3. Defendant Nos. 2 and 3 did not give any undertaking to the plaintiff that they would be liable for the said amount. It is also wrong and false that the defendants had undertaken to secure the supply of any machinery to the plain­tiff. By the agreement dated 24-1-1981, the vendors in the said agreement agreed to secure retirement or resignation of the then team of the directors on the board of defendant No. 1. The agree­ment dated 24-1-1981, is in between Mulkh Raj Bhalla and Raj Rattan Bhalla on the one hand, and defendant Nos. 2 and 3 on the other. They agreed to sell their shares and those of their friends and relatives in the said company to defendant Nos. 2 and 3. The said agreement was by Mulkh Raj Bhalla and Raj Rattan Bhalla in their individual capacity. Defendant Nos. 2 and 3 are thus in no way liable to pay anything to the plaintiff. In any case, the agreement dated 24-1-1981, does not stipulate any such conditions which binds defendant Nos. 2 and 3 to make any pay­ment to the plaintiff. The suit is false and frivolous. It is liable to be dismissed.

10. The following issues were framed by the learned predecessor of this Court, vide order dated 14-5-1985 :

        1. Whether the suit is properly instituted ?

        2. Whether the suit is barred by limitation ?

3. Whether there is any privity of contract between the plaintiff and defendant Nos. 2 and 3 ?

4  Whether the plaintiff entered into a contract with defendant No. 1 for supply of machinery being 300 tonne deep drying press and other machinery on ‘no profit no loss’ basis, and whether the plaintiff deposited with defendant No. 1 a sum of Rs. 4,05,000 as advance towards the same ?

5. What were the terms of the agreement for supply of the aforesaid machinery to the plaintiff by defendant No. 1 ?

6. What is the effect of agreement dated 24-1-1981, be­tween Shri M. R. Bhalla and Shri R. R. Bhalla on the one part and defendant Nos. 2 and 3 on the other part for transfer of shares of defendant No. 1, vis-a-vis, the agreement for sale of machinery in question ?

7. Whether defendant No. 1 had placed orders with Swadeshi Engg. Co., Maya Puri for manufacture of 300 tonne deep drying press to be supplied to the plaintiff and whether defendant No. 1 paid a sum of Rs. 60,000 and supplied certain machinery parts valued at Rs. 91,482.95 to Swadeshi Engg. Co. and if so, to what effect ?

8. Whether the plaintiff were entitled to take delivery of the aforesaid machinery direct from Swadeshi Engg. Co. and wheth­er the plaintiff made any further payment to Swadeshi Engg. Co. and if so, to what effect ?

9. Whether issue Nos. 7 and 8 can be decided in the ab­sence of Swadeshi Engg. Co. and for that matter is not Swadeshi Engg. Co. a necessary party to the suit ?

10.Whether the plaintiff received one circuit cutting machine of the value of Rs. 23,500 from defendant No. 1 under the aforesaid contract and if so, to what effect ?

11.Whether the plaintiff is entitled to a sum of Rs. 2,30,017.04 (Rs. 4,05,000 minus Rs. 1,51,482.96 and minus Rs. 23,500) under the aforesaid contract with defendant No. 1 ?

12.Whether the plaintiff is entitled to any interest and if so, at what rate and for what period ?

        13.Relief.

Issue Nos. 7, 8, 9 and 10.—The above issues were deleted, vide order dated 4-8-1998, as per the above statements of the learned counsel for the parties made on the said date.

Issue Nos. 1 and 3.—Both these issues are being taken up to­gether as the same can be conveniently disposed of at one and the same time.

11.   The plaintiff in order to show and prove that the present suit is a properly instituted suit have examined P.W. 6, Shri RR Bhalla. He has deposed to the fact that a resolution was passed through a meeting of the board of directors held on 14-1-1984, copy whereof is exhibit P.W. 6/3, wherein Shri R. K. Bhalla, managing director, was authorised to file a suit against defend­ant No. 1 for recovery of the remaining amount which was paid to defendant No. 1 by way of advance for the purchase of the machin­ery. To the same effect is the statement of P.W. 7 Shri RK Bhalla. The learned counsel on the strength of the said document and the above statements has vehemently contended that the present suit is a properly instituted suit and P.W. 7 Shri RK Bhalla is fully competent to sign and verify the plaint and to bring forward the present suit.

The learned counsel for the defendant, Mr. Ishwar Sahai, senior advocate, has urged to the contrary.

12. It is manifest from the above that the learned counsel for the plaintiff Mr. Gupta while so arguing has drawn sustenance from the impugned resolution of the board of directors, exhibit P.W.6/3. Thus, exhibit P.W. 6/3 is the pivot round which the entire controversy with regard to the present issues revolve. A close scrutiny of the said document reveals that the board of directors while passing the said resolution authorised Shri RK Bhalla to file a suit against defendant No. 1 only, i.e., Hindu­stan General Industries Ltd., Nangloi. There is no mention there­in that a suit be also instituted against defendant Nos. 2 and 3. Thus, the learned counsel while construing the said resolution has tried to read therein much more than what is contained there­in. I thus feel he cannot be permitted to do so in the eye of law.

13. The learned counsel for the plaintiff has contended that once a permission was granted to institute a suit against defendant No. 1 it implies thereby that the said permission can be treated and would be a permission against defendant Nos. 2 and 3 who are the directors of defendant No. 1. The contention of the learned counsel is without any force. Admittedly, defendant No. 1 is not a partnership firm. It is a corporate body with a separate existence inasmuch as it is an artificial person with a perpetual succession. It is not like a firm whose existence cannot be visualised in the absence of its partners. Thus, it would be a sheer travesty to contend that the permission which was granted against defendant No. 1 can also be treated as permission against defendant Nos. 2 and 3 as well. Thus, it can be safely concluded from the above discussion that the present suit is not a properly instituted suit against defendant Nos. 2 and 3.

14. It has been urged for and on behalf of the plaintiff that the order for supply of goods was placed on defendant No. 1 and advance payment was also made in connection therewith by the plaintiff to defendant No. 1. Defendant Nos. 2 and 3 stood guarantee for the proper execution of the said contract, being the directors of defendant No. 1. Hence, in case of the failure of defendant No. 1 to return the said advance payment the same can be recovered from defendant Nos. 2 and 3. The learned coun­sel for the plaintiff Mr. Gupta has placed much reliance to substantiate his contention on clause (vi) of the agreement dated 24-1-1981 (exhibit P.W.6/1.)

15. Since we are concerned with the construction of the said clause, it would be just and proper to carefully examine the said clause before proceeding any further in the matter which is in the following words :

“The vendees have undertaken and bound themselves to ensure that the vendors are not made liable for any past, present or future liability, financial towards banks, Government bodies, Railway Board or anyone else having claim against the company. They will indemnify the vendors if they for any reason whatsoever are called upon or made to pay.”

16. The learned counsel inspired by the said clause contained in the aforementioned agreement has vehemently contended that the said clause is sufficient enough to fasten the liability on the head of defendant Nos. 2 and 3 in case of failure of defendant No. 1 to make payment. The learned counsel for defendants, Mr. Ishwar Sahai and Mr. Jaisi Ram Goyal, have on the other hand, argued that the learned counsel for the plaintiff has construed amiss clause (vi) alluded to above. According to them, there is absolutely nothing in the said clause to assist and help the plaintiff to recover the alleged advance payment made by them to defendant No. 1.

17. Let us now see as to on whose side the truth is ? Admittedly, the impugned agreement exhibit P.W. 6/1 is an agreement in be­tween Shri M. R. Bhalla, Chairman of Hindustan General Industries Ltd., and Shri R.R. Bhalla, Managing Director of Hindustan Gener­al Industries Ltd., as the vendors on their own behalf and on behalf of their friends, relatives other directors and associ­ates, who are registered shareholders of Hindustan General Indus­tries Ltd., and defendant Nos. 2 and 3. The said Shri M. R. Bhalla and Shri R. R. Bhalla and other shareholders sold majority of their shares through the impugned agreement in favour of defendant Nos. 2 and 3. Thus, the said agreement in between Shri M.R. Bhalla and Shri R.R. Bhalla is in their individual capacity to sell shares in defendant No. 1 company to defendant Nos. 2 and 3. Thus, if there is any breach of the said agreement the same would give rise to a cause of action in favour of Shri M. R. Bhalla and Shri R.R. Bhalla to bring forward a suit from defend­ant Nos. 2 and 3. The plaintiff admittedly is a legal entity. It was not a party to the impugned contract. Hence, the plaintiff would not be entitled to claim any amount through the present suit against defendant  Nos. 2 and 3.

18. There is another aspect of the matter. A close scrutiny of clause (vi) of the agreement referred to above would reveal that it simply envisages that in case the vendors were required to pay anything to the authorities mentioned therein the said liability was to be met by defendant Nos. 2 and 3. Admittedly, the plain­tiffs are not being required to pay anything to the abovesaid authorities. Thus, the same cannot be claimed from defendant  Nos. 2 and 3. Moreover, the present suit can by no stretch of imagination be treated as a suit for breach of the contract. Consequently, no action is maintainable under law as per the terms of the said clause against defendant Nos. 2 and 3. It can be safely concluded therefrom that there is no privity of con­tract between the plaintiff and defendant Nos. 2 and 3.

19. Issue No. 2—The learned counsel for defendant No. 1, Mr. Ishwar Sahai, senior advocate, has urged with all the vehemence at his command that the present suit is hopelessly barred by time. According to the learned counsel, the present suit has been filed for recovery of the remaining advance payment which was alleged to have been made by the plaintiff to defendant No. 1 in connection with certain machineries which were to be supplied by defendant No. 1 to the plaintiff which they failed to do. Accord­ing to him, the present case is to be governed by article 13 of the Limitation Act. Article 13 provides that when a suit is filed for the balance of the money advance in payment of goods to be delivered, then the period of limitation would start running from the date when the goods ought to have been delivered. The learned counsel for the plaintiff, Mr. Gupta, on the other hand, has urged to the contrary. According to him, the suit is well within time inasmuch as the same was filed on 20-1-1984, i.e., within three years from the date of the execution of the agreement dated 24-1-1981 (vide exhibit P.W. 6/1) as the period of limitation (which is three years) would start running from the date of the agreement. The learned counsel in support of his argument has led me through article 113 of the Limitation Act which deals with a contingency when there is no period of limitation provided else­where in the Schedule under the Limitation Act.

20. I am sorry, I am unable to agree with the above contention of the learned counsel for the plaintiff. It is manifest from article 113 that the said article would come into operation only in those discerning few cases where there is no limitation provided in the Schedule under the Limitation Act. In such an eventuality the three years period would be computed for the institution of the suit from the date when the right to sue accrues. Admittedly, the present suit has been filed for recovery of the balance amount which was paid as advance for the purchase of certain goods. Hence, the proper article which will govern the period of limita­tion in the present case would be article 13. I am tempted here to reproduce the provisions of the said article in support of my above view. It envisages “for the balance of money advanced in payment of goods to be delivered the period of limitation would start running from the date on which the goods ought to have been delivered”. The plaintiff placed the order on the defendant No. 1, vide their letter dated 2-11-1979 (exhibit D-1). The said order was for the supply of as many as six machines mentioned at serial numbers 1 to 6 in the body of the said letter. One of the said machines was a deep drying press of 300 mt. capacity, re­ferred to at serial No. 1 of the letter, which is the bone of contention in between the parties. One of the stipulations of the said order was that the machines were to be supplied within three months from the date of the order. Thus, the said machines were to be supplied by 2-2-1980. If the period of limitation is to be computed from the said date then the suit should have been filed on or before 2-2-1983. There is no dispute with regard to the placement of the said order on the said date. This fact has been admitted by P.W.6 Shri R.R. Bhalla in his examination-in-chief. He has got this to say on this point. “The quotation submitted by defendant No. 1 was accepted by the plaintiff, vide agreement dated November 2, 1979, which is exhibit. D-1”. Thus, the factum of the acceptance of the order on the terms and conditions enu­merated in the letter dated 2-11-1979 (exhibit D-1), is very much admitted by the plaintiff. Hence, they cannot wriggle out of their words. They are very much bound by them. Thus, the period of limitation in the present case would commence running from 2-2-1980, and it came to an end on 2-2-1983. The present suit was filed on 20-1-1984. Hence, the suit is barred by time.

21. The learned counsel for the plaintiff in his anxiety to bring the present suit within time raised different pleas during the course of his arguments. However, they are of no avail to him. Para 9 of the plaint deals with the question of limitation. The plaintiffs are very much bound by the averments made therein. It has been stated therein that since the defendant acknowledged their liability to supply the machinery, vide agreement dated 24-1-1981. Consequently, the period of limitation would start run­ning from the said date and if three years are so counted from the said date then the suit is well within time inasmuch as the same was filed on 20-1-1984. The contention of the learned coun­sel does not hold any water. The said agreement in between the parties is with regard to the sale and purchase of the shares. Defendant Nos. 2 and 3, vide the said agreement agreed to pur­chase majority of shares held in defendant No. 1 company from its erstwhile chairman and managing director and other shareholders, i.e., Shri M.R. Bhalla and Shri R.R. Bhalla. Thus, the said agree­ment has got absolutely nothing to do with the supply of the machinery.

22. The learned counsel for the plaintiff has then contended that defendant No. 1 made payments to the plaintiff on different dates. The same is tantamount to acknowledgement of liability. The period of limitation would commence from the different dates on which said payments were made. He has in this connection referred to the entries in the books of account of the defendant in connection with the account of the plaintiff. The said entries are exhibit D-3 to exhibit D-12. The said entries are not tanta­mount to the acknowledgement of liability. The last entry in connection therewith is dated 11-12-1980, on which date payment of Rs. 1 lakh was made to defendant No. 1. The said payments have been adverted to in para 3 of the plaint. Assuming arguendo, even if the period of limitation of three years is computed from the last payment still the present suit is not within time inas­much as the same was filed on 20-1-1984.

23. The learned counsel for the plaintiff has then during the course of his arguments also tried to seek sustenance from a letter dated 23-1-1981, written by Shri Raj Rattan Bhalla who was then acting as the managing director of defendant No. 1 company to the plaintiff (vide exhibit P.W.6/2), wherein there is an acknowledgement that a sum of Rs. 3,81,500 is due to the plaintiff from the defendant. The learned counsel for the plaintiff has argued on the basis of the said letter that it is a clear case of acknowledgement of liability. Hence, the period of limitation should be computed from the last date. The contention of the learned counsel at first blush may appear to be of some substance but on a deeper scrutiny and read in the light of the subsequent events is without any merit. Admittedly, the said letter was written on 23-1-1981, by Shri Raj Rattan Bhalla then director of the defendant No. 1 to the plaintiff wherein he stated that a sum of Rs. 3,81,500 was due to the plaintiff from the defendant. However, on the next day in the agreement dated 24-1-1981 (vide exhibit P.W.6/1), to which Shri Raj Rattan Bhalla is a party there is a reference to the advance payment made by Raj Cylinders (plaintiff) to defendant No. 1 and it is shown to be in the neigh­bourhood of about Rs. 3 or 4 lakh, vide clause (vii) of exhibit P.W.6/1. In view of the above, the question which comes to the tip of the tongue is as to why an exact figure of the advance payment did not find a mention in the agreement dated 24-1-1981, which was of a subsequent date when it was known to Shri Raj Rattan Bhalla on 23-1-1984, that an exact amount of Rs. 3,81,500 had been paid by the plaintiff to the defendant. This goes to show that the said letter had been fabricated by the plaintiff in collusion with Raj Rattan Bhalla, son of Shri M. R. Bhalla who was the managing director of the defendant No. 1 company during those days. In view of the above discussion, I am of the view that viewed from any angle even then the suit filed by the plain­tiff is not within time. It is hopelessly barred by limitation. Issue No. 2 is decided accordingly.

24. Issue Nos. 4, 5 and 6.—All the above three issues are inter-connected, hence, they are being taken up together for the purpose of disposal as the same points are to be gone into while dispos­ing of them.

The learned counsel for the plaintiff in order to show and prove that the contract with regard to the supply of deep drying press was entered into on ‘no profit no loss’ basis has led me through the agreement dated 24-1-1981 (vide exhibit P.W.6/1). It is true that there is a mention in the said agreement with regard to the sale and purchase of machinery on ‘no profit no loss’ basis. The learned counsel on the basis of the said recital in the said agreement wants this Court to conclude therefrom that the im­pugned machinery was to be purchased by the plaintiff on ‘no profit no loss’ basis.

25. The learned counsel for the defendant, Mr. Ishwar Sahai, senior advocate, has refuted the said contention. He has contend­ed that the said agreement dated 24-1-1981 (exhibit P.W.6/1), was for the purchase and sale of the shares. Defendant Nos. 2 and 3, the directors of defendant No. 1 now, wanted to purchase the majority of the shares of defendant No. 1 from Shri M. R. Bhalla, then chairman of the defendant No. 1 and Shri R.R. Bhal­la, managing director of defendant No. 1, vide the impugned agreement. Defendant No. 1 which is a company was in no way connected with the said agreement. In fact, it has got absolutely nothing to do with the same. Hence, the mention therein that the machinery was to be supplied on ‘no profit no loss’ basis does not lead us anywhere. It is a recital which has got no meaning and has got no bearing. The said agreement was by Shri M. R. Bhalla and Shri R.R. Bhalla in their individual capacity and, thus, could not have bound defendant No. 1. The obligations which arose out of the said agreement and which defendant Nos. 2 and 3 undertook to perform for the benefit of Shri M.R. Bhalla and Shri R.R. Bhalla were their personal obligations. The said obligations cannot be so stretched as to bring within their domain defendant No. 1. If there is any grievance of Shri M.R. Bhalla and Shri R.R. Bhalla for the non-performance of any of the covenants they can seek no doubt a redressal of the said grievance against defendant Nos. 2 and 3. However, they can do so in their person­al capacity. Furthermore, a forum was also settled for the re­dressal of the grievances, if any, through arbitration and an arbitrator was to be appointed by mutual consent who was to be a person not lesser in rank than a retired judge of a High Court. Thus, the said parties are bound by the said term in the agree­ment. In view of the above, the said agreement dated 24-1-1981, vide exhibit P.W.6/1 is of no avail to the plaintiff.

26. There is another side of the picture. It has already been observed above while disposing of issue No. 2 that the plaintiff, vide their letter dated 2-11-1979 (exhibit D-1), accepted the offer made by defendant No. 1 for the supply of machines. The terms and conditions enumerated in the said letter cannot be changed subsequently to the detriment of defendant No. 1 through the agreement dated 24-1-1981 (exhibit P.W.6/1) which is pure and simple an agreement for the sale and purchase of shares of defendant No. 1 company. Defendant No. 1 company neither passed any resolution to the effect to supply machinery on ‘no profit no loss’ basis nor could it have passed any resolution to its detri­ment at the meeting of the board of directors. Furthermore, defendant Nos. 2 and 3 could not have participated in any such meeting in which they were interested in view of the clear cut provisions of section 300 of the Companies Act, 1956. The previ­sions of section 300 can be referred to with profit. It runs as under :

“Interested director not to participate or vote in Board’s pro­ceedings—(1) No director of a company shall, as a director, take any part in the discussion of, or vote on, any contract or ar­rangement entered into, or to be entered into, by or on behalf of the company, if he is in any way, whether directly or indirectly, concerned or interested in the contract or arrangement; nor shall his presence count for the purpose of forming a quorum at the time of any such discussion or vote; and if he does vote, his vote shall be void.”

27. Admittedly, defendant Nos. 2 and 3 wanted to purchase the majority of the shares of defendant No. 1. Thus with the said end in view they must have entered into an agreement dated 24-1-1981, vide exhibit P.W.6/1 on certain terms and conditions with Shri M.R Bhalla and Shri R.R. Bhalla. However, the said terms and conditions by no stretch of imagination would be deemed to be binding on defendant No. 1 particularly when the said terms and conditions are to the detriment of defendant No. 1. It can thus be held that defendant No. 1 never agreed to supply the machiner­ies on no profit no loss basis to the plaintiff.

It thus brings us to the question as to whether a sum of Rs. 4,05,000 was paid by the plaintiff to defendant No. 1 by way of advance for the purchase of the machinery as alleged in para 3 of the plaint. Out of the 14 payments which find a mention in para 3 of the plaint, defendant No. 1 have challenged only the four payments, i.e., the payments of Rs. 30,000 dated 2-11-1979, Rs. 20,000 dated 7-5-1980, Rs. 35,000 dated 10-8-1980, and Rs. 17,000 dated 10-11-1980. Besides the above the plaintiff have also alleged the receipt of Rs. 12,000 from defendant No. 1 though the same has been denied by the defendant.

28. The plaintiff in order to show and prove that in fact they made the said payments have placed on record receipts exhibit P.W.4/1, dated 10-11-1980, in regard to payment of Rs. 17,000 exhibit P.W.4/2, dated 10-8-1980, for Rs. 35,000, exhibit P.W. 4/3, dated 7-5-1980, for Rs. 20,000 and photocopy of the receipt dated 2-11-1979, in the sum of Rs. 30,000. The learned counsel further contends that the said receipts are on the letter-head of defendant No. 1. The said receipts bear the initials of P.W.4 Shri P.K. Bhalla, a personnel officer of defendant No. 1 P.W.4 Shri P.K. Bhalla has further deposed to the fact that he did receive the payment for and on behalf of defendant No. 1 and issued the said receipts in token thereof. The learned counsel has then urged that the said payments are also duly reflected in the account books of the plaintiff-company which have been placed on the file of this Court. The learned counsel in this connection has led me through the cash book which was being maintained at the relevant time by the plaintiff-company, the extract whereof is exhibit P.W.2/1. Hence, the learned counsel wants this Court to draw a conclusion therefrom that the said payments were duly made to defendant No. 1 and as such they are liable to refund the said amount to the plaintiff.

29. The learned counsel for the defendant Mr. Ishwar Sahai on the other hand has argued that the said receipts are forged and fictitious. The entries made in the cash book (vide exhibit P.W.2/1) are not worth placing reliance thereupon. Entries relating to the said payment are also forged and fictitious inasmuch as no such payment has been shown to have been made to defendant No. 1 during that period as is crystal clear from the accounts of defendant No. 1 which have been placed on the record (vide exhib­it D-3 to exhibit D-19).

30. I have heard the learned counsel for the parties on the above point and have very carefully examined their rival contentions and have given my anxious thoughts thereto.

31. It is in the statement of P.W.4 Shri P.K. Bhalla that de­fendant No. 1 maintained proper receipt books. The said receipt books contain serial numbers. The impugned receipts, admittedly, are not from the said receipt books. It creates serious doubts with regard to the authenticity of the said receipts. The said receipts were typed at the residence of Shri M.R. Bhalla, father of Shri R.R. Bhalla (as per the statement of P.W.4, Shri P.K. Bhalla).

32. Shri P.K. Bhalla (P.W.4) is a highly interested witness inasmuch as he is a close relation of Shri M.R. Bhalla and Shri R.R. Bhalla. He has admitted this fact with commendable fairness on his part during the course of his cross-examination. He has got this to say on this point that his father and Shri M.R. Bhalla, father of Shri R.R. Bhalla, are cousins. Though this fact has been denied by P.W. 6 Shri R.R. Bhalla in his statement on oath.

33. Shri P.K. Bhalla (P.W.4) has admitted during the course of cross-examination that being the secretary of defendant No. 1 company he was not supposed to receive the cash. However, he could have received the same in case of urgency. Later on, on being asked as to what was the urgency, he has contented himself by pretending ignorance. This fact further becomes relevant in view of the fact that on being asked he was unable to tell that he never issued any such receipts like the impugned ones for any amount to anybody else.

34. P.W. 4 Shri P.K. Bhalla has deposed to the fact that the impugned amounts were handed over to him by Shri M.R. Bhalla in the year 1980 and he was asked to issue receipts in token thereof in the name of the plaintiff-company. The said statement is contradictory to and inconsistent with the statement of Shri R.R. Bhalla (P.W.-6) who has averred on oath that Shri P.K. Bhalla, secretary of defendant No. 1, used to come to his residence to collect the amount from him and he made all the payments to Shri P.K. Bhalla in the presence of his father and secured the re­ceipts in token thereof from him, on the other hand, Shri P.K. Bhalla (P.W.-4) does not talk of the presence of Shri R.R. Bhalla when the payments were made to him by Shri M.R. Bhalla.

35. P.W 4 Shri P.K. Bhalla has asserted in his statement on oath that the amounts received by him, vide receipts exhibit P.W.4/1 to exhibit P.W.4/3 might have been handed over by him to the persons working in the accounts department. In this connection, he has mentioned the names of three persons as Mr. L.B. Sharma, Mr. Balbir Singh Chaudhary and Mr. A. S. Verma. Shri A.S. Verma has appeared before this Court as D.W-1. According to him, when­ever he received any payment he had invariably made an entry to that effect in the account books. Admittedly, no entry is there in the account books of defendant No. 1 with regard to the pay­ment of the said disputed amounts.

36. Exhibit P.W. 4/3 is a receipt dated 7-5-1980, with regard to payment of Rs. 20,000. A close scrutiny of the same reveals that the said amount was received, vide cheque No. 283910, dated 7-5-1980, drawn on the New Bank of India, Tolstoy Marg, New Delhi, on account of payment in connection with the order dated 2-11-1979. Photocopy of the said cheque is exhibit P.W. 1/3. A careful scrutiny of the same reveals that the said cheque was drawn in favour of self by Shri R.R. Bhalla as admitted by Shri R.R. Bhalla (P.W. 6). The amount was received by him as his signature appears on the back of the said cheque. It thus does not appeal to reason as to how and in what manner Shri P.K. Bhalla issued the receipt exhibit P.W. 4/3 for the payment of the said amount through a cheque (vide para 3 of the plaint and again reiterat­ed, vide paras 2 and 3 of the replication). Even if it is as­sumed that after the encashment of the said cheque the payment was made by Shri R.R. Bhalla to Shri P.K. Bhalla in that eventu­ality the said receipt should have been a receipt for cash and not for cheque as shown in para 3 of the plaint and paras 2 and 3 of the replication.

37. Another payment, i.e., for Rs. 35,000 is alleged to have been made in cash, vide receipt exhibit P.W. 4/2, dated 10-8-1980. There is an entry to that effect in the cash book of the plain­tiff-company, vide exhibit P.W.2/1. P.W.-2, Shri B.N. Chadha, has got this to say on this point during the course of his cross-examination “Shri Raj Rattan used to tell me about the transac­tions within a day or two of its occurring. Thereafter, I used to make entry in the account. No payment has been made in my presence”. He was working as part-time accountant. Shri Raj Rattan Bhalla was the chairman of defendant No. 1 company. Shri Raj Rattan Bhalla became a director of the plaintiff-company on 6-2-1981 (vide his statement in his cross-examination). Admitted­ly, all the alleged impugned payments were made prior to his becoming the chairman/director of the plaintiff-company. Hence, how he could have made the payment on behalf of the plaintiff. This goes a long way to show that the account books of the plain­tiff-company have been forged and fabricated.

38. The third receipt is with regard to the payment of Rs. 17,000 (vide exhibit P.W. 4/1) in cash as is manifest, vide  para 3 of the plaint. However, this fact is contrary to the evidence on record. The said payment is alleged to have been made through a cheque, vide exhibit P.W. 1/1. The said cheque is alleged to have been issued by Shri Raj Kishan Bhalla, director of the plaintiff-company payable to self or the bearer. It was encashed by Shri R.R. Bhalla. It is in the statement of Shri R.R. Bhalla that a cheque for Rs. 17,000, dated 10-11-1980, was received by him on behalf of defendant No. 1 and got it encashed. The amount was handed over by him to Shri P.K. Bhalla who issued a receipt. It has been further admitted that the cheque for Rs. 17,000 was a bearer cheque and was issued by his brother on behalf of the plaintiff-company. Surprisingly enough, this fact is not borne out from the record. The fact that the alleged payment was made through a cheque also does not find a mention in the receipt exhibit P.W.-4/1, dated 10-11-1980. This fact, moreover, is contradictory to the statement of Shri P.K. Bhalla, P.W. 4. He has averred through his statement on oath that Shri M.R. Bhalla was the chairman/managing director of defendant No. 1 that when­ever the company needed finances they approached him. The company requested him for money in the year 1980. He gave the requisite money and directed the receipt to be issued in the name of the plaintiff. He, accordingly, did the same. It is further very much surprising as to why the said cheque was not issued in the name of defendant No. 1 though the payment is alleged to have been made to defendant No. 1-company. The plaintiff admittedly is a limited liability company. Thus, in the normal course of business it is expected that a company would make payment to another company only through cheque and not in cash. This is not likely to happen particularly when a company deals with another company in connection with business transactions and when both the compa­nies are having their accounts in banks in Delhi.

39. It is an admitted case of both the parties, as per exhibit P.W. 6/1 (i.e., the agreement with regard to the sale of shares) that accounts were complete up to April, 1980. The accounts thereafter were to be completed under the new management which came to the hands of defendant Nos. 2 and 3. A perusal of the entries in the account books of the defendant reveals that there are entries for the payments made by the plaintiff in cash as well as by cheque after April 1980. However, the entries with regard to the disputed payments are missing therefrom. Thus, it does not appeal to reason as to why no entries were made with regard to the payments in question in the account books of de­fendant No. 1.

40. This brings me to the fourth payment of Rs. 30,000 (vide mark A). The said document was not got exhibited. Thus, it cannot be read in evidence. However, while dealing with it I would like to observe that the said payment has not been recorded in the ac­count books of defendant No. 1.  For the reasons stated above no reliance can be placed on the said receipt. Had the said payment been made it would have definitely found a mention in the account of the plaintiff particularly when other payments have been duly reflected.

41. It has next been urged by the learned counsel for the plain­tiff (vide para 3 of the plaint) that a sum of Rs. 12,000 was returned by defendant No. 1 to the plaintiff in cash on 13-11-1980. The said payment of Rs. 12,000 has got no bearing on the facts of the present case. I thus need not dwell on this point except to the extent that there is no entry with regard to the return of the said amount in the books of account of defendant No. 1. Furthermore, there is absolutely no evidence on record to show as to in what connection the said amount was returned to the plaintiff in cash on 13-11-1980, when a sum of Rs. 1 lakh was paid to the plaintiff by the defendant on 9-12-1980 (as is mani­fest from para 3 of the plaint). Thus, this court is not pre­pared to believe the plaintiff on this point also. It can thus safely be concluded that only a sum of Rs. 3,15,000 was received by defendant No. 1 from the plaintiff and not the sum of Rs. 4,05,000 as referred to in para 3 of the plaint.

42. The case of the plaintiff as set out, vide para 2 of the plaint is that defendant No. 1 company after oral discussions held on 26-10-1979, submitted a quotation for LPG cylinders, plant and machinery. The said quotation was followed by a letter dated 2-8-1980, as a revised quotation which was accepted by the plain­tiff. On the other hand, the case of the defendant is that de­fendant No. 1 submitted a quotation, vide  letter dated 26-10-1979, and the plaintiff accepted the same, vide  letter dated 2-11-1979 (exhibit D-1). It has been denied by defendant No. 1 that they gave a revised quotation dated 2-8-1980, which could have been accepted by the plaintiff. It has also been denied by the defend­ant to have agreed to supply the 300 tonne deep drying press on ‘no profit no loss’ basis. This Court while dealing with other issues has agreed with defendant No. 1 on this point. Surprising­ly enough the plaintiffs have placed on record the said revised quotation dated 2-8-1980, from the defendant to the plaintiff wherein the price of the impugned deep drying press has been shown as Rs. 4,25,000. However, for reasons best known to them the said revised quotation was not got proved. Hence, the same cannot be looked into and is not even worth the paper on which it has been typed. Though there is a denial with regard to the receipt and acceptance of the letter exhibit D-1, dated 2-11-1979, in the plaint. However, the said fact that the order exhib­it D-1 was placed by the plaintiff on defendant No. 1 has been accepted by P.W. 6 Shri Raj Rattan Bhalla. Thus, there is a variation in between the pleadings and the proof. The allegations and the averments in the plaint are quite contradictory to the evidence of P.W. 6 Shri Raj Rattan Bhalla. Thus, the plaintiffs have miserably failed to prove the terms and conditions on which the impugned machine was to be supplied. Exhibit D-1 shows that the plaintiff made a payment of Rs. 3,15,000 only in connection with the supply of machine. Hence, the plaintiffs are bound by the same.

43. Exhibit P.W. 6/1, i.e., the agreement dated 24-1-1981, is of no avail to the plaintiff in order or show and prove that the impugned machine was to be supplied on no profit no loss basis. As already observed above the said agreement is with regard to the sale and purchase of shares in between Shri M.R. Bhalla and Shri R.R. Bhalla and other shareholders on one side, and defend­ant Nos. 2 and 3 on the other. That is not a contract in between the plaintiff and defendant No. 1. Hence, the same is of no avail to the plaintiff as stated above. All the three issues are decid­ed accordingly.

44. Issue Nos. 11, 12 and 13.—In view of the above, the plain­tiffs are not entitled to the recovery of the sum of Rs. 3,54,217.04 from the defendant. The plaintiff are also not enti­tled to any interest. Thus, they are not entitled to any relief whatsoever. The suit of the plaintiff is, accordingly, dismissed with costs quantified at Rs. 12,000.

 

High Court of Delhi

Memtec Ltd.

v.

Lunarmech

Vikramajit Sen, J.

I.A. Nos. 8511 of 1998, 2238, 8315, 10258 of 1999

35 of 2000 and Suit No. 910 of 1995

July 14, 2000

 

Section 3 of the Companies Act, 1956 - Company - Definition of - Whether a company is a distinct legal entity from its sharehold­ers - Held, yes - Whether corporate legal entity mutates or transforms itself or undergoes a transfer with each change in shareholders - Held, no - Whether if total shareholding of a company is purchased by one person or a group of persons acting in concert, legal consequence would be that company ceases to exist or undergoes a cataclysmic metamorphosis leading to its complete disappearance - Held, no - Whether where suit is filed against a company and there is change in its ownership and, consequently, its name, that would result in dismissal of suit - Held, no

Facts

In a pending suit, the plaintiff filed applications for the change of name of plaintiff No. 1 from ‘M’ to ‘UF’ and of plain­tiff No. 2 from ‘MA’ to ‘UFS’, supported by an affidavit, nota­rised and authenticated by the Indian Embassy in the U.S. The U.S. Government had also furnished a certificate in support of the change of names. The defendant opposed the applications on the ground that the same had been filed only after they had moved an application for dismissal of suit as the plaintiff-company had ceased and had been acquired by ‘UF’ which was to be the owner and manufacturer of the machine and also subsequent to the filing of another application for the dismissal of the suit as even ‘UF’ had been taken over by ‘V’.

Held

A company is a distinct legal entity and should not be confused with its shareholders. This distinction appeared to had been lost sight of by the defendant. Shares of companies are usually freely transferable. The corporate legal entity does not mutate or transform itself or undergo a transfer with each change in its shareholders. Even if the total shareholding of a company is purchased by one person, or a group of persons acting in concert, the legal consequence is not that the company ceases to exist or undergoes a cataclysmic metamorphosis leading to its complete disappearance. There is a further distinction between change in shareholding and amalgamation. In the present case the latter had not occurred. The plaintiff at no stage extinguished its exist­ence by a mere change in its name, nor did this follow even if a change occurred in ownership.

The application was accordingly allowed and the amended memorandum of parties was taken on record. Change in ownership of a company was no ground for dismissal of the suit.

Sudhir Chandra Agarwal, Praveen Anand and Ms. Bini Kalra for the Plaintiff. S.K. Mehra and Ms. Mamta Mehra for the Defendant.

Judgment

1.   I.A. Nos. 2238 of 1999, 8511 of 1998 and 8315 of 1999  - These applications have been filed by the plaintiff for change of the name of plaintiff No. 1 from the present Memtec. Ltd. to USF Filteration Ltd. and of plaintiff No. 2 from the present Manteec America Corpn. to USF Filteration & Separation Group Inc. The application is supported by an affidavit of Mr. Kevin F.O. Neill which has been duly notarised and authenticated by the Indian Embassy in Washington D.C.A. certificate from the Australian Securities Commission and Secretary of State, State of Delaware has also been filed in support of the change of names.

2.   The relief has been strenuously opposed by Shri S.K. Mehra, the learned counsel for the defendant. He has contended that the application has been filed only after the defendants had moved I.A. No. 8511 of 1998 for dismissal of the suit “as the plain­tiff-company had ceased and having been acquired by USF Filtera­tion to be the owner and manufacturer of the machine; and also subsequent to the filing of I.A. No. 8315 of 1999 for the dis­missal of the suit as even USF Filteration had been taken over by Vivendi, a French group”. Reliance was placed on the treatise of Dutta and also of Gower on Company Law. It is Mr. Mehra’s conten­tion that an amalgamation of companies had taken place and hence the suit was liable to be dismissed.

3.   It must be borne in mind that a company is a distinct legal entity and should not be confused with its shareholders. This distinction appears to have been lost sight of by the defendant. Shares of companies are usually freely transferable. The corporate legal entity does not mutate or transform itself or undergo a transfer with each change in its shareholders. Even if the total shareholding of a company is purchased by one person or a group of persons acting in concert, the legal consequence is not that the company ceases to exist or undergoes a cataclysmic metamor­phosis leading to its complete disappearance. There is a further distinction between change in shareholding and amalgamation. In the present case the latter has not occurred. The plaintiff at no stage extinguished its existence by a mere change in its name, nor does this follow even if a change occurs in ownership. Neither of the treatises relied on by the learned counsel for the defendant are authorities for the proposition pressed by him. Even where amal­gamation takes place, due care is taken to transfer the assets and debts of one company to the other so as to, inter alia, protect pending litigation. The objection is, therefore, without merit.

4.   In this analysis I.A. No. 2238 of 1999 is allowed. The amended memorandum of parties is taken on record. I.A. Nos. 8511 of 1998 and 8315 of 1999 are dismissed. Change in ownership of a company is no ground for dismissal of the suit.

5.   I.A. No. 10258 of 1999—I.A. No. 10258 of 1999, under Order XI, rule 12 of the Code of Civil Procedure, 1908, has been filed by the defendant on 5-10-1999, inter alia, for the following relief :

“It is, therefore, prayed that this Court may be pleased to direct the plaintiffs to give discovery on oath of all the relevant documents which are in their possession and power in respect of acquisition of Brunswick Corporation by the plain­tiffs; and thereafter acquisition of present plaintiffs by the US Filteration Ltd. and USF Filteration & Separation Group Inc. and again thereafter acquisition of the said companies by Vivendi. The plaintiff be also direct to file the said documents in the Court.”

The application is predicated, as the above extracted relief would itself indicate, on the acquisition of the present plain­tiff by Brunswick Corpn. and thereafter by the alleged acquisi­tion of the plaintiff by USF Filteration Ltd. and USF Filteration & Separation Group Inc. and again by the alleged subsequent acquisition of these companies by Vivendi. In reply, the plain­tiff has disclosed that in the first instance the copyright which vested in Brunswick Corpn. was purchased by the plaintiff; thereafter only a change in name had occurred and hence an appli­cation for amending the memo of parties was filed; thereafter Vivendi had acquired the shares of US Filteration Ltd. and USF Filteration & Separation Group Inc. These companies continued to exist. Documents evidencing these transactions have been filed by the plaintiff, but it is speciously argued that these documents are not sufficient compliance. The contention of the learned counsel for the defendant that because of these transactions an amalgamation of the plaintiff has occurred and hence the suits are not maintainable, is untenable being an incorrect assumption and understanding of the law relating to the formation and existence of companies. For this reason I. As. Nos. 8511 of 1998 and 8315 of 1999 are dismissed by separate orders. This is sufficient reason to dismiss the present application also.

The defence of defendant No. 1, in addition to the challenge to the territorial jurisdiction of the Court is that the plaintiff has no right in the CPP System and that the defendant has not copied the plaintiff’s machines but has adopted and modified the process known the world over. There is a specific denial of the plaintiff’s averment that the defendant has, by reverse engineer­ing, manufactured the machines. It is not the stand of the de­fendant that it has purchased or succeeded to the copyright held by Brunswick Corpn. or obtained a right of user by licence or otherwise from any of the legal corporations mentioned above. Therefore, the discovery of documents pertaining to these companies is of no relevance to the defence of the applicant-defendant No. 1, or to the issues that may arise in the case. This application is dismissed.

6.   I.A. No. 12271 of 1999.—This application has also been filed by the defendant again under Order XI, rule 12 of the Code of Civil Procedure, on 4-12-1999. Its foundation is that the plain­tiff should give discovery of the blueprints and drawings on the basis of which Brunswick Corpn. was manufacturing the machines, along with registration number, model numbers and distinctive marks. Thereafter, documents executed between the United States Filteration Corpn. and Vivendi have been called for. In its reply the plaintiff has stated that full disclosure has been given in response to I.A. No. 10258 of 1999. I am of the view that the plaintiff has made appropriate discovery, even before any order directing it to do so had been passed by the Court, i.e., the draw­ings created by Ms. Susan Buller and blueprints in these proceed­ings as well as in the appellate court. Since the averments in the plaint are to the effect that the plaintiff has obtained the copyright in the machines from Brunswick, documents relating to the latter are not relevant at this stage. If the plaintiff fails to prove its ownership it runs the danger of a dismissal of the suit. The position would be different had it been the case/de­fence of the applicant that it had succeeded to the rights for­merly possessed and owned by Brunswick. This is not its case. Further, I have already expressed the view that the ownership of companies can change hands by transfer/purchase of its shares. Predictably, it has been stated in the plaintiff’s reply that no documents have been executed between the plaintiffs and Vivendi. The application is dismissed with costs of Rs. 2,000.

7.   I.A. No. 35 of 2000.—This application can be appropriately considered after the issues have been struck by the Court and, therefore, a decision is deferred.

8.   S. No. 910 of 1995.—On 22-7-1998, the Division Bench of this Court had directed that the matter be listed before the Joint Registrar on 17-8-1998, for admission/denial of documents. It was thereafter directed to be listed on 24-8-1998, for framing of issues and that the trial would commence sometime in the first week of October, 1998, and would go on day-to-day basis. Because of the frequent filing of applications these orders have not been implemented till date.

9.   Accordingly, the suit be now listed for framing of issues on 31-7-2000.

 

[1970] 40 COMP. CAS. 809 (CD)

CHANXERY DIVISION

F. Goldsmith (Sicklesmere) Ltd.

v.

Baxter

STAMP, J.

JULY 3, 4, 7, 1969

 

Stamp-J.—This is an action by the plaintiff company for specific performance of a contract for the sale to the defendant of a piece of land, cottage and buildings known as "Shelley," Stanstead, Suffolk. The plaintiff company, is a company incorporated under the Companies Act, 1948, as one limited by shares. Its issued share capital consists of 1,500 shares all owned by a Mr. Brewster, his wife and son, to whom I shall hereinafter refer as Mr. Brewster junior. Each owns 500 shares. The three Brewsters are directors of the plaintiff company. It carries on businesses a bus and coach contractor at Sicklesmere, near Stanstead, at a garage-bungalow. Its registered office is at the bungalow. It was incorporated on June 8, 1949. Locally it is known as Goldsmith Coaches; that as I understand it, is the . name which appears above the garage premises, although the plaintiff company properly displays at its registered office at the garage its registered: name, which of course is F. Goldsmith (Sicklesmere) Ltd. In 1966 it purchased for the sum of £5,000 from Edith Annie Honeywood property of which "Shelley," the property the subject-matter of this action, forms part. So much did Mr. Brewster regard the name "Goldsmith Coaches" as (the plaintiff company's name that when, on the occasion of the purchase from Mrs. Honeywood his solicitor, Mr. Winch, asked him the name of the plaintiff company, he told Mr. Winch it was Goldsmith Coaches (Sicklesmere) ' Ltd., with the insult that the land was conveyed by a conveyance dated "March 16, 1966, to the purchaser under that name. Whether the effect of that was that the conveyance was ineffective to pass the legal estate so that Mrs. Honeywood was a bare trustee for the plaintiff company, or whether the error was one which could have been remedied by evidence that the person named as purchaser was a director of the plaintiff company, it is: unnecessary to decide, because it is manifest that the plaintiff company paid the purchase price to Mrs. Honeywood became beneficial owners property, and entitled if necessary to call for a conveyance, and in fact on May 7, 1968, when the error was discovered, a confirmatory conveyance was executed.

I, should perhaps mention that May 7, 1968, was the date fixed for completion of the contract which I have to consider. Part of the land purchased from Mrs. Honeywood that is "Shelly" was, or became, surplus to the requirements of the plaintiff company, and the Brewsters decided to sell it, and so, "Shelly" was put up for sale. On or about February 12, 1968, the defendant came to the garage premises as a prospective purchaser. He first saw Mr. Brewster junior, and later in the day Mr. Brewster himself. Mr. Brewster, at the request of the defendant, who I think wanted to check the parcels of the property being sold, took the defendant that same after noon to see Mr. Winch, and before the end of the day the defendant had orally agreed with Mr. Brewster to buy the property and the price had been agreed. Mr. Brewster junior had at the outset, that is, before Mr Brewster himself arrived on the scene, told the defendant that the property being sold belonged to a company: Goldsmith Coaches, I think he said.

It is unnecessary to decide if there was on that day a concluded oral agreement, -because the plaintiff company's counsel did not rely on any such oral agreement. There probably was not an oral agreement, because it appear? to have been contemplated that a formal written agreement would be entered into. Thereafter matters took a normal course down to the point at which the written agreement came into existence. It is also necessary to remark that the correspondence between the solicitors for the plaintiff company and for the defendant, and the preliminary inquiries were headed "Brewster to Baxter." The contract was prepared in Mr. Winch's office, and perhaps not surprisingly in view of how the title stood, Goldsmith Coaches (Sicklesmere) Ltd. was named in it. The National Conditions of Sale were used, and the agreement, which was dated April 9, 1968, took the form of a memorandums of agreement that Goldsmith Coaches (Sicklesmere) Ltd., whose registered office was situate at Sicklesmere in the county of Suffolk, was the vendor, and that Eric Hugh Baxter, was the purchaser of the property described in the accompanying particulars of sale at the price of £4,300 subject to the accompanying conditions of sale. "Shelley" was of course described in the particulars. The contract had one or two other features to which I must draw attention. In the first place, as I have said, the property was described as "Shelley"; secondly, it was stated that the tender was the beneficial owner of it; thirdly, that the memorandum was signed by Mr. Brewster "for and on behalf of Goldsmith Coaches (Sicklesmere) Ltd."

Thereafter matters again took a usual course until the defendant's solicitors, searching to see if there was any charge registered against the vendor in the companies register at Bush House, were unable to trace any company registered in the name of Goldsmith Coaches (Sicklesmere) Ltd. They so informed the plaintiff company's solicitor in a letter of April 23, 1968. The plaintiff company's solicitors on April 26, 1968, replied fully to the defend ant's solicitors' letter, and in justice to them I think I should read the letter of April 26, in full.

It runs as follows:

"Thank you for-your letter of the 23ra4nstant, the contents of which we note. We have taken this up with our client, who was under the impression that his company was called Goldsmith Coaches (Sicklesmere) Ltd., and he certainly instructed us that this was its name when we acted for him on the purchase of the property. On reference to his accountants who were responsible for the formation of the company, we are informed that the name of the company is in fact F. Goldsmith (Sicklesmere) Ltd.

"As the conveyance executed by the vendor to the company is to a non-existent company we take the view that it was ineffective to pass a legal estate but that the then vendor having received the money from F. Goldsmith (Sicklesmere) Ltd., holds the property upon trust for that company; and it appears to us that a supplemental conveyance by the original vendor should be executed. We suggest that this can conveniently be endorsed on the ineffective conveyance and enclose herewith a draft of the proposed conveyance for your approval.

"If you agree with our view of the situation and approve the proposed confirmatory conveyance we can arrange to have this executed by the original, vendor without causing undue delay."

As I have indicated, the confirmative conveyance was in fact executed by the original vendor on May 7, 1968. Taking the view, however, that there was no vendor and therefore no contract, the defendant's solicitors gave advice to the defendant which resulted in his refusing to complete.

The defendant has Continued to take up this position, and his short defence to this action is: no vendor, no contract.

A somewhat elaborate argument has been addressed to me on behalf of the plaintiff company, and I have been invited to a number of authorities where there has been a mistake as to the identity of one of the contracting parties, and where a distinction has been drawn between a case where that identity was material, inducing the other party to enter into the contract, and a case where it was not. It has been urged that since in this case it mattered not to the defendant with whom he was contracting, the plaintiff company should succeed, notwithstanding that there was no person known to the law as Goldsmith Coaches (Sicklesmere) Ltd. There is much confusion here: there must be two parties to a contract for the sale of land, vendor and a purchaser, and if there was in truth no such person as is stated to be the vendor in the memorandum of April 9, 1968, the conclusion that there was no contract appears to me inescapable. In my judgment the question: contract or no contract? depends on the answer to the question whether applying permitted principles of construction, the vendor named and described in the memorandum can be found to be identical to plaintiff company

Looking at the memorandum alone, and without regard to the surrounding circumstances. It seen find that the person—the persona fida—said to be the vendor has the following characteristics: (1) it is named Goldsmith Coaches (Sicklesmere) Ltd.; (2) its registered office is said to be at Sicklesmere; (3) it has an agent called a who claims to act for it is the beneficial owner of " Shelley.

Applying the rule that a contract is to be construed by reference to the surrounding circumstances, or in the light of the known facts. It timing is (1) there is no limited company which in law has the name Goldsmitr Coaches (Sicklesmere) Ltd., but the plaintiff company is often known as "Goldsmith Coaches" and carries on business as a bus and coach contractor and does so at Sicklesmere; (2) the plaintiff company's registered Office is at Sicklesmere, in the very place at which it carries on the bus and coach business; (3) the plaintiff company has an agent called and (4) it is the beneficial owner of "Shelley" also there is no other company having those characteristics. Applying this process, if it be permissible, the conclusion beyond peradventure is that Goldsmith Coaches (Sicklesmere) Ltd; is no more nor less than an inaccurate description of the plaintiff company, F. Goldsmith (Sicklesmere) Ltd.

On behalf of the defendant, Mrs. Puxon was constrained to concede, and she could not do otherwise, that the process which I have adopted to conclude that the plaintiff company is the vendor on behalf of whom Mr. Brewster contracted, is a proper process for identifying a vendor who is an individual and who had been inaccurately described in a contract. But it is urged that the process not permissible in ascertaining the identity of a company incorporated under the Companies Acts. Unlike a natural person, who can be recognised and identified by physical characteristics, a limited company, it is submitted, can only be recognised and identified by its registered name, and unless you find the correct registered name of a company in a document purporting to be a contract, or at least a name, so nearly correct that you can see merely by looking at it that the correct name of a particular company is intended, there is no contract.

It appears that in ancient times, acts of corporations were often avoided on this ground—namely, that a corporation, unlike a natural person has no identity but its name, and that if it does not act by its name, the act is not its act (see Grant's Law of Corporations (1850), at p. 145):

"But…”, says the author of that work, " equity very early, at latest in the reign of James I, began to relieve against this doctrine of the courts of common law, Lord Ellesmere, C, laying down, in effect, that an error in the name of a corporation demising by lease was of no importance, so long as it could be seen that the same corporation was meant, and there was no other corporation to which the name in the lease could be reasonably taken to refer, and he added, that’s his was the old law, and that judges might have done well at the first to have expounded it so."

In the absence of authority constraining me to do so—and none has been cited—I would find it impossible to hold that a company incorporated-under the Companies Acts has no identity but reference to its correct name, or that, unless an agent acts on its behalf by that name, or a name so nearly resembling it that it is obviously an error for that name, he acts for nobody. A limited company has, in my judgment, characteristics other than its. name by reference to which it can be identified: for example, a particular business, a particular place or places where it carries on business, particular shareholders and particular directors. If there are two limited companies having the same characteristics, then it is hardly to be supposed that each of them was incorporated on the same day, and owns the same property. Moreover, to accept the submission advanced on behalf of the defendant, would be to introduce a source of great confusion and uncertainty in respect of business transactions. Would it not follow that a memorandum signed by an auctioneer on behalf of the vendor or the owner would fail to bind the owner or vendor who was in fact a limited company?

Mrs. Puxon sought to escape from that position by submitting that special considerations applied to sales by auction. I am not persuaded that there is any relevant distinction between a memorandum signed at an auction and a memorandum signed to record an oral private contract, except perhaps that at an auction neither party at the moment when the oral contract is completed, when the hammer falls, may be aware of the identity of the other party. But assuming the distinction, I would be reluctant to hold that, if property is withdrawn from the auction and, as often happens, the auctioneer receives and accepts an offer when the auction is concluded, that this act of acceptance is a nullity unless he names with precision the limited company on whose behalf he has agreed to sell the property.

Happily there has come to light an authority which assists me to come to the conclusion to which I have come in its absence. Commins v. Scott was concerned with an agreement for the sale of real estate which did not disclose the names of the vendors, but it appears therefrom that the vendors were a company in possession of the property offered for sale and that they had carried on operations thereon. Thus that was a case where a company (and it was a limited company) was not named at all. Sir George Jessel, M.R., pointed out that the question in the case was: was there a contract? And he added, at page 16:

"Now, in order that there may be a contract, at least two things are necessary namely, contracting parties, and subject-matter of a contract. No. doubt other things are necessary, such as proper words of contract; but at all events, those two things there must be."

The only question which there had to be decided was whether the written memorandum of agreement contained a sufficient description of the parties to the contract. He continued his judgment by pointing out:

"Now the court ought to be careful not to manufacture descriptions, or to be astute to discover descriptions which a jury could not identify; for, as I understand it, at law that would be a question for the jury."

Upon the facts of that case, the Master of the Rolls pointed out that the memorandum there in question showed that the vendors, as here, employed a particular agent; it showed that they were in possession of the property to be sold, and were carrying on operations there and, finding that the vendor company in that, case was a company having those characteristics, the Master of the Rolls concluded that there was a good contract. He said at page 17:

"In my opinion, the only fair inference from these conditions is, that the vendors are a company in possession of the property, who have been carrying on operations there; it is admitted that the plaintiffs are such a company; and I am of opinion, therefore that there is a good contract."

Commins v. Scott was not a case of misdescription of a company, and it is not a direct authority in the present case, but I derive assistance from it to show that it is not essential to the validity of a contract made on behalf of a limited company that the company should be described with precision.

The name of the company on behalf of which signed the memorandum was a matter of indifference to the defendant, provided only that the vendor could be identified with certainty. There was no lack of the necessary consensus. It does not lie in the defendant's mouth to say that he paid cash under a contract with a non-existent person. The plaintiff company is entitled-in my opinion to have the contract specifically performed, but the claim for ratification is in my judgment misconceived. Either the plaintiff company was a party to the contract, or there was no contract, and I cannot rectify a non-existent contract.

The plaintiff company set up an alternative case of estoppel, resting on the fact that the defendant, with the permission, as I find, of Mr. Brewster went into possession of the property. In view of my decision that it was a party to the agreement, I express no opinion whether Mr. Sunnucks was successful in getting into the saddle of that unruly horse.

I will declare that the plaintiff company, although erroneously named Goldsmith Coaches (Sicklesmere) Ltd., was a party to the agreement in the pleading mentioned, and that the said agreement ought to be specifically performed, and will make the usual order for specific performance.

Order according.

 [2004] 52 SCL 762 (Guj.)

High Court of Gujarat

Floating Services Ltd.

v.

MV ‘San Fransceco Dipalola’

D.A. Mehta, J.

Admirality Suit No. 3 of 2004

and Misc. Civil Application No. 14 of 2004

March 9, 2004

 

Section 34 of the Companies Act, 1956 read with sections 651 to 653 of the British Companies Act, 1985 - Company - Effect of registration of - Whether on date of filing suit a company whose name has been struck off from Register of companies and as a consequence dissolved, can initiate any legal proceedings so as to be valid in law - Held, no

Facts

In a suit filed by the plaintiff, a UK based company, it was alleged that the company had purchased the vessel and sold it to defendant No. 2 who paid only 10 per cent of the consideration. However, on account of default in payment of entire balance consideration no delivery was given by the plaintiff. The defendant had prepared forged bill of sale and obtained registration certificate from Beuze Ship Rigistry, and on that basis, the vessel was removed by him from the port. On these facts, the plaintiff sought for restoration of possession of ownership of the vessel and arrest of the defendant-vessel. The Court under the Admiralty Act, passed an ex parte order of arrest of vessel.

In the meanwhile, the defendants filed a miscellaneous application (OJMCA) seeking to set aside the order of arrest and award of damages for wrongful arrest and detention of vessel. According to the defendants, the entire plaint was based on false statement, suppression of material facts and reckless allegations with complete knowledge that such statements and allegations were false, and also that the plaintiff company had been dissolved after having been struck off from Register of the Companies House under the provisions of sections 651 and 652 of the British Companies Act, 1985.

Held

The merits of the dispute between the parties had not been gone into as both the sides presented their case only in relation to the preliminary issue: viz., whether the plaintiff could have presented the suit in the circumstances of the case. In the circumstances, the question before the Court was not as to what was the effect of an order of restoration but as to whether on the date of filing the suit, a company, whose name had been struck off from the register of the companies and as a consequence, it was dissolved, could initiate any legal proceedings so as to be valid in law. [Para 13]

One of the characteristics of a company is that it is an incorporated body of persons. It is not mere aggregate of its members : it is not like a partnership firm or a family. The company is constituted into a distinct and independent person in law and is endowed with special rights and privileges; it is in law a person distinct from its members. The advantage of incorporation is that a company never dies. It has perpetual succession and remains in existence, however, often its members change, until its dissolution. This prevents the dissolution of the company by the death, bankruptcy, or lunacy of any of its members - unlike a partnership firm. This characteristic offers to a company and its shareholders various special advantages and privileges; more particularly, the company is permitted to acquire and hold property in its corporate name, and enables the company to use a common seal, to contract with its shareholders and others. [Para 15]

A company is a separate legal entity notwithstanding the fact that there is only one governing director who also holds a majority of the shares of the company. The separate legal entity enabled the director, representing the company, to enter into a contract of employment with himself in his individual capacity. [Para 16]

Companies incorporated under the Act are capable of suing and being sued in their corporate names. A company’s right to sue arises when some loss is caused to the company, i.e., to the property or the personality of the company, as distinct from a loss occasioned to the directors of the company. The rights of the company and the rights of its shareholders are not co-extensive. Incorporation brings into existence a legal person which develops into its own separate existence as a business or enterprise. A company, as a person separate from its members, may even sue one of its own members for libel. The publication of any statement which disparages the business of the company, defames the company at the same time. Hence, the company is entitled to sue in damages for libel or slander as the case may be. [Para 17]

A shareholder has a limited restricted right only after an order of winding up is made, liabilities of the company discharged and then if any surplus of assets is left. In the instant case it was not possible even for the plaintiff to make a statement that the shareholder was entitled to the vessel as being net surplus of assets after discharging all liabilities of the company. In fact, during the course of hearing a stand was adopted that one Mrs. ‘R’, was the sole shareholder and director of the plaintiff company and, hence, was an interested person. Once the position was admitted that the company was struck off from the register and dissolved as a consequence there was no question of any particular shareholder, even the sole shareholder, making a claim to the property of the company without showing that all liabilities of the company stood discharge. [Para 22]

Limited company is a separate legal entity distinct from its shareholder. Merely because there is only one shareholder, the entities which are otherwise distinct, one is a natural person and the other is an artificial juristic person, it cannot be contended that the said entities merge and one can act for and on behalf of other. The principle of agency has to be understood and appreciated in light of the provisions of the Act, memorandum and articles of association of the company. [Para 23]

Section 291 deals with general powers of the Board; but this does not include power to institute suits/legal proceedings. [Para 24]

Unless the power to institute a suit is specifically conferred on a particular director, he would have no authority to institute a suit on behalf of the company. Individual directors are vested with only such powers as are available to them either under the memorandum or articles of the company, or otherwise by the board of directors. A managing director also does not have any power to manage the affairs of the company over and above those available to the Board; the managing director can exercise only such powers as have been delegated to him. A company cannot orally authorise another person to sign a plaint on its behalf. A company can act only as provided under its articles of association. [Para 25]

On the date of presentation of the suit, the company was admittedly struck off the register and dissolved. There could be, therefore, no question of ratification of an action which a non-existent entity could not have initiated in the first instance. [Para 28]

Admittedly, the plaint was signed and verified by a person who was neither secretary, nor director, nor principal officer of the plaintiff. Hence, he was not a person who was able to depose to the facts of the case. [Para 29]

Moreover, there were three statements of the same lady stating at one place that restoration application was already made on 5-3-2004, another where it was accepted that as the suit was filed in extreme urgency the plaintiff could not make an application for restoration and third one where it stated that the application was being moved on 8-3-2004. These by themselves did not determine the lis between the parties, and appeared to be small blemishes when viewed in isolation, but were factors which when cumulatively considered reflected upon the conduct of the plaintiff/shareholder. [Para 31]

It was thus, clear that : (i) there was absence of full and frank disclosure; (ii) there was a misstatement of a material fact or suppression of material fact; and, there was withholding of a vital fact by the plaintiff. This amounted to commission of fraud on the Court. Misrepresentation itself amounts to fraud. A representation is fraudulent not only when the person making it knows it to be false, but also when, he ought to have known, or must be taken to have known, that it was false. The plaintiff was a limited company - a juristic entity - acting through a living person. That person claimed to be sole shareholder-director, who admitted that she instructed the Company Secretary in July 2003 to apply for having the name of the company struck off from the register; and that she received letter and notice from the Registrar in July and September 2003 : and yet expected the Court to believe that there was no suppression. There was no offer/attempt to amend the plaint even after receipt of OJMCA. The offer, during course of hearing, was only to substitute the plaint to remove defects. Therefore, that was a clear case of deception. Fraud and deception are synonymous. [Para 36]

A non-existent entity cannot ratify any action which it could not have initiated : there is no director, no secretary, no principal officer. The company having been dissolved there is no entity/person who can authorise anyone. A shareholder of erstwhile company cannot claim any right, title or interest in any particular asset/property of the company. Then there is no question of executing any power of attorney as authorised signatory. [Para 37]

The legal position is well settled that on dissolution, properties of a company vest in the Government. By virtue of section 654 of the 1985 Act even if the property of the company is not sold (as per the plaintiff), the property has vested in the crown. Then there is no question of any person, including a shareholder, staking a claim to the property; and, thus, filing a plaint by self or through a power of attorney holder. [Para 39]

On a conjoint reading of provisions of sub-sections (1) and (2) of section 653 of the 1985 Act it is apparent that a company or any member or creditor can apply to a Court if the company or member or creditor feels aggrieved by the name of the company having been struck off from the register. The Court is required to be satisfied that at the point of time when the name of the company was struck off from the register, the company was carrying on business or was in operation, or otherwise, that it is just that the company be restored to the register. Therefore, the person applying for restoration has to be a person who is aggrieved. The concept of ‘aggrieved’ here means that the order of striking off has resulted in a situation which is detrimental to the applicant, viz., company or any member or creditor. Therefore, unless the applicant is ‘aggrieved’ there is no question of making an application seeking restoration. Upon an application being made the Court is required to ascertain whether the company was carrying on business or was in operation at the time of the striking off the name from the register. In effect, it means that the reasonable belief entertained by the Registrar of Companies under section 652(1) of the 1985 Act is found to be incorrect. For the Court to record such a finding there must be some material available on record. The other alternative contention which permits the Court to exercise discretion requires that ‘it is just’ that the company be restored to the register. This requirement has to be backed by facts and circumstances prevailing in a given situation so as to enable the Court to exercise discretion in favour of the applicant, namely that the action of the Registrar striking off the name of the company of the register would result in creating a situation which is unfair and unjust to the applicant. [Para 46]

In the instant case, admittedly, the plaintiff could not seek restoration on the ground that it was carrying on business or was in operation at the time when its name was struck off, as the plaintiff had applied that its name be struck off from the register as the company was not carrying on business or was not in operation. In light of the fact that an application had been moved, it was not necessary to deal with the alternative situation whether it would be permissible for the Court to exercise discretion on the basis of the consequence of striking off being unjust to the applicant. Suffice it to state that there had to be cogent and sufficient material in that regard. [Para 47]

Section 654 of the 1985 Act stipulates that property and rights of a dissolved company are deemed to be bona vacantia and, accordingly, belong to the Crown. Once this was the position, the plaintiff could not seek any relief on the basis of being owner of the property without either impleading Crown or putting it to notice. [Para 48]

In the aforesaid factual matrix even if the plaintiff had moved an application seeking restoration of the company to the register it was not necessary to await outcome of such application. Considering the fact that an order of arrest was operating against the defendant it was not possible to do so, especially in light of the fact that the plaintiff was not inclined to permit vacation of the ex parte interim order of arrest. [Para 49]

In the aforesaid fact situation it was not possible to state that these were procedural defects which did not go to the root of the matter and should not be permitted to defeat a just cause. The plaintiff had failed to make out a case. [Para 53]

In the result, the OJMCA was allowed and as a consequence the suit was dismissed. The order of the arrest of the vessel was vacated/set aside. [Para 54]

Cases referred to

Lee v. Lee’s Air Farming Ltd. [1961] 31 Comp. Cas. 233 (PC) (para 16), Nandgopal v. NEPC Agro Foods Ltd. [1995] 83 Comp. Cas. 213 (Mad.) (para 17), Metropolitan Saloon Omnibus Co. Ltd. v. Hawkins [1859] 28 L.J.CL. 830 (para 17), Agarwalla H.P. v. Union of India [1963] BLJR 127 (para 18), O.K. Trust v. Rees 23 TC 217 (para 19), Stanely v. Gramophone & Typewriter 5 Tax Cases 358 (CA) (para 19), I.R. v. John 8 TC 20 (CA) (para 19), Kodak v. Clark 4 TC 549 (para 19), Mrs. Bacha F. Guzdar v. CIT AIR 1955 SC 74 (para 20), United Bank of India v. Naresh Kumar AIR 1997 SC 3 (para 26), ‘VASSO’ (Formerly ‘ANDRIA’) [1984] 1 LLR 235 (CA) (para 33), Seemax Construction (P.) Ltd. v. State Bank of India AIR 1992 Delhi 197 (para 34), S.P. Chengalvaraya Naidu v. Jagannath [1994] 1 SCC 1 (para 35), Ram Chandra Singh v. Savitri Devi [2003] 8 SCC 319 (para 36) and Pierce Leslie & Co. Ltd. v. Miss. Violet Ouchterlong Wakshare AIR 1969 SC 843 (para 38).

M.J. Thakor and A.S. Vakil for the Plaintiff. Pratap and R.J. Oza for the Defendant.

Judgment

1.   This suit has been presented by the plaintiff seeking arrest of defendant No. 1-Vessel, i.e., M.V. ‘San Fransceco Di Paola’ in the following circumstances :

2.   The case of the plaintiff is that the plaintiff, a Limited Company, incorporated under the laws of United Kingdom and having its address as stated in the cause title, is the owner of defendant No. 1-Vessel. It is stated that the said vessel was purchased by the plaintiff from one Audrey ventures company on 27-6-2000. That thereafter the plaintiff entered into a Memorandum of Agreement dated 1-7-2003 with defendant No. 2 for sale of vessel for a consideration of US $ 4,00,000 and defendant No. 2 paid 10% of the said consideration. The expected time of delivery of the vessel was 7-7-2003. However, according to the plaintiff, as defendant No. 2 had not paid the entire balance consideration, no delivery was given by the plaintiff. It is further averred that defendant No. 1 - vessel was laid up at the port/Harbour of Oostende Port, Belgium since 27-6-2000 and hence, there was no crew on board. The case of the plaintiff is that defendant No. 2 clandestinely removed the vessel from the closed basin and sailed the vessel out of the Oostende Port without paying the balance consideration of US $ 3,60,000. That for this purpose, it is averred, the defendant No. 2 utilized a forged bill of sale dated 30-6-2003 and obtained a certificate of registration dated 6-11-2003 issued by the Belize Ship Registry.

3.   In the circumstances, the plaintiff seeks declaration to the effect that the plaintiff is the sole owner of the vessel and title vests with the plaintiff, that defendant No. 2 or any person claiming through the said 2nd defendant does not have any right, title or interest in the vessel and the vessel is required to be restored in lawful possession of the plaintiff. Over and above such a declaration, the plaintiff has also sought a mandatory injunction against defendant No. 2 or any other person claiming through the 2nd defendant and being in possession of the vessel, directing them to hand over the possession of the vessel to the plaintiff.

4.   The suit came to be filed on 1-3-2004. The learned Advocate for the plaintiff mentioned the matter at 11.00 a.m. on the said day and sought circulation of the matter on the ground of urgency. Upon such permission having been granted the matter was taken up for hearing at 2.15 p.m.

5.   Mr. M.J. Thakor, learned senior counsel appearing for Mr. A.S. Vakil, learned Advocate for the plaintiff submitted that in the aforesaid backdrop of facts and circumstances the plaintiff had filed the suit claiming possession of ownership of the vessel and as the same was a maritime lien and claim the suit under the Admiralty Act was maintainable. It was submitted that the vessel was in port and Harbour of Alang, i.e., Alang anchorage, and hence within the territorial jurisdiction of this Court. An apprehension was expressed that defendant No. 2 was likely to enter into a sale or had already entered into a sale of the vessel with a Ship breaker and hence, an order seeking arrest of the vessel to protect the interest of the plaintiff was sought for till the defendants appear and furnish necessary security. Accordingly, on 1-3-2004 an ex parte order of arrest came to be made by this Court.

6.   The defendants have filed OJMCA No. 14 of 2004 and the same came to be presented on 4-3-2004. Considering the urgency of the matter both the Misc. Civil Application and the suit were taken up for hearing on 5-3-2004. Thereafter, the matters have been heard continuously on 8th & 9th March, 2004. The defendants in the application presented by them have prayed that the order of arrest dated 1-3-2004 (wrongly mentioned as 2-3-2004) be set aside and/or vacated. A further prayer seeking damages @ US $ 4,000 per day for wrongful arrest and detention of the vessel has also been made and consequential prayer seeking direction to the plaintiff to furnish a bank guarantee has also been made. The case of the defendants is that the entire plaint is based on false statements, suppression of material facts and reckless allegations with complete knowledge that such statements and allegations are false and hence, it is the say of the defendants that the ex parte order of arrest of the vessel dated 1-3-2004 be vacated and defendants be compensated by awarding adequate damages for wrongful arrest. The basis for the stand adopted by the defendants is the factum of the plaintiff company having been dissolved on 16-12-2003 after having been struck off from the Register of Companies House of the United Kingdom.

7.   Before adverting to the contentions raised on behalf of the respective parties it is necessary to briefly recapitulate facts which are admitted and undisputed. The plaintiff, a limited company, has come into existence on 29-6-2000 bearing company No. 04023540. The plaintiff purchased the vessel on 27-6-2000 from one Audrey Ventures Company Limited, U.S.A. The vessel was originally plying under the name of ‘Princess Christine’ which has subsequently been changed to the present name, i.e., MV ‘San Fransceco Di Paola’. The plaintiff has no other property and no other business. Since the day the vessel was purchased by the plaintiff it has been lying in the closed basin of Oostende Port, Belgium. The vessel required extensive repairs. The last account of the plaintiff company has been made upto 30-6-2002 (dormant) and similarly last return was made upto 29-6-2002. The next return due was 27-7-2003. The Company Secretary of the plaintiff is one Eikos International Ltd. and has been appointed on 29-6-2000. The registered address of the plaintiff is the same as address of the Company Secretary. The plaintiff has only one Director, who is sole shareholder and has been appointed in the capacity of Director on 29-11-2002.

8.   On 18-7-2003 application for having name of the company struck off from the register of the Companies House was made by or on behalf of the plaintiff, under instructions of the plaintiff. The first Gazette notice for voluntary strike off as statutorily required came to be published on 26-8-2003. Similarly the final Gazette notice for voluntary strike off as statutorily required came to be published on 16-12-2003, and upon such publication in the Gazette, as a statutory consequence, plaintiff company came to be dissolved.

9.   The suit has been filed, as already noticed, by the Limited Company. The plaint has been signed by the constituted attorney, viz., one Mr. Shridhar Burke. The dispute between the parties is as to whether the plaintiff had executed the final sale in favour of defendant No. 2 as per Bill of Sale dated 30-6-2003. The case of the plaintiff is that the said Bill of Sale (Exh. ‘E’) is a forged document and hence, there is no completed contract of sale entitling defendant No. 2 to possess the vessel in absence of any right, title or interest in the said property. There is a further dispute between the parties that the consideration for the sale which was fixed as per Memorandum of Agreement at US $ 4 lacs (US $ 4,00,000.00) has not fully passed from defendant No. 2 to the plaintiff. The defendants have disputed both the averments. It is stated that the vessel was already under existing charge and had various outstanding dues against its name. That defendant No. 2 paid off those dues either in entirety or at a settled figure and hence, as per the understanding between the parties the plaintiff had executed the Bill of Sale dated 30-6-2003, which was in fact executed on 12-7-2003.

10. Mr. M.J. Thakor, appearing on behalf of the plaintiff submitted that it was an admitted position that the plaintiff company was dissolved on the date of presentation of the suit, but the sole shareholder who is also the only Director of the plaintiff company, was not aware of the fact of the name of the company having been struck off; that the said shareholder-Director became aware of this fact only when OJMCA was served on the plaintiff, and hence, the plaintiff has taken appropriate steps to have the company restored to the Register by moving appropriate application on 8-3-2004. Mr. Thakor also accepted the fact that the vessel being the only asset of the plaintiff company and having entered into an agreement to sell on 1-7-2003, the shareholder Director had pursuant to the said agreement directed the Company Secretary to move an application for having the name struck off from the Register. That accordingly on 18-7-2003 the Company Secretary had moved such an application. It is reiterated with emphasis that sole shareholder Director was not aware of any subsequent developments viz. post 18-7-2003 and hence, the application seeking restoration. It was submitted that the law was well settled that upon an order of restoration being made the company would stand restored to the Register and the consequence of such restoration would be that the company and all other persons would be placed in the same position as if the company’s name had not been struck off from the Register. Reliance was placed on provisions of sections 651, 652 and 653 of the Companies Act, 1985 (1985 Act) as well as various decisions to contend that once an order of restoration was made it shall be deemed as if the company was never struck off from the Register of Companies House. It was further submitted that as could be seen from various decisions pressed into service, the said decisions were rendered in different factual scenario, viz., one, where the company whose name had been struck off from the Register had applied for restoration before initiating any proceedings; second, a situation where the company whose name had been struck off from the register had moved an application for restoration where proceedings had been initiated but no effective hearing had taken place, and, last a situation where the parties, including third parties, had acted in pursuance of such dissolution and an application for restoration came to be moved after number of years, albeit within the statutory period of limitation of 20 years. Thus, according to Mr. Thakor in any set of circumstances the position in law was that once an application for restoration had been made and restoration ordered the company was deemed to be in existence as if its name had never been struck off from the register. The contention, hence, was that the plaintiff in the present case had already moved an application for restoration and once an order to restore the plaintiff to the register was made all actions, including the present suit initiated by the plaintiff would be legal and valid, being the consequence of the legal position or a legal fiction that the company was never dissolved. It was further submitted that the dissolution of the company was as a result of the name of the company being struck off from the register and the dissolution did not succeed as an order of winding up.

11. Mr. Pratap, learned Advocate appearing on behalf of the defendants contended that as could be seen from provisions of sections 651, 652 and 653 of the 1985 Act, the power of restoration was discretionary in nature and the entire basis on which the case of the plaintiff has proceeded is not warranted in light of the language employed in the provisions. It was further submitted that the case built on restoration is not a case which is coming out from the suit and an entirely different case from the one stated in the plaint was being argued before the Court. It was further submitted that, as stated in the OJMCA, the plaintiff had no locus standi to present the suit, the plaintiff being a non existent entity in law and hence, there was not only a fraud perpetrated on the Court but the entire plaint was based on suppression of material facts. It was urged that the Court was required to apply the test as to whether an ex parte order of arrest of the vessel would have been made by the Court if the factum of dissolution of the Company had been disclosed in the plaint. The test was, according to the counsel that there should be full and frank disclosure of all material facts.

11.1It was further submitted that the plaint was even otherwise bad in law and the suit should not be entertained as the same had been presented by a person who has not only failed to identify himself but has prima facie not even shown the authority on the basis of which the suit has been presented. Inviting attention to the power of attorney accompanying the plaint, viz., Exh.13, it was submitted that the said power of attorney did not mention the address of Mr. Shridhar Burke who was signatory to the plaint nor is the power shown to have been executed and authenticated before a Notary. Thus, in light of the provisions of section 85 of the Evidence Act the said document was not a valid document on the basis of which any person named therein could have initiated any proceeding. It was further submitted that the power of attorney was in the name of four different individuals but did not specify as to whether the said individuals were permitted to act independently or jointly or severally or in the alternative to each other and hence, a presumption should be drawn that they were required to act jointly. That the suit having been presented by only one individual was not in accordance with the authority granted under such power of attorney. In support of the submissions made various decisions were pressed into service.

12. Mr. Thakor in response to the objection regarding power of attorney not having been executed and authenticated by a notary public submitted that it was because of the urgency of the situation that an ordinary copy received by Fax had been annexed with the plaint. That he was in possession of copy of the power of attorney which was duly notarised. That the suit had been presented on 1-3-2004 while power had been executed on 29-2-2004 (a holiday) at Calais, France and hence could be notarised only on 1-3-2004 by which time the suit had already been filed. It was further submitted that section 85 of the Evidence Act only raised a presumption but that by itself does not impinge upon the validity of such a power of attorney. It was further submitted that in any event the plaintiff was filing a fresh affidavit sworn today by Luany Rodriguez Salas, a shareholder of plaintiff, ratifying all the actions taken hereinbefore on the basis of the power of attorney executed on 29-2-2004. That the plaintiff was ready and willing to submit a fresh plaint duly signed by the said shareholder, viz., Luany Rodriguez Salas so as to ensure that the procedural defects stand cured. It was submitted that the case of the plaintiff was governed only by virtue of provisions of sections 652 & 653 of the 1985 Act as could be seen from the details available at page No. 17 of OJMCA. That the three decisions cited on behalf of the defendants were dealing with cases of winding up and hence could not be applied to the facts of the present case.

13. It requires to be noted that the merits of the dispute between the parties have not been gone into as both the sides have presented their case only in relation to be preliminary issue : viz., whether the plaintiff could have presented the suit in the circumstances of the case. In the circumstances, the question before the Court is not as to what is the effect of an order of restoration but as to whether on the date of filing the suit a company whose name has been struck off from the register of the companies and as a consequence dissolved, can initiate any legal proceedings so as to be valid in law.

14. Section 33 of the Companies Act, 1956 (the Act) provides for Registration of Memorandum and Articles. The effect of such registration is as laid down in section 34 of the Act, i.e., the Registrar shall certify under his hand that the company is incorporated. From the date of incorporation, the subscribers of the memorandum and other persons, namely the members, shall be a body corporate by the name contained in the memorandum, capable of exercising all the functions of an incorporated company, and having perpetual succession and a common seal.

15. One of the characteristics of a company thus is that it is an incorporated body of persons. It is not mere aggregate of its members : it is not like a partnership firm or a family. The company is constituted into a distinct and independent person in law and is endowed with special rights and privileges; it is in law a person distinct from its members. The advantage of incorporation is that a company never dies. It has perpetual succession and remains in existence however often its members change, until its dissolution. This prevents the dissolution of the company by the death, bankruptcy, or lunacy of any of its members - unlike a partnership firm. This characteristic offers to a company and its shareholders various special advantages and privileges; more particularly, the company is permitted to acquire and hold property in its corporate name, and enables the company to use a common seal, to contract with its shareholders and others.

16. A company is a separate legal entity notwithstanding the fact that there was only one governing director who also held a majority of the shares of the company. The separate legal entity enabled the director, representing the company, to enter into a contract of employment with himself in his individual capacity. - Lee v. Lee’s Air Farming Ltd. [1961] 31 Comp. Cas. 233 (PC).

17. Companies incorporated under the Act are capable of suing and being sued in their corporate names. A company’s right to sue arises when some loss is caused to the company, i.e., to the property or the personality of the company, as distinct from a loss occasioned to the directors of the company. The rights of the company and the rights of its shareholders are not co-extensive. Where a company was the recipient of a cheque which was dishonoured, it was held that the company was competent to make a complaint under section 138 of the Negotiable Instruments Act. The money represented by the cheque was the company’s money and not that of its functionaries and therefore the company alone could file a complaint - Nandgopal v. NEPC Agro Foods Ltd. [1995] 83 Comp. Cas. 213 (Mad.). Incorporation brings into existence a legal person which develops into its own separate existence as a business or enterprise. A company, as a person separate from its members, may even sue one of its own members for libel. The publication of any statement which disparages the business of the company, defames the company at the same time. Hence, the company is entitled to sue in damages for libel or slander as the case may be. - Metropolitan Saloon Omnibus Co. Ltd. v. Hawkins [1859] 28 L.J.CL. 830.

18. In the case of Agarwalla H.P. v. Union of India [1963] BLJR 127, it has been held that a limited company has a separate legal personality and its directors cannot be made liable for legal liability incurred by the company.

19. A one-man company is a distinct assessable and legal entity as much as any other company - O.K. Trust v. Rees 23 TC 217; Stanely v. Gramophone & Typewriter 5 Tax Cases 358 (CA); I.R. v. John 8 TC 20 (CA).

An individual may control a company; but it does not necessarily follow, because the individual controls the company, that the business carried on by the company controlled is necessarily a business carried on by the Controller. - Kodak v. Clark 4 TC 549.

20. In the case of Mrs. Bacha F. Guzdar v. CIT AIR 1955 SC 74, the Apex Court was called upon to decide the rights of shareholder qua the rights of a company. It has been laid down :

“. . . That a shareholder acquires a right to participate in the profits of the company may be readily conceded but it is not possible to accept the contention that the shareholder acquires any interest in the assets of the company. . . .

A shareholder has got no interest in the property of the company though he has undoubtedly a right to participate in the profits if and when the company decides to divide them. The interest of a shareholder ‘vis-a-vis’ the company was explained in the ‘Solapur Mills case’ - ‘Charanjit Lal v. Union of India’, AIR 1951 SC 41 at pp. 54, 55(B). That judgment negatives the position taken up on behalf of the appellant that a shareholder has got a right in the property of the company. It is true that the shareholders of the company have the sole determining voice in administering the affairs of the company and are entitled, as provided by the articles of association, to declare that dividends should be distributed out of the profits of the company to the shareholders but the interest of the shareholder either individually or collectively does not amount to more than a right to participate in the profits of the company.

The company is a juristic person and is distinct from the shareholders. It is the company which owns the property and not the shareholders. . . .” (p. 77)

It is necessary to note that the aforesaid law has been enunciated by the Apex Court in the context of the contention raised before it to the effect that when an investor buys share of a limited company the investor buys in the first place a share of the assets of the company proportionate to the number of shares he has purchased. It is this contention which has been negatived by the aforesaid statement of law.

21. Applying the aforesaid principles to the present case it is apparent that today the limited company is no longer in existence, at least was not in existence on the date the suit was presented. The suit has been brought in relation to the property owned by and belonging to the limited company. Even if it could be stated that the shareholder had any interest by virtue of the shareholding, as stated by the Apex Court, it is only a right to participate in the profits. In the aforesaid decision in the case of Mrs. Bacha F. Guzdar (supra) it is further laid down that a shareholder has, over and above a right to participate in the profits of the company, a further right to participate in “assets of the company which would be leftover after winding up” but not in the assets as a whole.

22. Therefore, a shareholder has a limited, restricted right only after an order of winding up is made, liabilities of the company discharged and then if any surplus of assets is left. In the present case it is not possible even for the plaintiff to make a statement that the shareholder is entitled to the vessel as being net surplus of assets after discharging all liabilities of the company. In fact, during the course of hearing a stand is adopted that one Mrs. Luany Rodriguez Salas, is the sole shareholder and director of the plaintiff company and hence is an interested person. Once the position is admitted that the company is struck off from the register and dissolved as a consequence there is no question of any particular shareholder, even the sole shareholder, making a claim to the property of the company without showing that all liabilities of the company stand discharged.

23. One more aspect of the matter is that the limited company is a separate legal entity distinct from its shareholder. Merely because there is only one shareholder, the entities which are otherwise distinct, one is a natural person and the other is an artificial juristic person, it cannot be contended that the said entities merge and one can act for and on behalf of other. The principle of agency has to be understood and appreciated in light of the provisions of the Act, Memorandum and Articles of Association of the company.

24. Section 291 of the Act deals with general powers of the Board; but this does not include power to institute suits/legal proceedings. The provisions of section 291 of the Act while entitling a Board of Directors of a company to exercise all such powers provide, by way of exception that the Board shall not exercise any power which is required to be exercised by the company in general meeting, as required by the provisions of the Act or any other law for the time being in force as well as Memorandum or Articles of the company. Similarly the second Proviso carves out a further exception, that the Board while exercising powers shall be subject to the provisions contained in the Act or any other law for the time being in force as well as memorandum and articles of the company, and further that such exercise shall not be inconsistent with provisions of the Act or requirement of the Memorandum or Articles of the company.

25. Therefore, unless the power to institute a suit is specifically conferred on a particular director, he would have no authority to institute a suit on behalf of the company. Needless to state that such a power can be conferred by Board of Directors only by passing the resolution in that regard. Individual directors are vested with only such powers as are available to them either under the memorandum or articles of the company, or otherwise by the Board of Directors. A Managing Director also does not have any power to manage the affairs of the company over and above those available to the Board; the Managing Director can exercise only such powers as have been delegated to him. A company cannot orally authorise another person to sign a plaint on its behalf. A company can act only as provided under its Articles of Association. The provisions of Order VI rule 14 of the Code of Civil Procedure, 1908 read with Order XXIX rule 1 stipulate that pleadings of a corporation shall be signed by an authorised Director, Secretary or other Principal Officer.

26. In the case of United Bank of India v. Naresh Kumar AIR 1997 SC 3 while deciding the question whether the plaint was duly signed and verified by a competent officer, the Apex Court laid down as under :

“9. In cases like the present where suits are instituted or defended on behalf of a public corporation, public interest should not be permitted to be defeated on a mere technicality. Procedural defects which do not go to the root of the matter should not be permitted to defeat a just cause. There is sufficient power in the Courts, under the Code of Civil Procedure, to ensure that injustice is not done to any party who has a just case. As far as possible a substantive right should not be allowed to be defeated on account of a procedural irregularity which is curable.

10. It cannot be disputed that a company like the appellant can sue and be sued in its own name. Under order 6 rule 14 of the Code of Civil Procedure a pleading is required to be signed by the party and its pleader, if any. As a company is a juristic entity it is obvious that some person has to sign the pleadings on behalf of the company. Order 29 rule 1 of the Code of Civil Procedure, therefore, provides that in a suit by or against a corporation the Secretary or any Director or other Principal Officer of the Corporation who is able to depose to the facts of the case might sign and verify on behalf of the company. Reading order 6, rule 14 together with order 29, rule 1 of the Code of Civil Procedure it would appear that even in the absence of any formal letter or authority or power of attorney having been executed a person referred to in rule 1 of order 29 can, by virtue of the office which he holds, sign and verify the pleadings on behalf of the corporation. In addition thereto and de hors order 29, rule 1 of the Code of Civil Procedure, as a company is a juristic entity, it can duly authorise any person to sign the plaint or the written statement on its behalf and this would be regarded as sufficient compliance with the provisions of order 6, rule 14 of the Code of Civil Procedure. A person may be expressly authorised to sign the pleadings on behalf of the company, for example, by the board of directors passing a resolution to that effect or by a power of attorney being executed in favour of any individual. In absence thereof and in cases where pleadings have been signed by one of its officers a Corporation can ratify the said action of its officer in signing the pleadings. Such ratification can be express or implied. The Court can on the basis of the evidence on record, and after taking all the circumstances of the case, specially with regard to the conduct of the trial, come to the conclusion that the corporation had ratified the act of signing of the pleading by its officer.” (p. 5)

27. The plaintiff would like to adopt the approach laid down in paragraph 9 as reproduced hereinbefore. However, the observation regarding sufficient power being available to the Court to ensure that injustice is not done to any party who has a just case has to be read not only in the context of the facts of the case which were there before the Apex Court, but also while applying the principle facts of the present case have to be borne in mind. The distinction between a public corporation representing public interest and limited company has to be taken into consideration for the purpose of deciding whether it is only a procedural defect or it affects the rights of a party.

28. The question is not as to whether such a remedy is permissible, or whether defect is required to be permitted to be cured by ratification of the action, as is sought to be done by filing an affidavit dated 9-3-2004 by one Luany Rodriguez Salas, a shareholder of the plaintiff, but whether this can really amount to a procedural irregularity only. At the cost of repetition it requires to be reiterated that on the date of presentation of the suit the company was admittedly struck off from the Register and dissolved. There can be therefore, no question of ratification of an action which a non existent entity could not have initiated in the first instance.

29. As laid down by the Supreme Court in the case of United Bank of India (supra) in the case of a corporation primarily a pleading is required to be signed by the Secretary, or any director or other Principal Officer who is able to depose to the facts of the case. That such person may sign and verify pleadings even in absence of any formal document authorising such person by virtue of the office such person holds; and if he does so, the action can be ratified by the corporation subsequently expressly by a resolution, or impliedly by conduct. Here admittedly, the plaint is signed and verified by a person who is neither secretary, nor director, nor Principal Officer of the plaintiff. Hence, he is not a person who is able to depose to the facts of the case. This becomes abundantly clear when one reads the verification of the plaint.

30. In the plaint in paragraph 25 it is stated that one Mr. Shridhar Burke a Constituted Attorney of the plaintiff who has made himself conversant with the facts of the case on the basis of instructions, information and documents received has signed and verified the plaint. Page No. 14 is the verification and the same reads as under :

“I, Shridhar Burke, of adult, Indian Inhabitant, having my office at .... the Constituted Attorney of the plaintiffs abovenamed do hereby solemnly declare that what is stated in the foregoing paragraph Nos. 1 to .... is based on documents made available to me and instructions received by me and what is stated in the remaining paragraph Nos. ..... to ..... is based upon legal advise and I believe the same to be true.

Solemnly declared at Ahmedabad this 1st day of March, 2004.”

As can be seen from the verification the said gentleman after stating having my office at ......., has left the space for inserting address blank and in relation to paragraph numbers also except for mentioning paragraph No. 1 the remaining portion has been left blank; as to what are the paragraphs which are based on documents made available to him and what are the paragraph numbers in relation to instructions received by him as well as what are the paragraphs based on legal advice has been conveniently omitted. Thereafter, reply dated 5-3-2004 tendered in OJMCA has been affirmed by Luany Rodriguez Salas, a shareholder of the plaintiff company. Subsequently an affidavit dated ..... day of March, 2004 sworn at Mumbai by Luany Rodriguez Salas has been placed on record on 8-4-2004. In the said affidavit the deponent has not been identified by anyone nor does the notary state that he personally knows the lady. Similarly another affidavit has been tendered again sworn at Mumbai which has been counter signed by the learned Advocate for the plaintiff and notarized on the same day, viz., 7-3-2004. Today, i.e., 9-3-2004 one more affidavit has been filed wherein it is stated to have been sworn by Luany Rodriguez Salas but once again the deponent has not been identified by anybody though the rubber stamp has been affixed showing.

Identified by me.

Advocate.

31. In reply to OJMCA in paragraph 5 Mrs. Luany Rodriguez Salas states : “An application for restoration of the plaintiff to the register has been made and the restoration shall, in law, relate back”. In the same paragraph further it is stated : “the plaintiff had filed the suit in extreme urgency and could not make an application for restoration”. This affidavit is sworn on 5-3-2004. As against the two statements made by the same person there is one more affidavit without date, notarized on 7-3-2004 and presented in the Court on 8-3-2004 wherein it is stated that : “I say that I have signed the witness statement of claim and sent it to Holman Fenwick and Willan, London Solicitors to enable them to take all necessary steps for restoration of the company. I have been informed that the filing procedure will be completed by London opening on Monday, 8th March, 2004 and an application would be made to the Court for urgent restoration of the company. . . .”

Hence, we have three statements of the same lady stating at one place that restoration application is already made on 5-3-2004, another where it is accepted that as the suit was filed in extreme urgency the plaintiff could not make an application for restoration and third one where it states that the application is being moved on 8-3-2004. These by themselves do not determine the lis between the parties, and appear to be small blemishes when viewed in isolation, but are factors which when cumulatively considered reflect upon the conduct of the plaintiff/shareholder.

32. Along with the second affidavit notarized on 7-3-2004 Luany Rodriguez Salas has annexed a copy of the witness statement of claim. This is what is stated in relation to dissolution of the company.

“16 I understand that, in compliance with my instructions, on 16th July, 2003 an application was filed for the voluntary dissolution of the company (p.2). On 21st July, 2003, the Registrar of Companies wrote to the directors of the company acknowledging receipt and stating that he would take the requisite steps to remove the company from the Register (p. 3, 4).

17. Unfortunately, the sale of the Vessel did not materialize as expected. Under the MOA, the delivery of the Vessel was to be effected on 7th July, 2003 with a cancellation date of 7th August, 2003 (in the buyer’s option). By early August 2003 Simbolo had not paid the balance of the purchase price and sought time extensions for various reasons. As the Company did not have another potential purchaser for the Vessel, it did not terminate the MOA. The first Gazette notice for voluntary strike off was done on 26th August, 2003.

18. At this stage I should have ensured the withdrawal of the company’s application for voluntary dissolution. I now realise it was inappropriate for the Company to be struck off from the Register whilst it still held assets and whilst it still had to perform the MOA (i.e. give delivery of the Vessel under the MOA).

19. Regrettably, I did not give sufficient consideration to the fact that the Company Secretary had already instigated a procedure for the voluntary winding up of the company and that this procedure would be continued with unless the Company Secretary or I intervened on behalf of the company. This was a mistake on my behalf and I apologies to the Court.

20. On 2nd September, 2003 the Registrar of Companies gave notice that, unless cause was shown to the contrary, at the expiration of three months from the said date the name of the company would be struck off the register and the company would be dissolved (p. 5). This notice was received but, due to my failure to appreciate its significance, I did not instruct the Company Secretary to withdraw the company’s application for dissolution and show cause as to why the company should remain on the register.

21. Accordingly, the company was struck off from the Register under section 652(5) of the Companies Act, 1985 on 9th December, 2003 and dissolved by voluntary dissolution by notice in the London Gazette dated 16th December, 2003 (p. 6).”

Therefore, the contention raised on behalf of the plaintiff that the sole shareholder-director had no knowledge about the proceedings under section 652 of the 1985 Act, or that it had escaped attention is not only not supported by any evidence on record, but stands falsified by this statement of claim : when she accepts that a letter dated 21-7-2003 and then a notice dated 2-9-2003 were received from the Registrar of Companies. The statement during course of hearing that she realised (that the company had been dissolved) only when she was served with OJMCA is thus patently false.

33. In the case of ‘VASSO’ (Formerly ‘ANDRIA’) [1984] 1 LLR 235 the Court of Appeal says :

“It is axiomatic that in ex parte proceedings there should be full and frank disclosure to the Court of facts known to the applicant, and that failure to make such disclosure may result in the discharge of any order made upon the ex parte application, even though the facts were such that, with full disclosure, an order would have been justified : See R.V. Kensington Income Tax Commissioners, ex parte Princess Edmond de Polignac [1917] 1 K.B. 486, Examples of this principle are to be found in the case of ex parte injunctions (Daglish v. Jarvis [1850] 2 Mac & G.231), ex parte orders made for service of proceedings out of the jurisdiction under order 11 of the rules of the Supreme Court (The Hagen [1908] p. 189 at p. 201, per Lord Justice Farewell), and Mareva Injunctions (Negocios del mar S.A. v. Doric Shipping Corporation S.A. (The Assios) [1979] 1 Lloyd’s Rep. 331). In our judgment, exactly the same applies in the case of an ex parte application for the arrest of a ship where, as here, there has not been full disclosure of the material facts to the Court.”

34. The High Court of Delhi in the case of Seemax Construction (P.) Ltd. v. State Bank of India AIR 1992 Delhi 197 has laid down :

“10. The suppression of material fact by itself is a sufficient ground to decline the discretionary relief of injunction. A party seeking discretionary relief has to approach the court with clean hands and is required to disclose all material facts which may, one way or the other, affect the decision. A person deliberately concealing material facts from court is not entitled to any discretionary relief. The Court can refuse to hear such person on merits. A person seeking relief of injunction is required to make honest disclosure of all relevant statement of facts otherwise it would amount to an abuse of the process of the Court. Reference may be made to decision in King v. General Commissioner for the purposes of the Income-tax Acts for the District of Kensington 1917 (1) King’s Bench Division 486 where the Court refused a writ of prohibition without going into the merits because of suppression of material facts by the applicant. The legal position in our country is also no different. [See : Charanji Lal v. Financial Commissioner AIR 1978 Punj. & Har. 326 (FB)]. Reference may also be made to a decision of the Supreme Court in Udai Chand v. Shankar Lal AIR 1978 SC 265. In the said decision the Supreme Court revoked the order granting special leave and held that there was a misstatement of material fact and that amounted to serious misrepresentation. The principles applicable are same whether it is a case of misstatement of a material fact or suppression of material fact.” (p. 201)

35. The Supreme Court in the case of S.P. Chengalvaraya Naidu v. Jagannath [1994] 1 SCC 1 states :

“5. The High Court, in our view, fell into patent error. The short question before the High Court was whether in the facts and circumstances of this case, Jagannath obtained the preliminary decree by playing fraud on the Court. The High Court, however, went haywire and made observations which are wholly perverse. We do not agree with the High Court that there is no legal duty cast upon the plaintiff to come to court with a true case and prove it by true evidence’. The principle of ‘finality of litigation’ cannot be pressed to the extent of such an absurdity that it becomes an engine of fraud in the hands of dishonest litigants. The courts of law are meant for imparting justice between the parties. One who comes to the Court, must come with clean hands. We are constrained to say that more often than not, process of the Court is being abused. Property-grabbers, tax-evaders, bank-loan-dodgers and other unscrupulous persons from all walks of life find the Court-process a convenient lever to retain the illegal-gains indefinitely. We have no hesitation to say that a person, who’s case is based on falsehood, has no right to approach the Court. He can be summarily thrown out at any stage of the litigation.

6. The facts of the present case leave no manner of doubt that Jagannath obtained the preliminary decree by playing fraud on the Court. A fraud is an act of deliberate deception with the design of securing something by taking unfair advantage of another. It is a deception in order to gain by another’s loss. It is a cheating intended to get an advantage. Jagannath was working as a clerk with Chunilal Sowcar. He purchased the property in the Court auction on behalf of Chunilal Sowear. He had, on his own volition, executed the registered release deed (Ex. B-15) in favour of Chunilal Sowcar regarding the property in dispute. He knew that the appellants had paid the total decretal amount to his master Chunilal Sowcar. Without disclosing all these facts, he filed the suit for the partition of the property on the ground that he had purchased the property on his own behalf and not on behalf of Chunilal Sowcar. Non-production and even non-mentioning of the release deed at the trial is tantamount to playing fraud on the Court. We do not agree with the observations of the High Court that the appellants-defendants could have easily produced the certified registered copy of Ex. B-15 and non-suited the plaintiff. A litigant, who approaches the Court, is bound to produce all the documents executed by him which are relevant to the litigation. If he withholds a vital document in order to gain advantage on the other side then he would be guilty of playing fraud on the court as well as on the opposite party.” (p. 5)

36. The concept of fraud has been enunciated by the Apex Court in its latest decision in the following words, after discussing the entire case law on the subject, in the case of Ram Chandra Singh v. Savitri Devi [2003] 8 SCC 319 :

“15.Commission of fraud on Court and suppression of material facts are the core issues involved in these matters. Fraud as is well known vitiates every solemn act. Fraud and justice never dwell together.

16. Fraud is a conduct either by letter or words, which induces the other person or authority to take a definite determinative stand as a response to the conduct of the former either by word or letter.

17. It is also well settled that misrepresentation itself amounts to fraud. Indeed, innocent misrepresentation may also give reason to claim relief against fraud.

18. A fraudulent misrepresentation is called deceit and consists in leading a man into damage by wilfully or recklessly causing him to believe and act in flasehood. It is a fraud in law if a party makes representations which he knows to be false, and injury ensues therefrom although the motive from which the representations proceeded may not have been bad.

19. In Derry v. Peek [1889] 14 AC 337 it was held :

In an action of deceit the plaintiff must prove actual fraud. Fraud is proved when it is shown that a false representation has been made knowingly, or without belief in its truth, or recklessly, without caring whether it be true or false.

A false statement, made through carelessness and without reasonable ground for believing it to be true, may be evidence of fraud but does not necessarily amount to fraud. Such a statement, if made in the honest belief that it is true, is not fraudulent and does not render the person making it liable to an action of deceit.

20. In Kerr on Fraud and Mistake, at p. 23, it is stated :

‘The true and only sound principle to be derived from the cases represented by Slim v. Croucher [1860] 1 De GF & J 518 is thus : that a representation is fraudulent not only when the person making it knows it to be false, but also when, as Jessel, M.R., pointed out, he ought to have known, or must be taken to have known, that it was false. This is a sound and intelligible principle, and is, moreover, not inconsistent with Derry v. Peek [1889] 10 AC 337. A false statement which a person ought to have known was false, and which he must therefore be taken to have known was false, cannot be said to be honestly believed in. ‘A consideration of the grounds of belief’, said Lord Herschell, ‘is no doubt an important aid in ascertaining whether the belief was really entertained. A man’s mere assertion that he believed the statement he made to be true is not accepted as conclusive proof that he did so.’

**                                                                                                                           **                                                                                                                **

22. Recently this Court by an order dated 3-9-2003 in Ram Preeti Yadav v. U.P. Board of High School & Intermediate Education [2003] 8 SCC 311 held : (SCC pp. 316-317, paras 13-15)

                  ‘13. Fraud is a conduct either by letter or words, which induces the other person or authority to take a definite determinative stand as a response to the conduct of the former either by words or letter. Although negligence is not fraud but it can be evidence on fraud. (See Derry v. Peek).

                  14. In Lazarus Estates Ltd. v. Beasley [1956] 1 All ER 341 the Court of appeal stated the law thus : (All ER p. 345 C-D).

                  ‘I cannot accede to this argument for a moment. No court in this land will allow a person to keep an advantage which he has obtained by fraud. No judgment of a Court, no order of a minister, can be allowed to stand if it has been obtained by fraud. Fraud unravels everything. The Court is careful not to find fraud unless, it is distinctly pleaded and proved; but once it is proved it vitiates judgments, contracts and all transactions whatsoever;’

                  15. In S.P. Chengalvaraya Naidu v. Jagannath [1994] 1 SCC 1 this Court stated that fraud avoids all judicial acts, ecclesiastical or temporal.’

23. An act of fraud on Court is always viewed seriously. A collusion or conspiracy with a view to deprive the rights of the others in relation to a property would render the transaction void ab initio. Fraud and deception are synonymous.

**                                                                                            **                                                                                      **

29. In Chittaranjan Das v. Durgapore Project Ltd. [1995] 2 Cal.LJ 388 it has been held : (Cal LJ p. 402, paras 57-58).

‘57. Suppression of a material document which affects the condition of service of the petitioner, would amount to fraud in such matters. Even the principles of natural justice are not required to be complied with in such a situation.

58. It is now well known that a fraud vitiates all solemn acts. Thus, even if the date of birth of the petitioner had been recorded in the service returns on the basis of the certificate produced by the petitioner, the same is not sacrosanct nor the respondent company would be bound thereby.’” (pp. 327-330)

Applying the aforesaid principles it is clear that : (i) there is absence of full and frank disclosure; (ii) there is a misstatement of a material fact or suppression of material fact; and, there is withholding of a vital fact by the plaintiff. This amounts to commission of fraud on the Court. Misrepresentation itself amounts to fraud. A representation is fraudulent not only when the person making it knows it to be false, but also when, he ought to have known, or must be taken to have known, that it was false. The plaintiff is a limited company - a juristic entity - acting through a living person. That person herein claimed to be sole shareholder-director, who admits : (i) she instructed the Company Secretary in July 2003 to apply for having the name of the company struck off from the Register; (iii) received letter and notice from the Registrar in July and September 2003 : and yet expects the Court to believe that there is no suppression. There is no offer/attempt to amend the plaint even after receipt of OJMCA. The offer, during course of hearing, is only to substitute the plaint to remove defects. Therefore, this is a clear case of deception. Fraud and deception are synonymous.

37. As already seen a non existent entity cannot ratify any action which it could not have initiated : there is no director, no secretary, no principal officer. The company having been dissolved there is no entity/person who can authorise anyone. A shareholder of erstwhile company cannot claim any right, title or interest in any particular asset/property of the company. Then there is no question of executing any power of attorney as authorised signatory. - [1986] BCLC 342 (CA).

38. In the case of Pierce Leslie & Co. Ltd. v. Miss. Violet Ouchterlony Wakshare AIR 1969 SC 843 it is laid down thus :

“12. As already stated, technical escheat of the real property of dissolved company was abolished in England in 1929 and section 354 of the Companies Act, 1948 now provides that all property and rights of a dissolved company shall be deemed to be bona vacantia and shall accordingly belong to the Crown. There was no statutory provision like section 354 before 1929. In the absence of such a provision, the Crown took the real property of a company dissolved before 1929 by escheat and its personal property as bona vacantia, except in so far as its right was cut down by statute, see 1933-1 Ch. 29 (supra). Likewise in this country, the Government took by escheat or as bona vacantia all the properties of a company dissolved under the Indian Companies Act, 1913 except insofar as its right was cut down by that Act. P.B. Mukherjee, J. expressed a similar opinion U.N. Mandal’s Esate (P.) Ltd., In re AIR 1959 Cal. 493 at p. 498.

13. Accordingly the shareholders or creditors of the dissolved company cannot maintain any action for recovery of its assets. No effective relief can be given in such action, as the company is not a party and the assets cannot be restored to its coffers. On this ground in Coxon v. Gorst 1891-2 Ch. 73 an action by creditors for recovery of moneys due to the dissolved company was dismissed, and in re Lewis & Smart Ltd., In re 1954-1 WLR 755 it was held that a pending misfeasance summons abated on the dissolution of the company.

14. The plaintiffs’ contention that the properties of a dissolved company passed to its shareholders is based upon American law, which is stated in American Jurisprudence, 2d, Corporations, Art. 1659 thus :

**                                                                                      **                                                                                      **

15. The law in our country is very different. Here the winding up precedes the dissolution. There is no statutory provision vesting the properties of a dissolved company in a trustee or having the effect of abrogating the law of escheat. The shareholders or creditors of a dissolved company cannot be regarded as its heirs and successors. On dissolution of a company, its properties, if any, vest in the Government. . . .” (p. 850)

39. In so far as applicability of order VI rule 14 of the Code of Civil Procedure is concerned : the moot question is : does the non existent company own any property? The legal position is now well settled : on dissolution, properties of a company vest in the Government. As can be seen hereinafter, by virtue of section 654 of the 1985 Act, even if the property of the company is not sold (as per the plaintiff), the property has vested in the Crown. Then there is no question of any person, including a shareholder, staking a claim to the property; and, thus, filing a plaint by self or through a power of attorney holder.

40. In light of the fact that the entire case of the plaintiff rests on the effect of restoration of the name of the company to the register it is necessary to examine, however briefly, the provisions in relation to restoration. At the same time it is necessary to bear in mind that the present proceedings are not for the purpose of restoration and this Court is not called upon to decide any such issue but so as to appreciate the contentions raised on behalf of the plaintiff it is necessary to look at the provisions dealing with the restoration.

41. Section 651 of the 1985 Act pertains to power of Court to declare dissolution of company void. Under sub-section (1) of section 651, the Court may at any time within two years from the date of dissolution, where a company has been dissolved, make an order, on such terms as the Court thinks fit, declaring dissolution to be void, on an application made for the purpose by liquidator of the company or by any other person (appearing to the Court to be interested). Sub-section (2) of section 651 states that thereupon such proceedings may be taken as might have been taken as if the company had not been dissolved. Under sub-section (3) a person making application is required within seven days after the making of the order by the Court to deliver to the Registrar of the Companies an office copy of the order. Therefore, under this section only the liquidator of the company or a person who appears to the Court to be interested can move the Court; and once the Court declares the dissolution to be void thereupon such proceedings may be taken as might have been taken as if the company had not been dissolved.

42. In the present case admittedly there being no winding up order a liquidator stands ruled out. Then question that requires to be looked into is whether the plaintiff or shareholder can be termed as a person who appears to the Court to be interested. It is not necessary for the present purpose to determine this question as, on behalf of the plaintiff, it is an accepted position that the plaintiff does not seek restoration under section 651 of the 1985 Act.

43. Section 652 of the 1985 Act provides powers to the Registrar to strike off a defuntct company off the register. Sub-sections (1) and (2) of section 652 pertain to the procedure to be adopted. Sub-section (3) provides that if the Registrar either does not receive an answer in response to the communication required to be sent under sub-sections (1) and (2), or receives an answer to the effect that the company is not carrying on business or is not in operation, he may publish in the Gazette a notice and also send a notice by post to the company that at the expiration of three months from the date of such notice the name of the company will be struck off from the register and the company will be dissolved, unless a contrary cause is shown. Sub-section (4) of section 652 pertains to a situation where a company is being wound up and hence, is not relevant for the present purpose. Sub-section (5) of section 652 stipulates that at the expiration of the time mentioned in the notice the Registrar may strike the name of the company off the register, unless contrary cause has been shown by the company and shall publish notice of such striking off in the Gazette; and the company is dissolved on the publication of such notice in the Gazette.

44. Admittedly, in the present case sub-sections (1) & (2) of section 652 of the 1985 Act have no play. It is an accepted position that it was the plaintiff who had moved the Registrar for having the name of the company struck off from the register, and the Registrar had acted in pursuance of such application resulting in dissolution of the company, publication in the Gazette as required both under sub-sections (3) and (5) of section 652 having been complied with. The application for striking off had been made on 18-7-2003. The first notice for voluntary strike off had been published in the Gazette on 26-8-2003 and the final notice for voluntary striking off had been published in the Gazette on 16-12-2003, resulting in dissolution on the said day.

45. Section 653 of the 1985 Act pertains to objection to striking off by an aggrieved person. Sub-section (1) of section 653 states that the following sub-section applies if a company or any member or creditor of the company feels aggrieved by the company having been struck off the register. Under sub-section (2) on an application by the company or a member or creditor within stipulated period of limitation the Court, may, if satisfied that the company was at the time of striking off carrying on business or in operation, or otherwise that it is just that the company be restored to the register, order the company’s name to be restored. Sub-section (3) of section 653 is made up of two parts : The first part states that on an office copy of the order being delivered to the Registrar of Companies for registration the company is deemed to have continued in existence as if its name had not been struck off; while the second part of the provision stipulates that the court may by order give such directions and make such provisions as seem just for placing the company and all other persons in the same position (as nearly as may be) as if the company’s name had not been struck off.

46. Thus, on a conjoint reading of provisions of sub-sections (1) and (2) of section 653 of the 1985 Act it is apparent that a company or any member or creditor can apply to a Court if the company or member or creditor feels aggrieved by the name of the company having been struck off from the register, while sub-section (2) of section 653 of the 1985 Act provides for the condition on fulfilment of which the Court may exercise discretion of restoring the company to the register. The Court is required to be satisfied that at the point of time when the name of the company was struck off from the register (a) company was carrying on business or was in operation, (b) or otherwise, that it is just that the company be restored to the register. Therefore, the person applying for restoration has to be a person who is aggrieved. The concept of ‘aggrieved’ here means that the order of striking off has resulted in a situation which is detrimental to the applicant, viz., company or any member or creditor. Therefore, unless the applicant is ‘aggrieved’ there is no question of making an application seeking restoration. Upon an application being made the Court is required to ascertain whether the company was carrying on business or was in operation at the time of the striking off the name from the register. In effect, it means that the reasonable belief entertained by the Registrar of Companies under section 652(1) of the 1985 Act is found to be incorrect. For the Court to record such a finding there must be some material available on record. The other alternative contention which permits the Court to exercise discretion requires that ‘it is just’ that the company be restored to the register. This requirement has to be backed by facts and circumstances prevailing in a given situation so as to enable the Court to exercise discretion in favour of the applicant, namely that the action of the Registrar striking off the name of the company of the register would result in creating a situation which is unfair and unjust to the applicant.

47. In the present case, admittedly, the plaintiff cannot seek restoration on the ground that it was carrying on business or was in operation at the time when its name was struck off, as the plaintiff had applied that its name be struck off from the register as the company was not carrying on business or was not in operation. In light of the fact that an application has been moved, as stated at the bar, it is not necessary to deal with the alternative situation whether it would be permissible for the Court to exercise discretion on the basis of the consequence of striking off being unjust to the applicant. Suffice it to state that there has to be cogent and sufficient material in this regard.

48. Section 654 of the 1985 Act stipulates that property and rights of a dissolved company are deemed to be bona vacantia and accordingly, belong to the Crown. Once this is the position, the plaintiff cannot seek any relief on the basis of being owner of the property without either impleading crown or putting it to notice.

49. In the aforesaid factual matrix even if the plaintiff has moved an application seeking restoration of the company to the register it is not necessary to await outcome of such application. The learned counsel on behalf of the plaintiff had orally requested that the matter may be adjourned to await outcome of the restoration application. However, considering the fact that an order of arrest is operating against the defendant it is not possible to the said request, especially in light of the fact that the plaintiff was not inclined to permit vacation of the ex parte interim order of arrest.

50. There is a serious dispute between the parties as regards whether any sale has been effected by the plaintiff as averred by the defendants in OJMCA. In this context the defendants have in paragraphs 10 of OJMCA, in support of their averments that the plaintiff had executed a sale in favour of the defendants, placed reliance on factum of the Director of the plaintiff having provided a copy of her passport for identification purpose and provided confirmation that she was a Director of the plaintiff company. In support of the averment a copy of the passport has been annexed and marked as Exhibit-6 of OJMCA. No explanation is forthcoming on behalf of the plaintiff even though an affidavit-in-reply has been tendered as to in what circumstances the said lady had furnished a copy of her passport to the defendants. Therefore, this is one factor which remains uncontroverted and would go to show that the plaintiff has not approached the Court with full and true disclosure of all material facts.

51. In relation to the payment of sale consideration it is averred by the defendants in paragraph 12 of OJMCA that defendant No. 2 had paid all outstanding dues of Oostende Port as well as negotiated a settlement with other persons who were having prior charges over the vessel. In this context reliance has been placed on a copy of fax message dated 4-11-2003 from Ernst & Young copy of which is annexed as Exhibit-8. As can be seen from page Nos. 26, 27 & 28 the various charges and claims outstanding against the vessel have been mentioned. The plaintiff has in its reply disputed this by stating in paragraph 6(i) that it is not stated who the creditors were, what were the claims, etc. The details are available at page 28 of OJMCA, but more importantly, as can be seen from page 39 which is annexed to the reply of the plaintiff, the plaintiff was aware that there were seizures in place but these were at the expenses of Audrey Ventures, viz., the previous owner. In the same communication which is admittedly generated from the office of advocates of the plaintiff, it is stated as to which amounts have been paid by the defendants to lift seizures. Thus, prima facie it appears that there were claims outstanding against the vessel and the averment made by the plaintiff that it has not been paid full consideration is not found to be absolutely correct. Whether the defendants have paid the entire amount of consideration or not by discharging such existing claim is not the question that is required to be decided. The only aspect that requires consideration at this stage is whether the plaintiff has placed all relevant facts before the Court or not.

52. In the plaint paragraph 2 reads as under :

“2. At the outset, the plaintiffs wish to state that the present suit is being filed under circumstances warranting extreme urgency. The plaintiffs only a very short while ago learnt about the arrival of the 1st defendant vessel at Alang/Bhavnagar for scrapping. Immediately thereupon the plaintiffs instructed their Advocates to address a letter dated 28th February, 2004 (Saturday) to the Commissioner of Customs, Bhavnagar, requesting him not to grant beaching permission to the 1st defendant vessel and not to accept the Bill of Entry relating to the 1st defendant vessel and informing him that the plaintiff would be adopting appropriate proceedings. Having regard to the critical urgency that the matter entails, the plaintiffs have had to file the present suit on the first working day thereafter. The plaintiffs have thus had very little time to instruct their Indian Advocates and appraise them of all facts and documents. The difficulty has been compounded by different time zones, the fact that many of the documents are in foreign language and the office of their Belgian lawyers being closed over the intervening week end. Although every attempt has been made in the circumstances to bring all relevant facts and documents to the notice of this Hon’ble Court, it is possible that due to oversight and inadvertence and want of translations, something may be omitted or overlooked. The plaintiffs therefore crave liberty from this Hon’ble Court to place the same on record at a later stage, should this be necessary or advised.”

At the time of hearing on 1-3-2004 a specific query was put to the learned counsel of the plaintiff as to what had prompted insertion of such paragraph in the plaint. The answer was that having regard to the urgency and the documents being in foreign language, it was found necessary to make such averment. All that can be said after hearing the parties in relation to such averment is that it appears that the plaintiff has sought to prevaricate and build a proposed defence, with the knowledge that the suit was being presented on behalf of defunct company which had already been struck off from the Register.

53. In the aforesaid fact situation applying the test and adopting the approach stated by the Apex Court in the case of United Bank of India (supra) it is not possible to state that these are procedural defects which do not go to the root of the matter and should not be permitted to defeat a just cause. The plaintiff has failed to make out a case so as to seek assistance of the aforesaid observations made by the Apex Court.

54. In the result, the OJMCA is allowed and as a consequence the suit is dismissed. The order of the arrest of the vessel made on 1-3-2004 is hereby vacated/set aside. The plaintiff shall bear the cost of the suit and the OJMCA. It will be permissible to the defendants to communicate this order by fax at their own costs. At this stage, Mr. Thakor, learned counsel appearing on behalf of the plaintiff makes a request that the order of arrest may be continued so as to enable the plaintiff to approach the higher forum. On the facts and the circumstances which have come on record the said request is rejected.

[2004] 50 SCL 19 (Ker.)

High Court of Kerala

K.M. Basheer

v.

Lona Chackola

J.B. Koshy and K. Padmanabhan Nair, JJ.

C.R.P. Nos. 2196, 2205 and 2285 of 2001

March 20, 2002

 

Section 34 of the Companies Act, 1956, read with section 11(3) of the Kerala Buildings (Lease and Rent Control) Act, 1965 - Incorporation of company - Respondent-landlord formed a registered private company along with his family members, office of which was being conducted in a rented premises - Since premise was insufficient to make use of same as office, respondent being director of company filed a eviction petition under section 11(3) of Kerala Buildings (Lease and Rent Control) Act, to evict revision petitioner-tenants contending that building was bona fidely needed to accommodate office of company in which respondent was a director and need of company was that of respondent himself - Whether once a company is incorporated, it is entirely different from its shareholders - Held, yes - Whether company incorporated by respondent was a different entity and need of company for occupation of building could not be said to be need of respondent for his own occupation and, therefore, respondent could not file petition under section 11(3) - Held, yes

Facts

The respondent-landlord, along with his family members, formed a registered private company for the construction and sale of flats. The office of the company was being conducted in a rented premises. The revision petitioners were tenants of the respondent and occupied line rooms in the same building owned by the respondent. The respondent submitting that the rented premises was not at all sufficient and suitable to make use of the same as office filed a eviction petition under section 11(3) of the Kerala Buildings (Lease and Rent Control) Act, to evict the petitioners on the ground that the whole building was bona fidely needed by the respondent to accommodate the office of the company of which he was a director, and the need of the company was that of the respondent himself. The Rent Control Court dismissed the application holding that the company was a separate entity and the need of the company could not be stated to be the need of the individual landlord or his dependent family members. On appeal, the Appellate Court held that the need urged by the respondent was for housing a company in which he had substantial interest and, therefore, the finding of the Rent Control Court was not sustainable one and was set aside.

On revision petition :

Held

It is well-settled law that whether it is a private limited company or a public limited company, a registered company is a separate entity. Once a company is incorporated, it is entirely different from the persons who are shareholders of the company. In a limited company, liabilities of shareholders are limited unlike a partnership firm. A shareholder cannot bind another as there is no joint or several liabilities. A partnership has no legal existence apart from its members. Unlike partnership, an incorporated company is a separate entity distinct from its shareholders. A company is a legal person. Therefore, a company is entirely a different persona. By incorporation under the Companies Act, a company is vested with a corporate personality which is distinct from the members who compose it. An incorporated company never dies. It is an entity with perpetual succession. Even if the landlord transfers his shares, the company continues. The company will continue despite change of members or directors. The property of the company is not the property of the shareholders; it is the property of the company. A company, being a body corporate, can sue and be sued in its own name unlike a partnership firm. Lifting of corporate veil allowed in certain circumstances as an exception to Saloman’s principles in the interests of the revenue, in cases of fraud or liability fixed on directors in specific cases by statutes will not change the separate personality of the company. [Para 9]

In the instant case, the company wanted to have an office and since the respondent-landlord was a director of the company, it could not be stated that it was his need or requirement for his ‘own’ occupation. In the eviction petition, the need of the company in which the landlord was the director, was projected as his own need. The same could not be agreed with. Unlike a partnership firm, a company is a different entity and need of the company in which landlord is a director cannot be said to be the need of the landlord for his ‘own’ occupation and, therefore, the landlord cannot file a petition under section 11(3) for the occupation of the building owned personally by him for the functioning of the company merely because he is a director of the company. [Para 10]

In the above circumstances, the application was not maintainable and the decision of the Rent Control Court was affirmed and the decision of the Appellate Court was set aside. [Para 11]

Cases referred to

D.N. Sanghavi & Sons v. Ambalal Tribhuwan Das AIR 1974 SC 1026 (Para 5), Bega Begum v. Abdul Ahad Khan AIR 1979 SC 272 (Para 7), Govinda Pai v. Sarvothama Rao [1981] KLT 330 (para 7), Panduranga Prabhu v. Muhammed Kunju [1994] 2 KLT 1043 (para 7), Shantilal Thakordas v. Chimanlal Maganlal AIR 1976 SC 2358 (para 7), Madras Bangalore Transport Co. (West) v. Inder Singh AIR 1986 SC 1564 (para 8), Janaki Devi v. Jain [1994] 5 SCC 337 (para 8), Palakkad District Co-operative Bank v. Mohammed Kaleem [1996] 1 KLT 247 (para 8), Sundaresan Trading Co. Ltd. v. Narayan [1977] KLT 595 (para 8), Kalinga Tubes Ltd. v. Shanti Prasad Jain AIR 1963 Ori. 189 (para 9), Aron Saloman v. A. Saloman & Co. Ltd. [1897] AC 22 (HL) (para 9) and Tunstall v. Steigman [1962] 2 QB 593 (para 10).

K.G. Sarathkumar for the Petitioner. C.K. Aravindaksha Menon, A. Balagopalan, Varghese Parambil, Prakash P. George, M.N. Manmadan, V.N. Gopinathan and Basil Mathew for the Respondent.

Judgment

J.B. Koshy, J. - An important question of law to be decided in this case is whether need for occupation of a registered private company in which the landlord is a director, is the bona fide need of the landlord for his own occupation. The revision petitioners are tenants of the respondent. They occupied line rooms in the same building owned by the respondent. The respondent filed eviction petition to evict these revision petitioners. The common ground urged is one under section 11(3) of the Kerala Buildings (Lease and Rent Control) Act (hereinafter referred to as “the Act”). Other grounds were also urged. The Rent Control Court dismissed the application in all respects. The matter came in appeal. The Appellate Court held that the claim is maintainable under section 11(3) of the Act and dismissal of the case on that ground was not correct and the matter was remanded. Section 11(3) of the Act reads as follows :

“(3) A landlord may apply to the Rent Control Court for an order directing the tenant to put the landlord in possession of the building if he bona fide needs the building for his own occupation or for the occupation by any member of his family dependent on him....”

2.   The bona fide need put forward by the respondent landlord is that the respondent along with his two brothers aged 32, 38 and 28 along with their family members formed a registered company in the name and style of Chackolas Habitat Pvt. Ltd. for the construction and sale of flats and it was registered under the Companies Act. The landlord is one of the directors and the other directors are members of the landlord’s family. It is further averred as follows :

“The company is receiving good orders one after another for construction of flats, it is submitted that the company has no offices of its own. In other words petitioner has no other building to accommodate the office of Chackolas Habitat. At present the office of the company is being conducted in a building belonging to Kerala Traders, M.G. Road, Ernakulam. It is paying a monthly rent of Rs. 5,000 inclusive of the facilities offered by the landlord. At first it is submitted that the rented premises in which the office of the company is being conducted is not at all sufficient and suitable to make use of the same as office. The petition schedule room forms one room in a line building consisting of three rooms. After getting vacant possession petitioner intends to carry out necessary alterations to the whole building. Along with the above petition two other rent control petitions for the eviction of the other occupants are also being filed. The whole line building is bona fide needed by the petitioner to accommodate the office of the Chackolas Habitat of which petitioner is a director. The need of the company is that of the petitioner himself. Petitioner sent word through his Karyastha saying that the petitioner wants to get vacant possession of the building as he wants to make use of the petition schedule building for accommodating the office of Chackolas Habitat Private Ltd.” [Emphasis supplied]

3.   Therefore, the bona fide need urged by the respondent landlord is that he needed the above building for occupation of the company of which he is a director and shareholders of the company are his family members. All of them are not dependent on him. The Rent Control Court found that the company is a separate entity and the need of the company cannot be stated to be the need of the individual landlord or his dependent family members. In fact the other two brothers are not dependent on him also.

4.   In appeal the Appellate Court found that the need urged by the appellants is for housing company in which he has substantial interest and therefore lower Court finding is not sustainable and was set aside. The Appellate Court found as follows :

“In the facts and circumstances of this case, it can be stated that his family members depend on the appellant for getting a vacant building. Therefore, merely because of the fact that a private limited company is a separate legal entity, it cannot be said that appellant’s claim for eviction for housing a business, in which he has substantial interest, cannot be allowed under section 11(3) of the Act. Finding entered into by the Court below on this respect is not sustainable and hence it is set aside.”

5.   The whole question to be considered is can the need of the company in which the landlord is substantially interested be said to be the landlord’s own needs for the purpose of section 11(3) of the Act. One decision referred to in this matter is D.N. Sanghavi & Sons v. Ambalal Tribhuwan Das AIR 1974 SC 1026. There the Supreme Court stated that the phrase his own occupation used in the Madhya Pradesh Accommodation Control Act has got very much significance. The Supreme Court held in paragraph 8 (page 1030) as follows :

“The first proviso to sub-section (2) of section 39 provides that at the request of the landlord such accommodation may be allotted to him if he needs it ‘for his own occupation’. As section 39 deals with a residential as well as a non-residential accommodation, the expression ‘his own occupation’ in the first proviso should be amplified to read as ‘his own occupation by way of residence or business’. Clauses (e) and (f) of section 12(1) are complementary to the first proviso to section 39(2). While the first proviso enables the landlord to obtain possession of a vacant accommodation for his own occupation by way of residence or business, section 12(1)(e) enables him to obtain a residential accommodation for his or his family’s residence by ejecting a tenant. Similarly, section 12(1)(f) enables him to obtain a non-residential accommodation for continuing or starting ‘his business’ by ejecting the tenant. Considering the complementary nature of section 12(1)(f), we have little doubt in our mind that the words ‘for the purpose of continuing or starting his business’ in the section should be amplified to read as ‘for the purpose of his own occupation by way of continuing or starting his business’. It cannot be legitimately complained that we are trying to redraft clause (f). This amplification is necessarily implied, for we think that the Legislature intended to use the phrase ‘for the purpose of continuing or starting his business’, as synonym for the phrase ‘for his own occupation’ in the first proviso to section 39(2) as explained earlier. The words ‘in his occupation’ at the end of clause (f) fortify our construction. Again, the word ‘own’ in the phrase ‘his own occupation’ should not be discarded as redundant. It seems to us that the Legislature has deliberately used it to add emphasis to the possessive force of the pronoun ‘his’ (see the Shorter Oxford Dictionary, 3rd edition, page 1409). It connotes the idea that the accommodation is needed directly and substantially for his occupation.

On this construction of clause (f) of section 12(1), it is necessary for the respondent to prove that the accommodation is needed directly and substantially for his occupation for the purpose of continuing or starting his business.”

6.   After holding so, the Supreme Court held that since the petitioner therein was a sleeping partner he cannot say that it is for his business. In paragraph 11 of the judgment it was held as follows (page 1031) :

“If the deed of partnership has excluded him expressly or impliedly from the management of firm’s business and has made him a sleeping partner, it cannot be held that the accommodation is needed directly and substantially for his occupation by way of business. Nor he has power to shift the business. To sum up, for the reasons already given, his suit should fail.”

7.   Here in this case the landlord is not requiring the building for his partnership business or his own occupation for the business of a partnership firm in which he is an active partner. A partnership is different from an incorporated company which has its own legal personality. The possibility of the landlord starting a business in the building is not excluded from the section as held by the Supreme Court in Bega Begum v. Abdul Ahad Khan AIR 1979 SC 272. In Govinda Pai v. Sarvothama Rao [1981] KLT 330 it was held that application by a landlord seeking eviction for the purpose of occupation by a firm of which he is a partner is sustainable. In Panduranga Prabhu v. Muhammed Kunju [1994] 2 KLT 1043 it was held that eviction for the bona fide need of his son to accommodate a business which he was carrying on in partnership with others is sustainable. But in Shantilal Thakordas v. Chimanlal Maganlal AIR 1976 SC 2358 the landlord, a partner of a firm sought eviction for his bona fide requirement for the use of the firm. After his death the firm was reconstituted including some outsiders as partners. It was held that the requirement of the deceased landlord cannot be said to be the requirement of the partners.

8.   Another decision cited before us was the decision of the Supreme Court in Madras Bangalore Transport Co. (West) v. Inder Singh AIR 1986 SC 1564. Therein the case was whether there was subletting. A firm was in occupation of the premises. The firm was converted into a limited company. The Supreme Court held in that case that there is no parting of possession of the premises by the landlord and there is no subletting. The question to be considered is whether eviction is to be granted on the ground of subletting and whether there is transfer of exclusive possession, whereas under section 11(3) bona fide need for ‘own’ occupation has to be proved. Therefore, the above case is of no help to the petitioners while interpreting the provisions of section 11(3). (See also Janaki Devi v. Jain [1994] 5 SCC 337.) In Palakkad District Co-operative Bank v. Mohammed Kaleem [1996] 1 KLT 247 it was held that the words “his livelihood” mentioned under the second proviso to section 11(3) of the Act can have reference only to a natural person and not to an inanimate lifeless legal entity like a co-operative society or company incorporated under the Companies Act. There the Court was considering only the effect of the proviso to section 11(3) of the Act. If the company is the tenant, it cannot claim the protection of the second proviso to section 11(3). But a company also can claim benefits under section 11(3) of the Act. A company can own property. If the company is a landlord and if it requires occupation of the employees or extending the business of the company for its own use, a petition under section 11(3) will be maintainable. See (Sundaresan Trading Co. Ltd. v. Narayan [1977] KLT 595.) Here the question is entirely different. Here the question is whether requirement of the company can be said to be the requirement of the landlord merely because landlord is the director of the company and shareholders are his family members.

9.   It was argued on behalf of the respondent landlord that a private limited company is different from a public limited company and a private limited company is more or less equal to a partnership firm as held by the Orissa High Court in Kalinga Tubes Ltd. v. Shanti Parsad Jain AIR 1963 Ori. 189. It is well-settled law that whether it is a private limited company or public limited company, a registered company is a separate entity. Once a company is incorporated, it is entirely different from the persons who are shareholders of the company. In a limited company, liabilities of shareholders are limited unlike a partnership firm. A shareholder cannot bind another as there is no joint or several liability. A partnership has no legal existence apart from its members. Unlike partnership an incorporated company, is a separate entity distinct from the shareholders. A company is a legal person. This position is well-illustrated in Aron Saloman v. A. Saloman & Co. Ltd. [1897] AC 22 HL. This principle laid down in the 18th century is still followed. Therefore, a company is entirely a different persona. By incorporation under the Companies Act, a company is vested with a corporate personality which is distinct from the members who compose it. In this connection we also refer to section 34(2) of the Companies Act, 1956. An incorporated company never dies. It is an entity with perpetual succession. Even if the landlord transfers his shares, the company continues. The company will continue despite change of members or directors as Blackstone has put it “in the like manner as the river Thames is still the same river, though the parts which compose it are changing every instant” and Gower has stated “members may come and go but the company can go on for ever.” The property of the company is not the property of the shareholders; it is the property of the company. A company, being a body corporate, can sue and be sued in its own name unlike a partnership firm. Lifting of corporate veil allowed in certain circumstances as exception to Saloman’s principles in the interests of the Revenue, in cases of fraud or liability fixed on directors in specific cases by statutes will not change the separate personality of the company.

10. A similar case as claimed by the landlord herein was considered in England in Tunstall v. Steigman [1962] 2 QB 593. There is landlady’s bid to regain tenanted premises for self business failed as the business was in the name of an incorporated private limited company. Here Chackolas Habitat Pvt. Ltd. the company wants to have an office and since the respondent landlord is a director of the company it cannot be stated that it is his need or requirement of “own” occupation. In the eviction petition, the need of the company in which the landlord is the director is projected as his own need. We are unable to agree with the above. Unlike a partnership firm, a company is a different entity and need of the company in which landlord is a director cannot be said to be the need of the landlord for his “own” occupation and therefore, the landlord cannot file a petition under section 11(3) for the occupation of the building owned personally by him for the functioning of the company merely because he is a director of the company.

11. In the above circumstances, the application is not maintainable and we agree with the Rent Control Court and affirm the decision of the Rent Control Court and set aside the appellate authority’s decision.

All the C.R.Ps. are allowed to the above extent.

 [1998] 18 SCL 12 (SC)

SUPREME COURT OF INDIA

Electrical Cable Development Association

v.

Arun Commercial Premises Co-Operative Housing Society Ltd.

DR. A.S. ANAND AND S. RAJEDNRA BABU, JJ.

CIVIL APPEAL NO. 4260 OF 1992

MAY 6, 1998

 

Section 34, read with section 12, of the Companies Act, 1956 - Incorporation of company - Under an agreement to leave and licence an association of an unregistered body became a tenant of a premises - Later association was incorporated under Companies Act - No separate agreement was entered into between registered body and landlord - No resolution was produced to show that unregistered body was converting themselves into an incorporated body nor articles of association of incorporated body say all members of an unregistered body became automatically members of registered company - Whether appellant-registered company could not be said to be a successor of unregistered body and registered company being a distinct legal entity could not claim to be a tenant in respect of premises in question - Held, yes

FACTS

An association ECD, which was an unregistered body, became a tenant of premises under an agreement of leave and licence. Subsequently a company ECD was incorporated under the Companies Act and the registered company continued to occupy the same premises of the unregistered body. The registered company filed suit for a declaration that it was a tenant of the premises and an eviction suit was filed by the landlord and both the suits were pending. While so on a dispute under section 91 of the Maharashtra Co-operative Societies Act an arbitrator was appointed who ordered eviction of the company which was upheld by the High Court giving a finding that the appellant-company was distinct legal entity and was in occupation of suit premises without any agreement of leave or licence and appellant-company was not a successor to unregistered body.

On appeal to the Supreme Court the company, inter alia questioned the authority of the arbitrator and the Co-operative Tribunal to order eviction.

HELD

As per the article of the appellant company, a member of ECD Association as of right be admitted as a member of the appellant-company subject to certain conditions. It did not say that all those members in the unregistered association become members of the association much less any resolution was produced before the Court to show that they were converting themselves into an incorporated body. The members of the unregistered body were all incorporated bodies having a high commercial standing in the corporate sector, and therefore, could not be expected to be so naive or ignorant as not to take such steps in the event it was the intention of such body to become an incorporated body in the manner suggested by the appellant. If really such action had been taken, it would not have been difficult for the appellant to produce such material Therefore, the fact that the appellant was a distinct legal entity as found by the authorities below and affirmed by the High Court, could not be seriously disputed Since the appellant was a distinct legal entity other than the unregistered body and there was no material to show that it was a successor thereto it was not understandable as to how it became a tenant in respect of the premises in question without an agreement with the society or respondent No. 2, a member thereof. Therefore the view taken by the High Court appeared to be correct.

CASES REFERRED TO

O.N. Bhatnagar v. RukiBai AIR 1982 SC 1097 and Sanwarmal Kejrimal v. Vishwa Co-operative Housing Society Ltd AIR 1990 SC 1563.

Mukul Rohtagi, Ms. Bina Gupta and Ms. Rakhi Ray for the Appellant. Anil B. Diwan, Javed M. Rao, Girish Chandra, Bhimrao Naik, V.N. Ganpule, Manish Garg and R. Sasiprabhu for the Respondent.

ORDER

Babu, J. -This appeal is preferred by a company incorporated under the Companies Act, 1956 ('the Act'). The claim of the appellants is that an association which was an unregistered body known as 'Indian Cables Maker's Association' was inducted in the year 1969 as a tenant in the premises Room No. 503, 5th Floor, Arun Chambers, Tardeo, Bombay by respondent No. 2 under an agreement termed as leave and licence dated 23-9-1969 at a rental of Rs. 1,500 out of which Rs. 1,000 was towards the premises and rent of Rs. 500 p.m. was payable towards furniture and fixtures; that the name of the appellant was changed from Indian Cable Maker's Association into Electrical Cable Development Association also another unregistered body in the month of August 1972 and with the said association also a similar leave and licence agreement was executed by the respondent No. 2 on a rental of Rs. 1,750 p.m. out of which rent of Rs. 1,000 was towards the premises and Rs. 750 towards fixtures and furniture; that in the year 1976 the unregistered body decided to convert itself into a company in order to carry on its affairs more effectively and so registered as such under the Act; that respondent No. 2 continued to receive rents from appellant in respect of the said premises. The appellant had also been using parking space in the building in question and had been making regular payments to respondent No. 1 society; that the appellant filed a suit for declaration in the year 1981 in the Court of Small Causes at Bombay that they are tenants in respect of the suit premises; that the second respondent filed a suit bearing No. 210/296 of 1981 seeking for eviction of the appellant; that when those proceedings were pending, respondent No. 2 egged upon respondent No. 1 to raise a dispute in terms of section 91 of the Maharashtra Co-operative Societies Act, 1960 for the purpose of evicting the appellant to enable respondent No. 2 to get the said premises and use personally through an arbitrator; that the arbitrator made an award on 23-3-1990 directing eviction of the appellant and that the second respondent be directed to use the suit premises personally, that the appellant filed an appeal against the said award before the Maharashtra State Co-operative Appellate Court which was further dismissed by an order made on 8-1-1991; that a writ petition was thereafter preferred under article 227 of the Constitution before the Bombay High Court, that by an order made on 2-4-1991 the High Court upheld the order made by the Maharashtra State Co-operative Appellate Court and dismissed the writ petition, however, giving time to the appellant to vacate the premises by about a month. Hence, this appeal by special leave.

2.   On 20-8-1991, this Court made an order calling for a report from Appellate Court after giving an opportunity to the appellant to examine such of its witnesses as are considered necessary to prove the receipts and the agreement and allow the respondent also a similar opportunity of rebuttal by leading evidence both oral and documentary. A report has been received by this Court pursuant to the said order. The findings recorded by the Appellate Court are against the appellant.

3.   Shri Mukul Rohtagi, the learned senior advocate for the appellant contended that (7) the dispute between the appellant and the second respondent arising under the Bombay Rent Act is pending consideration in a Court of competent jurisdiction and, therefore, the authorities exercising powers under section 91 of the Maharashtra Co-operative Societies Act could not exercise their jurisdiction in the matter; (2) that the finding recorded by the Appellate Court and affirmed by the High Court that the appellant-company is a distinct legal entity which came into existence in 1976 and is in occupation of suit premises without any agreement of leave or licence is incorrect inasmuch as the appellant- company is only a successor to the two un-registered bodies referred to earlier; and (3) that the finding recorded by the Appellate Court pursuant to the directions issued by this Court on 20-8-1991 are not correct.

4.   Section 91 provides for raising a dispute inter alia touching upon the business of a co-operative society. When a question was raised as to where a society builds houses for the members and such members let out the premises, whether it would be within the scope of business of the society, this Court in O.N. Bhatnagar v. RukiBai AIR 1982 SC 1097, answered the same. It was held that if the business of the society is to construct or buy houses and let them out to its members, such letting out would form part of its business. A society formed with the object of providing accommodation to its members which is its normal business activity, has to ensure that the premises are in occupation of its members in accordance with the bye-laws framed by it rather than of a person in unauthorised occupation as it is the concern of the members who let it out to another under an agreement to leave and licence and wants to secure possession of the premises for his own use after the termination of thelicence. Therefore, a claim by the society together with such member for ejectment of a person who was permitted to occupy, upon the revocation of licence, is a dispute falling within section 91(1). The same view has been reiterated by this Court in SanwarmalKejrimal v. Vishwa Co-operative Housing Society Ltd. AIR 1990 SC 1563. Therefore, it would not be open to the appellant now to contend that the proceedings before the authorities functioning under section 91 would be barred notwithstanding the proceedings filed by respondent No. 2 before the Small Causes Court. As held by this Court in the aforesaid decisions the proceedings under the Act could be maintained and, therefore, we are of the view that the first contention raised by Shri Rohtagi deserves to be rejected.

5.   Plethora of material was placed before the authorities and we were also taken through the same to show that there was in existence an unregistered body known as Electrical Cable Development Association and also India Cable Maker's Association, its predecessor. However, there is no material on the record to show that the appellant is the successor to such association. We have also carefully gone through the memorandum of association and the articles of the appellant-company to find out whether in any form the unregistered body has converted itself into a registered body as a company. On the other hand, what is stated in clause 3(a) in regard to membership is as follows:

"3(a) Every person who shall be a member of the unregistered association known as 'Electrical Cable Development Association' at the date of registration of this Association shall be entitled as of right to be admitted as a member of this Association on his submitting a formal application addressed to the Secretary of the Association agreeing to be bound by the Rules and Regulations and Bye-Laws made under these presents. Such a person shall be exempted from payment of entrance fee but shall have to pay deposit as per rule 5, within the period as may be prescribed and extended by the Executive Committee."

6.   All that is provided under the said article is that a member of Electrical Cable Development Association as of right be admitted as a member of the appellant-company subject to certain conditions. It does not say that all those members in the unregistered association become members of the association much less any resolution is produced before us of the Electrical Cable Development Association to show that they are converting themselves into an incorporated body. The members of the unregistered body are all incorporated bodies having a high commercial standing in the corporate sector, and, therefore, cannot be expected to be so naive or ignorant as not to take such steps in the event it was the intention of such body to become an incorporated body in the manner suggested by the appellant. If really such action had been taken, it would not have been difficult for the appellant to produce such material. Therefore, the fact that the appellant is a distinct legal entity as found by the authorities below and affirmed by the High Court. Cannot be seriously disputed. Since the appellant is a distinct legal entity other than the unregistered bodies and there is no material to show that it is a successor thereto it is not understandable as to how it became a tenant in respect of the premises in question without an agreement with the society or respondent No. 2 who is a member thereof. It baffles us and thus the view taken by the High Court appears to us to be correct. Therefore, the second contention raised by the appellant either has no merit and is rejected.

7.   So far as the third contention urged on behalf of the appellant is concerned in the view we have taken, we may at once state that it is not necessary to examine the evidence adduced before the Appellate Court and the appreciation of the same by it. Even without deciding the same if we assume the same for the purpose of appreciation of the matter that the findings recorded by the Appellate Court are not correct and deserve to be answered in favour of the appellant, still the appellant has to fail in view of the findings we have recorded on the second contention raised by the appellant.

8.   Therefore, we hold that the High Court was justified in not interfering with the order made by the Appellate Court and the appeal deserves to be dismissed. The appeal is dismissed accordingly. However, considering the nature and circumstances of the case, we make no order as to costs. In the circumstances of the case, we grant time to the appellant to vacate the premises till 31-12-1998 subject to the condition that it shall voluntarily, without putting the respondents to the necessity of any execution deliver vacant possession of the premises to respondent No. 2 and shall furnish the usual undertaking to that effect within four weeks from today.

 [2001] 30 SCL 456 (Punj. & Har.)

High Court of Punjab and Haryana

Punjab National Bank

v.

Bareja Knipping Fasteners Ltd.

Ashok Bhan, J.

Execution Petition No. 3/L of 1994,

C.A. No. 115 of 1986 and CP No. 46 of 1984

August 18, 1994

 

Section 3 of the Companies Act, 1956 - Company - Whether decree passed against a company can be satisfied by attachment and sale of properties belonging to other limited companies managed by same group of directors - Held, no

Facts

A decree was passed against ‘BKF Ltd.’, a company-in-liquidation, and three of its directors with costs and interest. In the instant execution application, the decree holder sought to recov­er the amount due by attachment and sale of the property of several companies owned and managed by judgment debtors. This was objected, contending that those other companies and their share­holders were different and their properties could not be at­tached.

Held

The decree passed against BKF Ltd., could not be satisfied by attachment and sale of properties belonging to other limited companies even if it was assumed that they were being managed by the same group of directors. Other companies were different and distinct juristic personalities
with different sets of share­holders. This petition, therefore, had to be dismissed.

H.N. Mehtani for the Petitioner. Suvir Sehgal for the Respondent.

Judgment

1.   In C.P. No. 46 of 1984, this Court passed a preliminary decree on 2-12-1985, and final decree on 15-1-1987, against Bareja Knipping Fasteners Ltd. (company in liquidation) and three of its directors with costs and interest. In this execution applica­tion, the decree-holder has claimed a sum of Rs. 19,07,800 due from the judgment debtors with future interest at 12 per cent. In the execution application, the decree-holder has sought to recov­er the amount by attachment and sale of property of Bareja Engg. Industries Ltd., Bareja Engineers Ltd. owned and managed by judgment-debtors Nos. 2 to 4, Bareja Industrial International (P.) Ltd. belonging to Raghunath Rai Bareja, judgment-debtor, Bareja Industries (P.) Ltd., owned by Raghunath Rai Bareja, judgment-debtor and other members of his family by attachment and sale of household goods comprising T.V. set, video cassette recorder, sofa-sets, tables, chairs, beds, steel almirahs, carpet and dining set lying at Flat Nos. 9A and 9C situated at 9th Floor of 2A Mande-villa Garden, Jay Jayanti Apartment, Calcutta-19, Bareja Pumps (P.) Ltd. belonging to the judgment-debtors, sale of office furniture owned by Raghunath Rai Bareja, judgment-debtor.

2.   Objections have been filed by the judgment-debtors under Order 21, rule 23(2) read with section 47 of the Code of Civil Proce­dure, 1908. It has been averred that property belonging to the companies such as Bareja Industries (P.) Ltd., Bareja Pumps (P.) Ltd. cannot be attached and sold in execution of a decree passed against Bareja Knipping Fasteners Ltd. as these companies and their shareholders are different and the property of these companies cannot be sold to satisfy the claim of the decree-holder which arises out of the decree passed against Bareja Knipping Fasteners Ltd. In para 6, it has been averred that the decree-holder had earlier filed Execution Petition No. 14/L of 1987. In this application on a prayer made by the decree-holder judgment-debtor Nos. 2 to 4 were directed to make state­ments, and disclose all their property, movable or immovable, debts due to them, etc. and their source of income. This applica­tion was disposed of by I.S. Tiwana, J. (as his Lordship then was) on 23-8-1990, with the following observations :

“Reply has been filed on behalf of the respondents to the appli­cation under Order 21, rule 41(1)(2) of the Civil Procedure Code, whereby they have disclosed their assets and the property owned by them. The decree-holder is at liberty to get any property attached for recovery of the decretal amount. This application is disposed of as indicated above.”

3.   I find force in the objections taken by the respondents. The decree passed against Bareja Knipping Fasteners Ltd., cannot be satisfied by attachment and sale of properties belonging to other limited companies even if it is assumed that they are being man­aged by the same group of directors. Other companies are differ­ent and distinct juristic personalities with different sets of shareholders against the assets of judgment-debtor Nos. 2 to 4 which were disclosed by them in their petition No. 14/L of 1987. No prayer has been made for attachment and sale of those assets. This petition, therefore, has to be dismissed. It would, however, be open to the decree-holders to get the decree executed in any other mode or by claiming the properties which are owned by the original judgment-debtors. With these observations, this petition is dismissed.

 [2004] 50 scl 116 (Mad.)

HIGH COURT OF MADRAS

K.S. Mothilal

v.

K.S. Kasimaris Ceramique (P.) Ltd.

E. PADMANABHAN, J.

C.P. NOS. 60 OF 1996 AND 199 AND 274 OF 1998

AND C.A. NOS. 1033, 1386 AND 1387 OF 1998

AND 996 OF 1999 AND 2548 OF 2000

OCTOBER 19, 2001

 

Section 41 of the Companies Act, 1956 - Member - Whether shareholder can claim to be owner of property owned or held by company - Held, no

Section 433, read with section 443(2) of the Companies Act, 1956 - Winding up - Circumstances in which company may be wound up - Whether winding up proceedings are not meant for settling personal scores among family members - Held, yes - Whether where liability of company was marginal when compared to value of properties and assets owned by company and company could very well proceed with one or more of objects approved in Memorandum of association and Articles of association, merely because major business of company had been stopped, it could be said that substratum of company had been lost and company could be wound up on that score - Held, no - Whether further when company petitions were filed out of personal animosity or personal grudge and no ground had been made out to order winding of company as just and equitable, petitions under section 433(f) were liable to be rejected - Held, yes - Whether, apart from that, since alternative remedies were definitely available and in fact for substantial portion of grievance alternative remedy had already been invoked and was pending, petitioners could not maintain an application under section 433(f) - Held, yes

Facts

The first respondent company was incorporated in 1970 by ‘S’. At the time of inception ‘S’ and his first son were appointed as directors. In due course shares were allotted to other sons and family members and some of the family members were also designated as directors. The company carried on business upto 1976 and thereafter business operations were stopped. ‘S’ passed away in 1995. Thereafter sons and daughter of ‘S’ filed company petitions for winding up of the company alleging that there were several irregularities in the matters of the company, and further that company had lost its substratum as its main business had been stopped and its lands were being sold fraudulently. In the petitions, the petitioners had sought not only for appointment of official liquidator but also to distribute the assets of the company according to will of ‘S’ which itself was disputed by them in other proceedings.

Held

The petitioner in both the company petitions and at least one or two of the respondents in the company petitions proceeded as they were the owners of the entire assets of the company, while forgetting the fact that they were mere shareholders and they could not claim to be the owners of the property owned or held by the company. In fact, proceedings had been instituted as if the petitioners and contesting respondents were entitled to share in the properties held by the first respondent-company, which was a misconception. Merely because sons, widow and daughter of the late ‘S’ held substantial shares, it did not mean they became the owners of the land or the assets of the company. Substantial portion of the case and claim had been made only on that misconception. [Para 48]

It is a well-settled legal position that there is nothing to warrant the assumption that a shareholder has any interest in the property of the company, which is juristic person and which is entirely distinct from the shareholders. The true position of a shareholder is that as an investor he will be entitled to participate in the profits of the company in which he holds shares as and when the company declares, subject to the articles of association that the profits or portion thereof should be distributed by way of dividends among the shareholders. That apart, the shareholder has got a further right to participate in the assets of the company, which would be left over after winding up, but not in the assets as a whole. [Para 49]

In the instant case, liability, if any, was only minimal or marginal when compared to the value of properties or assets owned by the company. There might be a misunderstanding between the members of the family, who held majority shares among themselves and attempted to overreach other members of the family. It might be that the only major business that was being carried on had been stopped, but on that score, it could not be said that the substratum of the company had been lost. Even after the sale of the lands there would be sufficient surplus and the company could very well proceed with one or more of the objects, approved in the memorandum and articles of association. [Para 58]

Therefore, on that score there could not be an order of winding up on the facts of the instant case. It was nobody’s case that it was impossible to carry on one or more business of the company as provided in the memorandum, except by loss or existing assets were not sufficient to meet the liabilities. [Para 59]

Though the petitioner in both the petitions represented themselves that the company could not be continued and that the company had to be wound up, the entire focus related to personal dispute between the family members of the late ‘S’ and major portion of the dispute was whether the will left by ‘S’ bequeathing his share was genuine and true [Para 60]

In several places, the petition proceeded as if it was a plaint where the plaintiff claimed reliefs of personal nature against the defendant and that would disclose not only the mind of the petitioners, but also their object. The substantial portion of the averment set out in the petition related to personal disputes or disputes among the family members and regarding the will. [Para 61]

Having come to know of the sale agreements entered into by the board of directors pursuant to a resolution of the board, if the other shareholders or anyone interested desired to avoid the same, they should have initiated appropriate proceedings. [Para 63]

Accordingly, the petitions could very well be held as an abuse of the process and it was not a bona fide action, but it was an action, which had been initiated out of personal animosity or personal grudge or enmity. Winding up proceedings are not meant for settling personal scores among the family members. The company proceedings cannot be a proceeding for vendetta among the members of the family, though the family may be holding substantial shares and third parties may be minority shareholders and they may not be interested or they may even keep themselves aloof from the disputes. [Para 65]

There were however, no pleadings at all to show that it was just and equitable to order winding up nor any ground had been made out to order winding up of the respondent-company as just and equitable. [Para 66]

Both the petitioners had come before the Court with unclean hands and had invoked the equitable jurisdiction with unclean hands and that was sufficient to reject their petitions. [Para 71]

When alternative remedies were definitely available and in fact for substantial portion of grievance alternative remedy had already been invoked and was pending, the petitioners could not maintain an application under section 433(f) apart from the fact that there were no pleadings on that aspect by them. Failure even to suggest that there was no other alternative remedy in the company petition was also fatal since admittedly the petitioner in each of the company petitions had already invoked the other remedies available to them. Also the petitioner in each of the company petitions had a remedy under sections 397, 398 and/or 402 as the case may be. Therefore, on that ground also, both the petitions were not maintainable. [Para 83]

In the circumstances, all the company petitions having no merits, were to be dismissed. [Paras 86]

Cases referred to

Mrs. Bacha F. Guzdar v. CIT [1955] 25 Comp. Cas. 1 (SC) (para 49), Chiranjilal Chaudhari v. Union of India [1951] 21 Comp. Cas. 33 (SC) (para 50), Seth Mohan Lal v. Grain Chambers Ltd. [1968] 38 Comp. Cas. 543 (SC) (para 55), Madhusudan Gordhandas & Co. v. Madhu Woollen Industries (P.) Ltd. [1972] 42 Comp. Cas. 125 (SC) (para 56), Lokenath Gupta v. Credits Private Ltd. [1968] 38 Comp. Cas. 599 (Cal.) (para 57), Hindustan Lever Employees’ Union v. Hindustan Lever Ltd. [1995] 83 Comp. Cas. 30/[1994] 2 SCL 157 (SC) (para 64), Hind Overseas (P.) Ltd. v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp. Cas. 91 (SC) (para 66), Malabar Industrial Co. Ltd. v. A. John Anthrapper [1985] 57 Comp. Cas. 717 (Ker.) (para 81) and V.V. Projects & Investments (P.) Ltd. v. 21st Century Constructions (P.) Ltd. [1997] 90 Comp. Cas. 346 (AP) (para 82).

Rajendran and R. Subramanian for the Petitioner. Arvind P. Datar and K.M. Kodaiarasu for the Respondent.

Judgment

1.   C.P. No. 60 of 1996 has been filed by K.S. Mothilal under sections 433(f), 439(1)(c) and 439(1)(b) of the Companies Act, 1956, praying for appropriate orders or direction under the Companies Act, 1956, as amended and with reference to the memorandum and articles of association to safeguard the assets of the first respondent-company from destruction by respondent Nos. 3, 4 and 5 by winding up of the first respondent-company to safeguard the petitioner’s genuine share in the assets of the first respondent-company.

2.   C.P. No. 199 of 1998 has been instituted by K.S. Damodaran claiming to be the contributory chairman under sections 433(f), 439(1)(c) and 439(4)(h) of the Companies Act, 1956, praying this honourable court to order winding up of the first respondent-company, namely, K.S. Kasimari Ceramique Pvt. Ltd. appoint the official liquidator and distribute its assets and share value to the contributors and creditors and as a partner to allot 60 per cent share to the petitioner by way of intestate succession or 80 per cent share to the petitioner by way of testamentary succession and render justice.

3.   C.P. No. 274 of 1998 has been filed by Mrs. Mangala Vijayalakshmi under section 433(f) of the Companies Act, 1956, praying this court to order winding up of the company, K.S. Kasimari Ceramique Pvt. Ltd. at No. 50, Pulla Avenue, Shenoy Nagar, Madras, by the provisional liquidator to take charge of the assets of the company and pass such further or other orders.

4.   As all the three company petitions relate to winding up of the same company, namely K.S. Kasimari Ceramique Pvt. Ltd., with the consent of counsel appearing for the petitioner and respondents in the respective company petitions, the three company petitions were consolidated and taken up together for final disposal.

5.   All the three company petitions have been filed under section 433(f) of the Companies Act. In C.P. No. 199 of 1998, while seeking for winding up under section 433(f), the petitioner had sought not only for appointment of official liquidator, but also to distribute the assets of K.S. Kasimari Ceramique Pvt. Ltd., and their share values to the contributors and creditors and as a part thereof, allot 60 per cent share to the petitioner by way of intestate succession or 80 per cent share to the petitioner by way of testamentary succession. The latter part of the relief prayed for, namely, distribution of assets and share values or allotting 60 per cent or 80 per cent as the case may be, will not arise nor could it be the subject-matter of a winding up petition at this stage, nor could the claim by the petitioner be the subject-matter of adjudication in this winding up petition.

For convenience, C.P. No. 199 of 1998 is taken up at the first instance following it with C.P. No. 274 of 1998 and C.P. No. 60 of 1996. To begin with, the parties will be referred as arrayed in C.P. No. 199 of 1998.

Case of the petitioner in C.P. No. 199 of 1998:

6.   The late K. Shanmugasundaram alias Shanmugasundaram Nadar also known as Kasimari Shanmugasundaram, an entrepreneur, started a mechanized brick manufacturing unit with the assistance of the Tamil Nadu Industrial Investment Corporation. The said Kasimari Shanmugasundaram promoted M/s. K.S. Kasimari Ceramique Pvt. Ltd. (hereinafter referred to as “the company”). The promoter, Shanmugasundaram, had married Paulthai and through the said wedlock, Shanmugasundaram had three sons, namely, (1) K.S. Damodaran (petitioner in C.P. No. 199 of 1998), (2) K.S. Mothilal (third respondent in C.P. No. 199 of 1998) and (3) K.S. Anantharaman (fourth respondent in C.P. No. 199 of 1998). Apart from the said three sons, the said Shanmugasundaram had left his wife, Mrs. Paul Thai (second respondent in C.P. No. 199 of 1998) and his only daughter Mrs. Mangla Vijayalakshmi (fifth respondent in C.P. No. 199 of 1998). It is claimed that the said Shanmugasundaram took the help of his son K.S. Damodaran, an engineering graduate to start the project for manufacturing mechanized bricks, while promising equal share, benefits and profits in the said company.

7.   The company was incorporated on January 7, 1970, by the said Shanmugasundaram and his son K.S. Damodaran. K.S. Mothilal was appointed as the general manager from the date of incorporation. K.S. Mothilal had purchased 200 shares of Rs. 100 each of the first respondent-company after incorporation. The deceased Shanmugasundaram and the petitioner K.S. Damodaran have been the directors of the first respondent-company from its inception. The first respondent-company, though flourished well at its inception, grew sick and came to a standstill around March, 1976. The immovable properties remained intact and there have not been any tangible creditors till date. Though there is reference to promoting of other partnership firms, such as M/s. Kasimari Auto Products. M/s. Kasimari Machine Tools Company, etc., by the deceased Shanmugasundaram or one or more of his sons, since we are not concerned with those firms, it is not necessary to refer to the same in detail. It would be sufficient to add that there are allegations and counter allegations with respect to those firms as well as the first respondent-company.

It is the further case that the late Shanmugasundaram transferred all movables including all machines, lathes and shaping machines from the first respondent-company without any consideration or reward or returns to the new partnership firm where he was also holding 30 per cent shares along with K.S. Anantharaman, the managing partner of the firm. The father Shanmugasundaram was biased towards K.S. Anantharaman and the said firm was started for the benefit of the said Anantharaman. The deceased Shanmugasundaram did not take any preventive or punitive action over misappropriation of funds and profits by the said Anantharaman. The said firm was highly indebted to the first respondent-company. It is also the claim that the said firm is a holding company of the first respondent-company. (How it is a holding company and which is the holding company is not clear from the averments).

8.   It is also stated that the first respondent-company is owning a rice mill at No. 216, L. R. Road, Arumuganeri Village, Tiruchendur Taluk to an extent of one acre of land and also holding about 25 acres of land in the same village with palmirah grove. The first respondent-company owns 13.77 acres of land at Maduravoyal village in the outskirts of the city of Madras, which is a substantial asset.

9.   It is alleged that K.S. Anantharaman had entered into an agreement of sale with some party to deceive the other legitimate owners and legal heirs entitled to the assets of the first respondent-company. The said lands of 13.77 acres exit out of 42.19 acres owned by the first respondent-company in Maduravoyal village. 28.47 acres were acquired for the Tamil Nadu Housing Board, the compensation therefrom was utilised to discharge the major portion of the known liability to the Tamil Nadu Industrial Investment Corporation during 1989-90, which mortgage loan was incurred on April 24, 1970, by the first respondent-company. The petitioner Damodaran arranged for a loan of Rs. 16.50 lakhs from the Indian Bank and also offered a sum of Rs. 10 lakhs to enable his father to settle all the liabilities emanating from the TIIC loan. The title deeds were released and handed over to the father Shanmugasundaram and Anantharaman or anyone else had no role in the above activities.

10. The late Shanmugasundaram deposited the title deeds of the existing Maduravoyal property belonging to the company with the Indian Overseas Bank, Sowcarpet branch as security for a loan of Rs. 5 lakhs to meet his family expenses and a mortgage by deposit of title deeds was created to secure repayment. The mortgage had not been redeemed till date. It is alleged that the youngest brother, K.S. Anantharaman had played a fraud on the bank with the collusion of his mother and sister and redeemed the title deeds for his use in his attempt to generate funds for his self-misappropriation. K. Shanmugasundaram passed away on July 24, 1995, and he was cremated by Mothilal in his native place at Arumuganeri village on July 27, 1995. The following are the legal heirs of Shanmugasundaram alias Shanmugasundara Nadar :

“1. Paul Thai Shanmugasundaram

— 72 years

— Widow

2. K.S. Mothilal

— 53 years

— 1st son

3. K.S. Damodaran

— 51 years

— 2nd son

4. C. Mangala Vijayalakshmi

— 43 years

— Daughter

5. K.S. Anantharaman

— 41 years

— 3rd son.”

According to the petitioner, being an intestate succession, all the legal heirs are entitled to 1/5th share of the 50 per cent share of Shanmugasundaram in the company with 10 per cent to each legal heir and the remaining 50 per cent owned exclusively by the petitioner, K.S. Damodaran in the first respondent-company. The petitioner claims that he owns 60 per cent share of the total assets of the first respondent-company.

11. It is claimed that the petitioner as the sole surviving director and founder director of the first respondent-company, appointed K.S. Mothilal by co-option as director on August 9, 1995, which appointment he had accepted and took the place of the late Shanmugasundaram. The said change in the director was intimated to the Registrar of Companies apart from passing of resolutions. The board of directors also met on November 13, 1995, and January 20, 1996, and passed necessary resolutions.

12. After the said appointment of K.S. Mothilal, the youngest brother, K.S. Anantharaman and Mangala Vijayalakshmi colluded and seized the company records and handed them over on September 29, 1995, to panchayat committee, in the nature of arbitration called family welfare committee comprising P.K. Soundarapandi Nadar, T. Jayaram Nadar, G. Ramasamy Nadar and P. Arumugam Nadar.

13. One Johnson, son of V. Samy Nadar, residing at Rajamaniyapuram, Arumuganeri, Tiruchendur taluk, is instrumental in organising the fraudulent alienation of company’s lands at Maduravoyal by K.S. Anantharaman, even though neither of them has any right or share or claim in the first respondent-company’s assets.

14. Apprehending fraudulent sale and cheating, the third respondent, K.S. Mothilal filed C.P. No. 60 of 1996 against the legal heirs of the deceased Shanmugasundaram praying for winding up of the respondent-company and distribution of assets/share value and dues. The third respondent had filed a company petition on March 4, 1996. Notice has been served on all the parties in the said company petition as well as in the company application seeking for appointment of interim official liquidator. At the same time, the bare injunction suit was filed by K.S. Anantharaman against the first respondent, K.S. Mothilal, the second respondent, K.S. Damodaran in O.S. No. 5560 of 1996 on April 19, 1996, which was disclosed as seen from the counter affidavit filed by the third respondent in I.A. Nos. 7375 of 1996 to 7378 of 1996 on April 30, 1996. The said Anantharaman was served with the notice on May 4, 1996, itself. All the company records, it is alleged, have been confiscated by this hon’ble court by deputing an Advocate Commissioner to Arumuganeri during January, 1998, in C.A. No. 2556 of 1997 in C.P. No. 60 of 1996.

15. An order of injunction was enforced in C.A. No. 1882 of 1997 in respect of the immovable properties of the first respondent-company at the instance of the third respondent, since May, 1997, against everyone including all the directors as alleged by Anantharaman.

16. Winding up of the company in terms of section 441(2) shall be admitted to have commenced from the date of presentation of the petition for winding up. C.P. No. 60 of 1996 was presented on March 4, 1996. Further, in terms of section 442, the company Court has the power to stay or restrain the judicial proceedings before any other court. Sections 464 and 465 deal with the appointment and proceedings with the committee of inspection to assist the winding up proceedings. In terms of section 465, all the company’s properties vest with the custody of the official liquidator, where a provisional liquidator is appointed or where a winding up order is made. The hearing of C.P. No. 60 of 1996 is being delayed at the instance of the third respondent as he is colluding with other parties by way of secret and unjust enrichment and withdrawing C.P. No. 60 of 1996 or else by neglecting the case. Hence, the present company petition.

17. On April 29, 1996, one S. Shanmugam, an astrologer, resident of No. 9, Govinda Singh Street, Pulianthope, Chennai 12, who was the astrologer for the late Shanmugasundaram, came to the petitioner herein and handed over a will stating to be the last will dated March 22, 1994, of the said Shanmugasundaram. By the said will, the late Shanmugasundaram had appointed K. S. Damodaran, the petitioner herein, to be the executor. The contents of the will refer to various reasons for the disposition of assets made therein and the way the properties of the testator are to be enjoyed. All the properties have been bequeathed in the name of the legatees therein. Clause 4 of the will reads as under :

“I own 42.19 acres of land in Muduravoyal village, in the name of K.S. Kasimaris Ceramique Pvt. Ltd. started and maintained by myself and son, Damodaran, who signed wherever I wanted. Others do not have any share or right in this company. The State Housing Board acquired 28.42 acres of land. My son, Damodaran shall fight in Court and take the enhanced compensation in full. The property of 13.77 acres of encumbered land in sub-divisions of survey No. 127 of Maduravoyal village, Saidapet Taluk, shall go to my son Damodaran with 60 per cent share and to my son Mothilal with 40 per cent share. The properties of Pandian Rice Mill and 25 acres of lands also be shared by the said two sons with 60 per cent and 40 per cent. The title deeds shall remain with Damodaran. I owe a lot to my son Damodaran, morally and financially. I hereby give Damodaran my 30 per cent share in Kasimari Son Auto Products in full. . .”

The petitioner had already taken steps as the executor of the will to probate by filing O.P. No. 147 of 1997 on the original side of this court as early as February, 1997. All the legal heirs of the late Shanmugasundaram have entered appearance in the said probate proceedings. In terms of the will, the late Shanmugasundaram had not allotted the shares to the respondents, but the will emaciates and castrates the claim of everyone except the legatees including the claims of K.S. Anantharaman, Paul Thai, Ms. Mangala Vijayalakshmi and Johnson.

18. As per the memorandum and articles of association of the first respondent-company, the petitioner herein alone is competent to sue or be sued on behalf of the first respondent-company in the status of chairman and founder director having 60 per cent share in the case of intestate succession and 80 per cent share in the company in the case of testamentary succession. The first respondent has already filed a suit even during the year, 1997, on the file of this court for declaration of his shares in the first respondent-company and the same is now pending on some technical grounds. The petitioner is the owner of the 50 per cent shares of the share capital in the first respondent-company, which cannot be denied. One Mr. Johnson, son of V. Swamy Nadar is instrumental in abetting K.S. Anantharaman, Mangala Vijayalakshmi and Paulthai to conspire and collude to play a fraud and usurp the company’s assets and other valuables. The memorandum and articles of association of the company clearly prove the absence of the name of M/s. Pandian Brick Works. There is no office for the first respondent-company nor has it any staff nor does it incur expenditure or any activity whatsoever for the company except the watchman’s salary to safeguard the valuable vacant lands at Maduravoyal and for whom salaries are being disbursed by the petitioner from the first respondent-company’s accounts.

19. Even without admitting the claims of shares of the respondents, there should be at least 25,000 shares to repay the initial share capital of Rs. 25 lakhs, each share carrying the value of Rs. 100. But only 20,500 shares have been mentioned. The conspirators have done a lot of spade work in manipulating the records according to their evil designs. It appears that the respondents have colluded and harmed the share certificate vested with Arumuga Nadar. It is stated that 12,500 shares of Rs. 100 each were given to and owned by the petitioner as a 50 per cent shareholder of the entire share capital as well as in the assets of the company, which is manifest in the memorandum and articles of association of the company. The two directors of TIIC and the company director remained in the company’s board till the discharge of mortgage on April 22, 1990. Any dispute between the father and the petitioner could only mean a split in the company resulting in winding up. Appointment of Shanmugasundaram unilaterally as no other person as the director is illegal and untrue. Except Damodaran and Shanmugasundaram, nobody has any share or right in the assets or share capital of the first respondent-company.

20. The petitioner appointed K.S. Mothilal, the third respondent as a shareholder-director on August 9, 1995, considering his shares in the company as well as the legal heir of the deceased Shanmugasundaram. This is in accordance with article 27 of the articles of association of the first respondent-company.

21. There is no superstructure to be demolished because the entire superstructure and machineries of the first respondent-company were taken away by K.S. Anantharaman to Ambattur for M/s. Kasimari Auto Products. The petitioner does not know about the fate of M/s. Southern Peninsula Housing Ltd. who paid an advance of Rs. 10 lakhs by demand draft on September 23, 1996, for MoU for the loan, but gave up its claim later. The MoU was also terminated. By a later development, the will gives the petitioner herein 60 per cent right in the late Shanmugasundaram’s shares in the company’s properties in addition to the petitioner’s original 50 per cent shares in the assets and share capital of the first respondent-company. Already steps have been taken to probate the will left by the late Shanmugasundaram. C.P. No. 60 of 1996 is pending and interim injunction was granted in C.A. No. 1882 of 1997 on May 27, 1997. When Anantharaman and his group tried to violate the orders of this court, emboldened by their success in I.A. No. 7375 of 1996 in the bare injunction suit and also in C.M.A. Nos. 228 of 1996 and 230 of 1996 dated May 6, 1997, they landed themselves in Cont. Appln. No. 199 of 1997 and this court ensured the maintenance of status quo at that stage.

22. The third respondent in C.P. No. 60 of 1996 filed his reply during August, 1997, in the said company petition. Paras 24, 25 and 26 are material for the purpose of the present company petition. The hearing of C.P. No. 60 of 1996 is being delayed at the instance of the third respondent, who is the petitioner in C.P. No. 60 of 1996, since he is, with ulterior motives, colluding with other parties for secret, unjust enrichment and is withdrawing C.P. No. 60 of 1996. Hence, the present company petition has been filed for joint hearing of both the petitions.

23. While setting out the above averments, the petitioner had prayed for winding up of the first respondent-company and to distribute its assets and share values to the contributors and creditors and as a part thereof, allot 60 per cent shares to the petitioner by way of intestate succession or 80 per cent share to the petitioner by way of testamentary succession.

24. Pending C.P. No. 199 of 1998, the petitioner herein filed C.A. No. 1033 of 1998 repeating the same averments and the company petition as well as the company application proceed as if it is a dispute between the family members for the assets, besides claiming succession either intestate or testate succession. A reading of the company petition also would show that the petitioner had not only described himself in more than one place as the plaintiff and proceeds as if it is a claim by the plaintiff against the defendant in respect of the assets. C.A. No. 996 of 1999 also was taken out. K.S. Anantharaman had filed a counter in C.A. No. 996 of 1999. In fact in C.P. No. 199 of 1998, the first respondent and K.S. Anantharaman, who is the fourth respondent, took out C.A. No. 2548 of 2000 for clarification of earlier orders passed in C.A. No. 1033 of 1998, etc., on July 1, 1999. C.A. No. 2548 of 2000 was taken out by the petitioner herein also for a clarification.

25.Case of the petitioner in C.P. No. 274 of 1998

Mrs. C. Mangala Vijayalakshmi, who is the fifth respondent in C.P. No. 199 of 1998 has filed C.P. No. 274 of 1998 under section 433(f) for winding up of the same M/s. K.S. Kasimari Ceramique Pvt. Ltd. According to the petitioner in C.P. No. 274 of 1998, the company was incorporated on January 16, 1970. At the time of inception, the then directors were K.S. Damodaran and K. Shanmugasundaram each holding one share. In due course shares were allotted to family members of Shanmugasundaram and some of the family members were also designated as directors. The company carried on business up to 1976 and the company acquired immovable properties. After 1976, the business operations were stopped. Shanmugasundaram passed away on July 24, 1995. The deceased Shanmugasundaram was the chairman of the first respondent-company and was holding more than 50 per cent shares out of the total shares issued. The details of the shares held by the members in the first respondent-company as on the date of the death of K. Shanmugasundaram Nadar are :

 

1.

Thiru Shanmughasundaram Nadar

15,801

 

2.

Smt. Paulthai Shanmugasundaram

1,100

 

3.

Mrs. Mangala Vijayalakshmi

1,150

 

4.

Mr. K.S. Damodaran

201

 

5.

Mr. K.S. Mothilal

150

 

6.

Mr. S. Johnson

1,200

 

7.

Mr. A. Arulraj

200

 

8.

Mr. T. Thirumani Nadar

100

 

9.

Mr. T. Jayaraman

200

 

10.

Mr. John Jayakumar

200

 

11.

Mr. V. Thangamani Nadar

84

 

12.

Mr. A. Thangavelu Nadar

100

 

13.

Mr. Swamy Nadar

84

 

 

Total

20,570

26. Shanmugasundaram Nadar died intestate on July 24, 1995, and on his death his shares devolved on his legal heirs, namely, his widow, one daughter and three sons. Though some of the shares were held by some of their nearest relatives, the entire business was carried on only by Shanmugasundara Nadar and other shareholders did not show any interest in the business of the company. The petitioner got married on June 2, 1978. The relationship between the petitioner and her three brothers and mother is not disputed. K.S. Mothilal studied up to S.S.L.C. and was assisting Shanmugasundaram till 1974 and, thereafter, he did not have good terms with his father and worked in various other places. Mothilal was not on talking terms with his father since 1974. The petitioner’s second brother, Damodaran, the second respondent in the company petition, an engineering graduate was looking after M/s. K.S. Kasimari Machine Tools established by Shanmugasundaram Nadar, but in due course the second respondent had converted the said business as a proprietary concern and appropriated the same for himself. Since then, the second respondent is not on good terms with the father till his death in 1995. The deceased Shanmugasundaram incorporated M/s. Kasimari Sons Auto Products at Ambattur as a partnership firm consisting of Shanmugasundaram, Anantharaman, Thirugnanam, Mothilal and Mangala Vijayalakshmi, the petitioner herein.

27. After the death of Shanmugasundaram, disputes arose among the sons and compromise talks went on thrice in the presence of P.S.K. Soundarapandi Nadar, a close relative of the family of the petitioner. However, no settlement could be effected or arrived at.

28. After the death of Shanmugasundaram, notice was given to the directors on December 30, 1995, for convening a board meeting on January 12, 1996. K.S. Damodaran, the second respondent did not attend the meeting nor applied for leave of absence. In the said meeting, the fourth respondent was inducted as one of the directors and the third respondent was appointed as managing director to look after the day-to-day affairs of the company. Presently there are five directors of the first respondent-company, namely:

“(1) K.S. Anantharaman

(2) Mrs. Paulthai Shanmugasundaram

(3) K.S. Damodaran

(4) Mrs. Mangala Vijayalakshmi

(5) S. Johnson.”

Respondent Nos. 2 and 5 joined together and started to declare themselves as chairman and director respectively of the first respondent-company. Hence, the third respondent instituted O.S. No. 5560 of 1996 on the file of the Second Assistant Judge, City Civil Court, Madras, and prayed for declaration that respondent Nos. 2 and 5 herein are not the chairman and director respectively.

29. The first respondent-company owes dues to the Electricity Board, Indian Bank and also property tax to revenue authorities, Panchayat tax to local bodies as well as tax arrears of capital gains tax, etc., and the first respondent has not shown any interest to pay or discharge the said dues. Respondent Nos. 2, 3 and 5 are interested only in promoting the properties of the first respondent-company for themselves with a view to divide the rights of other directors or shareholders including the petitioner. The second respondent attempted to alienate the property owned by the first respondent-company and entered into an agreement with M/s. Southern Peninsula Housing Ltd., and received Rs. 10 lakhs as advance. The petitioner further states that the third respondent has entered into an agreement with third parties and has received advance amounts. The fifth respondent has joined the second respondent and have acknowledged receipt of the amounts from M/s. Southern Peninsula Housing Ltd. No amount was brought to the credit of the company nor was used for the discharge of debts due to the Government. Hence, the first respondent-company has to be ordered to be wound up on the ground that it is just and equitable.

30. The company is a private limited company founded on personal relationship involving mutual confidence between the members of the family. The substratum of the company had gone since the main object for which the company was started has become impractical. The company stopped its manufacturing operations and business as early as 1976. Respondent Nos. 2 and 3 refused to co-operate with other directors and have taken an adverse attitude with the intention to appropriate the properties of the company. The petitioner had not received any profit or any amount from the first respondent-company from the date of death of her father. Respondent Nos. 2, 3 and 5 have joined together and are appropriating the profits.

31. The third respondent received huge amounts by way of advance for sale of the properties belonging to the first respondent-company. However, the amount was not brought to the account of the company and the entire amount had been taken away by the third respondent. Thus it is an oppression as against the petitioner had as such it is just and equitable to wind up the company. The third respondent is also investing funds realised from the property belonging to the first respondent-company in his own name in one new business, where he and his wife are the directors. The third respondent had committed breach of good faith, which the members owe to each other and thereby acted inequitably and, hence, it is just and equitable that the first respondent-company has to be wound up.

32. While setting out the same, the petitioner had sought for winding up of the first respondent-company and also sought to settle the claims of the petitioners. Pending C.P. No. 274 of 1998, various applications were also taken out. These applications were also contested. In C.P. No. 274 of 1998 and applications, respondent Nos. 1, 3, 4 and 6 filed a common counter statement and it is sufficient to refer to common case.

33. As seen from the counter filed in C.P. No. 274 of 1998 by respondent Nos. 1, 3, 4 and 6 stand together, while respondent Nos. 2 and 5, namely, K.S. Damodaran and K.S. Mothilal, the first and second son of the late Shanmugasundaram stand aloof.

Counter case of respondent Nos. 1, 3, 4 and 6 in C.P. No. 274 of 1998 :

According to the said respondents, M/s. Kasimari Sons Auto Products was a partnership concern and managed by the third respondent, K.S. Anantharaman. It is incorrect to state that the third respondent, Anantharaman had not taken any interest in the first respondent-company. The third respondent, Anantharaman was appointed as director in the meeting held on November 17, 1989, along with the petitioner and the second respondent. Article 36 of the company does not provide any qualification shares being held for anybody to become a director of the company. Therefore, the appointment of the third respondent as director cannot be undermined on that score. It is stated that no compromise was arrived at the Panchayat held at Arumuganeri. In the meeting held at Arumuganeri on January 12, 1996, the second respondent had not chosen to attend and in the said meeting, the fourth respondent, Mrs. Paulthai Shanmugasundaram was nominated as director and the third respondent, K.S. Anantharaman was appointed as the managing director.

34. The claim of the second respondent that he had nominated the fifth respondent as director without conducting a board meeting and without notice to the other directors and, further, declared himself as the chairman of the company are invalid and illegal. The third respondent instituted the suit O.S. No. 5560 of 1998 on the file of the City Civil Court, Madras, in terms of the resolution, seeking for a relief of declaration and injunction against the second respondent and it is binding.

35. The allegation of collusion of the fifth respondent with the third respondent is denied. It is further stated that the petitioner’s counsel agreed to the suggestion made by the Hon’ble judge and also suggested expedient means for settlement. As per the discussions, the petitioner was even ready to accept a slightly lower share whereas the second respondent was not willing for a settlement as his claim was to the extent of 60 to 80 per cent. Hence, the settlement talks failed. The fifth respondent, who desired an amicable settlement, instituted C.P. No. 60 of 1996 on his own so that there could be family peace and harmony. It is incorrect to state that respondent Nos. 3 and 5 are colluding.

36. The liabilities of the company are true. When the first respondent-company was pressurized for payment, it was decided at the meeting held on January 12, 1996, to dispose of the immovable property at Maduravoyal and pay all the debts. Mrs. Paulthai Shanmugasundaram was the chairman of the meeting wherein various resolutions were passed in the presence of some of the other directors. Suitable purchasers were located and sale agreements were entered into with 25 persons. The petitioner in this company petition is signatory to those agreements.

37. The second respondent further claiming to be the owner of the aforesaid property agreed to sell the same to M/s. Southern Peninsula Housing Ltd. and illegally received Rs. 10 lakhs from the company, which has not been accounted for nor been brought into the accounts of the company. This necessitated the filing of O.S. No. 5560 of 1996 by the company for declaration and injunction against the second and fifth respondents as also resorting to the filing of O.S. No. 13337 of 1996 against the said M/s. Southern Peninsula Housing Ltd. for injunction. The fourth respondent was not willing to accede to the unreasonable request as the allotment was made according to the requirements of individual children. The petitioner is permanently residing at Kalpakkam. Though the petitioner had been allotted a decent residential portion of her family in the same property, she has refused to take possession of the same, the fourth respondent being an absolute owner has every right to deal with the property in such manner as he deems fit.

38. The averments made against the third and fifth respondents are denied. What happened to the sum of Rs. 10 lakhs is not known and they were commented upon by the said civil court as well as by this Court. The third respondent has not entered into unilateral agreement for sale. The petitioner being a signatory to the resolution as a director and for sale of the company’s property and receiving advance on behalf of the company, has dealt with the property of the company and, therefore, she is precluded from seeking the relief of winding up. Family or shareholders disputes have to be settled only by ordinary civil courts and/or the Company Law Board. The petitioner is prevented from seeking any discretionary relief of winding up before this Court. No money was received by the third respondent as alleged. The petitioner had already signed the agreements of sale. The petitioner was accompanied by her husband. S. Chandrasekaran, working as Scientific Advisor, has filed the present winding up petition as she could not get the property at No. 50, Pulla Avenue, Shenoy Nagar. It is highly improper for the petitioner to institute a company petition for personal vendetta.

39. After much persuasion only, the third respondent agreed to be the managing director. There was no compelling circumstance for any of the directors such as the petitioner, the third and fourth respondents to subscribe to all the resolutions. The petitioner had voluntarily signed all the 25 agreements for sale. The petitioner’s counsel was also present in all these occasions and never was a plea raised at any stage regarding her signature being made under compulsion. Even during the contempt proceedings before the civil court the petitioner has never raised a plea of being compelled to sign any agreement. The petitioner at the behest of her husband is deliberately sabotaging the settlement process by filing the winding up petition and unlawfully retaining the title deeds of Shenoy Nagar property and the 25 agreements of sale entered into with the third party purchasers. Family disputes raised, which requires elaborate evidence and cannot be agitated in winding up proceedings, which are summary in nature. The petitioner is estopped from seeking for winding up as she is a signatory to the board resolutions authorising sale of the property at Maduravoyal and has also signed all the 25 agreements of sale.

40. It is incorrect to contend that the petitioner’s signature was obtained by compulsion. The petitioner had refused to hand over the agreement with the company solely on the ground that she has not been given a major share in the house property at Shenoy Nagar. Respondent Nos. 1, 3, 4 and 6 pray that this Court may dismiss the winding up petition.

41. The contesting respondents in C.P. No. 199 of 1998 have filed counter-affidavit in the applications and the same is being treated as counter. As and when required, the very counter filed in the company applications, which is to be treated as part of the counter in the company petition, will be referred for convenience.

42. According to the contesting respondents, the petitions are not maintainable, there is no bona fides, there are no merits and the entire company petition is a misconception. The contesting respondents also filed detailed typed set of papers wherein they have included the resolutions of the board, authorised sale agreements as well as various interim orders passed by the civil court between the parties as well as the pleadings in the pending suits. The respondent also pleaded that the entire case of the petitioners is false and they have come before this court with unclean hands and on this short ground the petitions are liable to be dismissed.

43. The shares claimed by the petitioner in C.P. No. 199 of 1998 is denied and the will put forward by the said petition is also denied. It is also contended that the petitioner in C.P. No. 274 of 1998 is estopped by her conduct, in that she was a party to the agreement as well as the resolutions passed by the board. The petitioner in the respective petitions cannot invoke either section 433(f) or any other provisions of the Companies Act. The petitioners are not entitled to seek for winding up under section 433(f) and such a petition is not maintainable.

44. The company petition is an abuse of the process of the court. It is also contended that the substratum has not been lost nor is the company unable to pay its debts. The value of the assets owned by the company is substantial and it is growing day by day. The company has got a rice mill, besides garden land, which is also fetching income. The petitioners attempt to treat the company’s assets as their private property is also impermissible in law and such a claim is a misconception. In respect of the will put forward by the petitioner in C.P. No. 199 of 1998, it is contended that the will is not genuine, nor is it true, nor is it binding and it has been brought up at a belated stage. All the averments set out in the company petitions are denied and the petitioner in the respective petition is put to strict proof of the averments. The contesting respondents prayed for dismissal of the company petitions.

44A.Counter of respondent Nos. 1, 2 and 4 in C.P. No. 199 of 1998 :

It may not be necessary to set out in detail the counter statement filed on behalf of respondent Nos. 1, 2 and 4 in C.P. No. 199 of 1998 as it is verbatim the same plea in C.P. No. 274 of 1998.

45. Counter of fifth respondent in C.P. No. 199 of 1998 :

In C.P. No. 199 of 1998, the fifth respondent, Mrs. Mangala Vijayalakshmi, had filed a counter. It is also verbatim reproduction of the winding up petition in C.P. No. 274 of 1998 wherein she is the petitioner. Hence, it is unnecessary to set out the same once over.

Heard Mr. Rajendran, learned counsel appearing for the petitioner in C.P. No. 199 of 1998. Mr. R. Subramanian and Ms. Hemalatha, learned counsel appearing for the petitioner in C.P. No. 274 of 1998 and Mr. Aravind P. Datar, learned senior counsel for Mr. K.M. Kodaiarasu, appearing for respondent Nos. 1 and 4 in C.P. No. 199 of 1998 and for respondent Nos. 1, 3, 4 and 6 in C.P. No. 274 of 1998.

In respect of C.P. No. 60 of 1996, it is not necessary to refer to any other material or pleadings as counsel for the petitioner had made an endorsement as early as September 4, 1998, that the company petition may be permitted to be withdrawn. Such an endorsement has been made on September 4, 1998. However, arguments were advanced initially on September 4, 1998, and it came to be posted for continuation on September 11, 1998. Orders were reserved on September 11, 1998, but on October 9, 1998, the matter was reopened for further hearing and since then, the other company petition came to be filed. However, counsel for the petitioner had not made any different representation than what has been endorsed by him on September 4, 1998. In the light of the said endorsement, it is unnecessary to examine C.P. No. 60 of 1996 on merits. In the light of the endorsement made, C.P. No. 60 of 1996 does not deserve any further consideration.

Since all the three petitions relate to the same company and all of them have been filed invoking section 433(f) on the ground that it is just and equitable to order winding up of the same company, all the three company petitions could be taken up together.

In these three company petitions, the following points arise for consideration :

“(1)Whether C.P. Nos. 199 of 1998 and 274 of 1998 filed under section 433(f) seeking for winding up of M/s. Kasimari Ceramique Pvt. Ltd. as just and equitable is maintainable ?

(2)  Whether section 433(2) of the Companies Act is a bar to C.P. Nos. 199 of 1998 and 274 of 1998 ?

(3)  Whether substratum of the first respondent-company is lost ?

(4)  Whether the petitioner in each of the company petitions has made out a case to order winding up of the company as just and equitable clause ?

(5) Whether the filing of company petitions is an abuse of the process ?

(6)  Whether the petitioner in each of the company petitions has come before this Court with unclean hands ? If so, whether the company petition is liable to be dismissed on that score ?

(7)  Whether the petitioner in each of the company petitions by their conduct is disentitled to seek for winding up of the company under section 433(f) ?

(8)  Whether the disputed claims of testamentary succession with respect to the shares left by the late Shanmugasundaram could be the subject-matter of adjudication under sections 433(f) and 439 of the Companies Act ?

(9)  What are the rights of the shareholders like the petitioner and contesting respondents in the first respondent-company ?

(10) Whether the shareholder could claim any specific share or interest in the property held or owned by the company or seek for partition of the company’s assets ?

(11) Whether the first respondent-company is liable to be wound up on one or more of the grounds pleaded by the petitioner in the respective company petitions ?

(12) To what relief, if any ?”

Admittedly, the company was promoted by the late Shanmugasundaram Nadar during his lifetime. Shanmugasundaram Nadar and his family members were holding major share. There were a few third parties holding minimum shares. It is admitted that substantial shares in the company are held by the family of Shanmugasundaram Nadar. The promoter, Shanmugasundaram Nadar was holding a substantial number of shares. Shanmugasundram died leaving his widow, his three sons and a daughter. It is the claim of one set of the heirs of Shanmugasundaram that he died intestate, while another branch mainly set up a will claimed to have been executed by Shanmugasundaram and substantial portion of the shares held by Shanmugasundaram is claimed under the said testament. The alleged will is being disputed seriously, challenged by the contesting respondents. It is also admitted that the executor under the will has already moved the original side of this court for issue of succession certificate, the same is being disputed and denied and the same has been converted as a testamentary original suit and it is pending.

46. At this stage, this court will not be justified in entertaining any issue nor the company court has such a jurisdiction to go into the validity of the testamentary disposition made by the late Shanmugasundaram by the alleged will. Already the civil court is seized of the matter. Hence, this court not only will not be justified, but also will not have jurisdiction to decide the dispute as to whether the will left by the late Shanmugasundaram is true, valid and binding and truth or otherwise of the said will cannot be gone into. Therefore, it is essential to point out that this company court has to confine itself to the winding up petition filed under section 433(f) of the Companies Act and any other incidental question as sought to be advanced only could be the subject-matter of consideration or trial before the civil court. It is the ultimate judgment of the civil court with respect to the will executed by Shanmugasundaram Nadar and the decree and judgment of the civil court alone will bind the parties.

47. Point Nos. 9 and 10 :

At the first instance, it is essential to take up points 9 and 10 for consideration.

48. Also let us not lose sight of the fact that the petitioner in both the company petitions and at least one or two of the respondents in the company petitions proceed as if they are the owners of the entire assets of the company, while forgetting the fact that they are mere shareholders and they cannot claim to be the owners of the property owned or held by the company. In fact, proceedings have been instituted as if the petitioners and contesting respondents are entitled to share in the properties held by the first respondent-company, which is a misconception. Merely because sons, widow and daughter of the late Shanmugasundaram Nadar hold substantial shares, it does not mean they become the owners of the land or the assets of the company. Substantial portion of the case and claim has been made only on that misconception.

49. It is well-settled legal position that there is nothing to warrant for the assumption that a shareholder has any interest in the property of the company, which is a juristic person and which is entirely distinct from the shareholders. The true position of a shareholder is an investor, he will be entitled to participate in the profits of the company in which he holds shares as and when the company declares, subject to the articles of association that the profits or portion thereof should be distributed by way of dividends among the shareholders. That apart, the shareholder has got a further right to participate in the assets of the company, which would be left over after winding up, but not in the assets as a whole. This legal position is well-settled by the pronouncement of the Apex Court in Mrs. Bacha F. Guzdar v. CIT [1955] 25 Comp. Cas. 1

50. In Chiranjilal Chaudhari v. Union of India [1951] 21 Comp. Cas. 33 (SC), it has been held that the right of the shareholder is to elect directors, to give direction by passing resolutions and in case of loss, to present a petition for the winding up of the company, which are incidental to the ownership of the shareholders, but that does not mean the shareholders apart from being shareholders are the owners of the assets of the property owned or held by the company.

51. A five-judge Bench of the Apex Court in Mrs. Bacha F. Guzdar’s case (supra) held thus :

“. . . A shareholder has got no interest in the property of the company though he has undoubtedly a right to participate in the profits if and when the company decides to divide them. The interest of a shareholder vis-a-vis the company was explained in the Sholapur Mills Case ; Chiranjilal Chaudhari v. Union of India [1950] SCR 869. That judgment negatives the position taken up on behalf of the appellant that a shareholder has got a right in the property of the company. It is true that the shareholders of the company have the sole determining voice in administering the affairs of the company and are entitled, as provided by the articles of association, to declare that dividends should be distributed out of the profits of the company to the shareholders but the interest of the shareholder either individually or collectively does not amount to more than a right to participate in the profits of the company.

The company is a juristic person and is distinct from the shareholders. It is the company which owns the property and not the shareholders. The dividend is a share of the profits declared by the company as liable to be distributed among the shareholders. Reliance is placed on behalf of the appellant on a passage in Buckley’s Companies Act (12th Ed., page 894) where the etymological meaning of dividend is given as dividendum, the total devisible sum, but in its ordinary sense it means the sum paid and received as the quotient forming the share of the divisible sum payable to the recipient. This statement does not justify the contention that shareholders are owners of a divisible sum or that they are owners of the property of the company.

The proper approach to the solution of the question is to concentrate on the plain words of the definition of agricultural income which connects in no uncertain language revenue with the land from which it directly springs and a stray observation in a case which has no bearing upon the present question does not advance the solution of the question. There is nothing in the Indian Law to warrant the assumption that a shareholder who buys shares buys any interest in the property of the company which is a juristic person entirely distinct from the shareholders.

The true position of a shareholder is that on buying shares an investor becomes entitled to participate in the profits of the company in which he holds the shares if and when the company declares, subject to the articles of association, that the profits or any portion thereof should be distributed by way of dividends among the shareholders. He has undoubtedly a further right to participate in the assets of the company which would be left over after winding up but not in the assets as a whole. . . . “ (p. 5)

52. The same has been followed by a three-judge Bench of the Apex Court in Chiranjilal Chaudhary’s case (supra). It is unnecessary to multiply the pronouncements in this aspect. No pronouncement to the contra or taking a different view had been brought to the notice of the court by the learned counsel for the petitioner in both the company petitions. In the circumstances, the entire arguments of the petitioner in both the company petitions as if they are the owners of the land and entitled to proportionate shares in the land is a misconception of law. Hence, point Nos. 9 and 10 are necessarily answered against the petitioners.

53. Point No. 3

Taking up the next question whether the company has lost its substratum, it is to be pointed out that except making a bald averment that the company has lost its substratum in C.P. No. 274 of 1998, it cannot be even suggested that the company has lost its substratum. Mere stoppage of brick manufacturing unit is pointed out as the loss of substratum. Apart from the Maduravoyal lands, the company owns extensive agricultural lands in Tuticorin District and a rice mill. Assuming for the purpose of argument that Maduravoyal land is being offered for sale, the value of the land is so phenomenal even as admitted by either side, the liabilities referred to, namely, the liability to pay to the bank, Electricity Board, Revenue dues, etc., are only marginal and sale of one acre will be more than sufficient to wipe out the liabilities, yet there is substantial surplus and valuable lands are available.

54. The company has several projects which it could carry out by passing a suitable resolution by the board. In fact on November 27, 1999, in the board meeting, not only is there an approval regarding the sale of the lands, but also a resolution has been passed resolving that the company shall not be wound up on any account, the company may take up manufacturing of bricks and its allied products by acquiring new loans or probe other avenues as they are the objects of the memorandum of association for continuance of business. It is resolved to authorise the managing director to probe avenues for utilising the sale proceeds as and when received, in new profitable ventures in line which the objects of memorandum of association. Therefore, as long as funds and valuable assets are admittedly available, the objects for which the company has been registered could very well be carried on. Therefore, it cannot be said that the company had lost its substratum.

55. It is sought to be contended that loss of substratum or disappearance of substratum of a company is evident, since the object for which it was incorporated has substantially failed or that it is impossible to carry on the business of the company except at a loss or the existing and possible assets are insufficient to meet the existing liability. This contention is based upon a misconception of the legal position. In Seth Mohan Lal v. Grain Chambers Ltd. [1968] 38 Comp. Cas. 543 (SC), in a case arising out of the 1913 Act, it has been held thus :

“Finally, it was urged that by reason of the notification issued by the Central Government, the substratum of the company was destroyed and no business could be carried on by the company thereafter. It was said that all the liquid assets of the company were disposed of and there was no reasonable prospect of the company commencing or carrying on business thereafter.

The company was carrying on extensive business in ‘futures’ in gur, but the company was formed not with the object of carrying on business in ‘futures’ in gur alone, but in several other commodities as well. The company had immovable property and liquid assets of the total value of Rs. 2,54,000. There is no evidence that the company was unable to pay its debts. Under section 162 of the Indian Companies Act, the court may make an order for winding up a company if the court is of the opinion that it is just and equitable that the company be wound up. In making an order for winding up, on the ground that it is just and equitable that a company should be wound up, the court will consider the interests of the shareholders as well as of the creditors. Substratum of the company is said to have disappeared when the object for which it was incorporated has substantially failed, or when it is impossible to carry on the business of the company except at a loss, or the existing and possible assets are insufficient to meet the existing liabilities. In the present case the object for which the company was incorporated has not substantially failed, and it cannot be said that the company could not carry on its business except at a loss, nor that its assets were insufficient to meet its liabilities. On the view we have taken, there were no creditors to whom debts were payable by the company. The appellants had, it is true, filed suits against the company in respect of certain gur transactions on the footing that they had entered into transactions in the names of other persons. But those suits were dismissed. The business organisation of the company cannot be said to have been destroyed, merely because the brokers who were acting as mediators in carrying out the business between the members had been discharged and their accounts settled. The services of the brokers could again be secured. The company could always restart the business with the assets it possessed, and prosecute the objects for which it was incorporated. It is true that because of this long drawn out litigation, the company’s business has come to a standstill. But we cannot on that ground direct that the company be wound up. Primarily, the circumstances existing as at the date of the petition must be taken into consideration for determining whether a case is made out for holding that it is just and equitable that the company should be wound up, and we agree with the High Court that no such case is made out.” (p. 556)

The above pronouncement and the principles laid down by the Apex Court squarely apply to the present case and this contention deserves to be rejected.

56. In Madhusudan Gordhandas & Co. v. Madhu Woollen Industries (P.) Ltd. [1972] 42 Comp. Cas. 125, the Apex Court, while examining the question whether the substratum of the company has gone, held that it is to be alleged and proved as a fact and in that context held thus :

“. . . In determining whether or not the substratum of the company has gone, the objects of the company and the case of the company on that question will have to be looked into. In the present case, the company alleged that with the proceeds of sale, the company intended to enter into some other profitable business. The mere fact that the company has suffered trading losses will not destroy its substratum unless there is no reasonable prospect of it ever making a profit in the future, and the court is reluctant to hold that it has no such prospect. . . .The company has not abandoned objects of business. There is no such allegation or proof. It cannot, in the facts and circumstances of the present case, be held that the substratum of the company is gone. . . .” (p.134)

57. The Calcutta High Court in Lokenath Gupta v. Credits Private Ltd. [1968] 38 Comp. Cas. 599, 601, 602, while considering an identical situation in respect of a company whose shareholders were either family members or relatives, held that where the substratum is not completely gone and other business could be carried on, the company should not be directed to be wound up on the ground that it is just and equitable. In that context, the Calcutta High Court held thus :

“The allegations of the petitioners further are that the substratum of the company is gone.

The said company, according to the petitioners is in the nature of and in substance a partnership, the shareholders of the company are relatives and/or friends. . . .

Mr. Subrata Roy Chowdhury appearing on behalf of the petitioners contended before me that it is just and equitable that the said company should be wound up inasmuch as (1) the substratum of the company has gone, (2) there is a deadlock in the board of directors for reasons for relationship of parties and (3) there is oppression of minority shareholders which has led to justifiable lack of confidence in the person or persons, namely, Anand Mohan Gupta and his relatives who are in control of the said company. Mr. Roy Chowdhury has relied on the relevant passage in Palmer’s Company Precedents, Part II (17th edition) pages 28, 29, 30, 35 and 36. Mr. Roy Chowdhury has also relied on the case of Great Indian Motor Works Ltd. v. Chandi Das Nundy [1953] 23 Comp. Cas. 287 (Cal.) and the case of Loch v. John Blackwood Ltd. [1924] AC 783. . . .

It is true that where the substratum of the company has gone or its only business has become impossible it has been held that it was just and equitable ground for winding up (see Haven Gold Mining Co., In re [1882] 20 Ch. D. 151; Taldua Rubber Co., In re [1946] 2 All ER 763; Hindustan Co-operative Insurance Society Ltd., In re [1960] 65 C.W.N. 68. But where the substratum has not completely gone and other business can be carried on, the company should not be directed to be wound up on the ground that it is just and equitable that the said company should be wound up. In the instant case, in my opinion, it has not been established that the main business or the only business of the company is gone or that there are no other objects in the memorandum of the company which can be carried out (see Murlidhar Roy v. Bengal Steamship Co. Ltd. AIR 1920 Cal. 722).

Mere mismanagement or misappropriation or misconduct on the part of the directors or the managing director, as has been alleged in the instant case, by itself is no ground for winding up (see Lawang Tshang v. Goenka Commercial Bank Ltd. [1961] 31 Comp. Cas. 45 (Cal.), Halsbury’s Laws of England (3rd edition) volume 6 page 535, article 1035, Cuthbert Cooper & Sons Ltd., In re [1938] 8 Comp. Cas. 131 (Ch. D.); (Anglo-Continental Produce Co. Ltd., In re [1939] 1 All ER 99). General allegations of oppression of minority shareholders also is not a ground. In the instant case, it has not been alleged that Anand Mohan Gupta and his nominees or supporters are the majority of the shareholders. Such allegations, if any, are contained in paragraph 22 of the said petition. The said paragraph 22 has been verified as submission to this court and cannot be relied upon, in my view, on a question of fact. In the instant case it has not been proved that prejudice is being caused to the company by abuse of majority voting power or that it is impossible for the business of the company to be carried on for the benefit of the company as a whole, in view of the fact that they show the way in which the voting power is held and used.

In the instant case, the petitioner has alternative remedies for the redress of his grievances. The said remedies can be found in sections 163, 167, 210 and 220 of the Companies Act. The said remedies can also be found in clauses 66, 69 and 73 of the articles of association of the said company (see Anglo-Greek Steam Co., In re [1866] 2 Eq. 1; Cuthbert Cooper and Sons Ltd., In re case (supra); Janbazar Manna Estate Ltd., In re [1931] 1 Comp. Cas. 243 (Cal.).” (p. 601)

This court is in respectful agreement with the said enunciation of legal proposition.

58. In the present case, on the admitted materials, liability, if any, is only minimal or marginal when compared to the value of properties or assets owned by the company. There may be a misunderstanding between the members of the family, who hold majority shares among themselves and attempt to overreach other members of the family. It may be that the only major business that was being carried on had been stopped, but on that score, it cannot be held that the substratum of the company has been lost. Even after the sale of the lands, there will be sufficient surplus and the company could very well proceed with one or more of the objects, which is approved in the memorandum and articles of association and already steps have been taken as seen from a resolution.

59. Therefore, this contention that the company has lost its substratum cannot be sustained and on that score there cannot be an order of winding up on the facts of the present case. This contention advanced by the petitioner deserves to be rejected as it is nobody’s case that it is impossible to carry on one or more business of the company as provided in the memorandum, except by loss or the existing assets are not sufficient to meet the liabilities.

60. Point Nos. 5 and 6 :

Taking up the next point whether the company petitions instituted are a mere abuse of the process of this Court, though counsel for the petitioner in both the petitions represented themselves that the company cannot be continued and that the company has to be wound up, the entire focus relates to personal dispute between the family members of the late Shanmugasundaram Nadar and major portion of the dispute is whether the will left by Shanmugasundaram Nadar, bequeathing his share is genuine and true or whether the rule of intestate succession applies is the major controversy, which was concentrated by the petitioner in both the petitions. In fact, it is to be pointed out that the very relief prayed for in the company petition reads thus :

“Winding up of the respondent-company and distribution of its assets and share value to the contributories and creditors and as a part thereof allot 60 per cent share to the petitioner by way of intestate succession or 80 per cent share to the petitioner by way of testamentary succession.”

61. In fact in several places the company petition proceeds as if it is a plaint where the plaintiff claims for reliefs of personal nature against the defendant and this would disclose not only the mind of the petitioner, but also their object. That apart, the substantial portion of the averment set out in the company petition relates to personal disputes or disputes among the family members and regarding the will. This is clear from paragraphs 1 to 21 in C.P. No. 199 of 1998 as well as paragraphs 6 to 17 in C.P. No. 274 of 1998.

62. Though it may look incidental, it is the main onslaught by the petitioners that there is an attempt to dispose of all the company’s property by entering into an agreement and appropriate it. It is rightly being pointed out that the agreement entered into by the petitioner, K.S. Damodaran with Southern Peninsula Housing Ltd., was without any authority or board resolution and being a private limited company, there could be no alienation of the company’s assets or property without there being a valid resolution. It is true a suit in O.S. No. 5560 of 1996 is instituted on the file of the City Civil Court and it is pending in this respect. Hence, for the limited purpose of this company petition, this court has to point out that not being supported with the resolution by the board, there could be no sale agreement, which is binding the company, that could be entered into by K.S. Damodaran with Southern Peninsula Housing Ltd. At the same time, it has to be pointed out in respect of the very same lands, there is a resolution by the board of directors, and the board of directors have resolved to disburse all the property by way of twenty-five agreements to various buyers. The said sale agreements are in terms of the resolutions passed by the board. No one had challenged the said 25 sale agreements nor any proceedings have been initiated in this respect.

63. Having come to know of the sale agreements entered into by the board of directors pursuant to a resolution of the board, if the other shareholders or anyone interested desired to avoid the same, they should have initiated appropriate proceedings. As already pointed out, by being the shareholders in the first respondent-company, neither the petitioners nor the contesting respondents could claim share in the properties or immovable assets held by the company and a shareholder has not got a right in the property of the company.

64. In Hindustan Lever Employees’ Union v. Hindustan Lever Ltd. [1995] 83 Comp. Cas. 30, the Apex Court held that a shareholder has no interest in the assets of the company when the company is in existence. Courts have taken a uniform view that a shareholder of a company has no right in the assets of the company and he has no right to interfere with the day-to-day administration by its board of directors.

65. On an overall consideration of the pleadings, material documents and the contentions advanced by either side, this court holds that both the company petitions could very well be held as an abuse of the process and it is not a bona fide action, but it is an action, which has been initiated out of personal animosity or personal grudge or enmity, each member of the family had nourished against the other both during the lifetime of Shanmugasundaram Nadar and after the lifetime of the promoter, Shanmugasundaram Nadar. Winding up proceedings are not meant for settling personal scores among the family members. The company proceedings cannot be a proceeding for vendatta among the members of the family, though the family may be holding substantial shares and third parties may be minority shareholders and they may not be interested or they may even keep themselves aloof from the disputes. Hence, the points 5 and 6 are answered against the petitioner in both the company petitions.

66. Point Nos. 1 and 2 :

Taking up the next question whether it is just and equitable to order winding up of the company, it has to be pointed out that the expression “just and equitable” appearing in section 433(f) is not ejusdem generis with the preceding five clauses in the same section. On a perusal of the pleadings in both the company petitions and the materials placed, this court is at a loss to find that there are no pleadings at all to show that it is just and equitable to order winding up nor a ground has been made out to order winding up of the respondent-company as just and equitable. The Apex Court in Hind Overseas (P.) Ltd. v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp. Cas. 91, 104 held thus :

“When more than one family or several friends and relations together form a company and there is no right as such agreed upon for active participation of members who are sought to be excluded from management, the principles of dissolution of partnership cannot be liberally invoked. Besides, it is only when shareholding is more or less equal and there is a case of complete deadlock in the company on account of lack of probity in the management of the company and there is no hope or possibility of smooth and efficient continuance of the company as a commercial concern, there may arise a case for winding up on the just and equitable ground. In a given case the principles of dissolution of partnership may apply squarely if the apparent structure of the company is not the real structure and on piercing the veil it is found that in reality it is a partnership. On the allegations and submissions in the present case, we are not prepared to extend these principles to the present company.

The principle of just and equitable clause baffles a precise definition. It must rest with the judicial discretion of the court depending upon the facts and circumstances of each case. These are necessarily equitable considerations and may, in a given case, be superimposed on law. Whether it would so done in a particular case cannot be put in the strait-jacket of an inflexible formula.

In an application of this type allegations in the petition are of primary importance. A prima facie case has to be made out before the court can take any action in the matter. Even admission of a petition which will lead to advertisement of the winding up proceedings is likely to cause immense injury to the company if ultimately the application has to be dismissed. The interest of the applicant alone is not of predominant consideration. The interests of the shareholders of the company as a whole apart from those of other interests have to be kept in mind at the time of consideration as to whether the application should be admitted on the allegations mentioned in the petition.

The question that is raised in this appeal is as to what is the scope of section 433(f) of the Act. Section 433 provides for the circumstances in which a company may be wound up by the court. There are six recipes in this section and we are concerned with the sixth, namely, that a company may be wound up by the court if the court is of the opinion that it is just and equitable that the Company should be wound up. Section 222(f) of the English Companies Act, 1948, is in terms identical with the Indian counterpart, section 433(f). It is now well established that, the sixth clause, namely, ‘just and equitable’ is not to be read as being ejusdem generis with the preceding five clauses. While the five earlier clauses prescribe definite conditions to be fulfilled for the one or the other to be attracted in a given case, the just and equitable clause leaves the entire matter to the wide and wise judicial discretion of the court, the only limitations are the force and content of the words themselves, ‘just and equitable’. Since, however, the matter cannot be left so uncertain and indefinite, the courts in England for long have developed a rule derived from the history and extent of the equity jurisdiction itself and also born out of recognition of equitable considerations generally. This is particularly so as section 35(6) of the English Partnership Act, 1890, also contains, inter alia, an analogous provision for the dissolution of partnership by the court. Section 44(g) of the Indian Partnership Act also contains the words ‘just and equitable’.

Section 433(f) under which this application has been made has to be read with section 443(2) of the Act. Under the latter provision where the petition is presented on the ground that it is just and equitable that the company should be wound up, the court may refuse to make an order of winding up if it is of opinion that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy.

Again under sections 397 and 398 of the Act there are preventive provisions in the Act as a safeguard against oppression in management. These provisions also indicate that relief under section 433(f) based on the just and equitable clause is in the nature of a last resort when other remedies are not efficacious enough to protect the general interests of the company.” (p. 104)

Applying this pronouncement of the Apex Court, this court holds that the petitioners in both the company petitions have not made out a case to order winding up of the company as just and equitable and the contention advanced by learned counsel for the respondents deserves to be sustained.

67. Incidentally it is also contended that the petitioners in both the company petitions have not come before the court with clean hands and their objects, as disclosed by their conduct would disable them from getting an equitable relief before this court. Equitable relief, namely, making a winding up order on the ground that it is just and equitable, deserves to be rejected summarily if the petitioner is found guilty of misconduct with reference to the affairs of the company or had acted in a manner prejudicial to the interests of the company or had proceeded as if he is entitled to the share in the assets of the company and that he is entitled to deal with the company’s assets in any manner he likes. It is rightly pointed out that the petitioner in C.P. No. 199 of 1998, Mr. K.S. Damodaran had caused an advertisement to be issued in a daily where he had declared himself to be the owner of the property, while factually the owner of the property is the company itself. In the advertisement caused by the said petitioner, K.S. Damodaran, through his advocate Mr. G. Ramalingam, the following is the text :

“Notice

Please take notice that Mr. K.S. Damodaran is the absolute owner of the land and properties of K.S. Kasimari Ceramique Pvt. Ltd. comprised in Survey Nos. 127, etc., situate at Maduravoyal village, Saidapet Taluk. . . . Except my client, nobody else has got any right, title, interest over the above said properties . . . the public are hereby warned not to deal with any person except my client in respect of the above stated properties.”

This would show that the petitioner would go to any extent forgetting the fact that he is only a shareholder and the company is the owner of the property and he had mixed up the entire legal position with a view to enrich himself.

68. That apart, the petitioner, K.S. Damodaran had entered into an agreement of sale on March 23, 1996, on behalf of the company with Southern Peninsula Housing Ltd. agreeing to sell 13.77 acres of the company’s lands for a consideration of Rs. 3.15 crores after receiving Rs. 10 lakhs as advance. So also the very same petitioner on March 23, 1996, on the same day, has entered into an MoU with Southern Peninsula Housing Ltd. for sale of 13.77 acres of the company’s lands for a total consideration of Rs. 4.65 crores. In other words, by some underhand dealing, the said K.S. Damodaran had made arrangement to drain or pocket Rs. 1.5 crores out of the very same dealing, which is to the detriment of the company and its shareholders. Such is the conduct of the said petitioner. It is rather shocking that in respect of the same sale agreement there could be one sale agreement and a separate memorandum of understanding for different consideration by which a sum of Rs. 1.30 crores is attempted to be pocketed. Such a sale agreement is not backed by any resolution or authorisation by the company and the board of directors. This shows the anxious conduct to knock away the company’s property, which speaks volumes.

69. It is also being pointed out by counsel for the respondent that the sum of Rs. 10 lakhs received as advance from Southern Peninsula Housing Ltd., had not been brought to account nor has it been credited to the bank account of the company nor any other arrangement has been made to make the said sum of Rs. 10 lakhs available by opening an account. The amount had not been refunded to the purchaser nor deposited into the company’s accounts, despite undertaking given before the learned judges of this court. In fact, Southern Peninsula Housing Ltd. has filed a suit for recovery in C.S. No. 768 of 2000 and the same is pending. The said K.S. Damodaran had made very many averments, which are untrue and those statements are false to his knowledge. As claim of shareholding of 50 per cent, existence of two directors, claims that he is the founder chairman or the composition of directors, creditors as well as the valuation of the lands are not true nor is it correct and this would belie the very bona fides of the petitioner.

70. So far as the petitioner, Mrs. Mangala Vijayalakshmi in C.P. No. 274 of 1998 is concerned, it is to be pointed out that the petitioner is a party to all the decisions or resolutions of the board of directors including the resolution authorising sale of the lands at Maduravoyal. The petitioner had also signed the sale agreements in favour of 25 intending purchasers. Being a party to the sale agreement and resolutions, it is rather extraordinary on the part of the petitioner, Ms. Mangala Vijayalakshmi to turn round and accuse the respondent or refute her action in being a party to the resolutions, being a signatory to the 25 sale agreements. Belatedly, the said Ms. Mangala Vijayalakshmi had chosen to suggest for the first time that her signatures were secured by compulsion or force. There is no merit in the said suggestion. To a certain extent, as has been rightly pointed out, Mrs. Mangala Vijayalakshmi, petitioner in C.P. No. 274 of 1998 had been taking not only different but also shifting stands and different attitudes from time to time. In fact, in the Cont. Application No. 199 of 1997, the said Mrs. Mangala Vijayalakshmi had supported the board resolutions and admitted that she had signed the same. Having said so, it is too late in the day for her to plead that her signature had been secured forcibly. In Cont. Application No. 199 of 1997, the very same Mrs. Mangala Vijayalakshmi had filed a counter-affidavit and the material portion reads thus :

“I submit that as early as January 12, 1996, the board of directors passed resolution to dispose of excess lands of the company in Maduravoyal on the basis as negotiated by my late father chairman Sri K. Shanmugasundaram Nadar. The board also authorised the present managing director Mr. K.S. Anantharaman to negotiate with probable buyers and submit proposal to the board. In the subsequent board meeting held on February 10, 1996, under my mother as chairperson, a resolution was passed to authorise Mr. K.S. Anantharaman to receive original documents from Indian Overseas Bank, after paying the dues. In all the above meetings Mr. K.S. Damodaran as a director was absent.”

Thus, it is clear that the petitioner, Mrs. Mangala Vijayalakshmi, was a party to the resolutions and she cannot turn around and say that she had been a signatory due to compulsion. The above conduct on the part of the petitioner in the company petitions would show that they have neither a consistent stand nor have they approached this court with clean hands nor their conduct is above board nor had they taken a consistent stand right through.

71. So far as the petitioner, K.S. Damodaran in C.P. No. 199 of 1998 is concerned, there had been much comment and substantial portion of it relates to the will, this court is of the considered view that it is unnecessary to refer to the same in detail, lest it will affect the pending proceedings initiated by the said K.S. Damodaran for probate. It is, therefore, clear that both the petitioners have come before this court with unclean hands and they have invoked the equitable jurisdiction with unclean hands and this is sufficient to reject their respective petitions.

72. Taking up the controversy regarding holding of shares by the heirs of the late Shanmugasundaram Nadar, in particular the petitioner in both the company petitions, and the claim made on the basis of the alleged will, this court will not be justified in examining such a dispute or issue as it is a complex question of fact. Shareholding cannot be decided by the company court. The petitioners have made reference to various aspects such as appointment of the petitioner as director, which is a self-appointment, the number of directors, the extent of shareholding the claim of share in excess of what is shown in the share register, the validity of meetings held on August 9, 1995, the validity of meetings held by the board on January 12, 1996, are all questions, which cannot be gone into in summary proceedings. Further, all these matters are pending consideration before the civil court and this court will not be justified in permitting the petitioner to agitate the same in this winding up proceedings, which is summary in nature. The company court, having summary jurisdiction, will not at all be justified in investigating complex questions of fact, which are to be decided by letting in evidence. Further, suits or other proceedings are pending and this court persuades itself not to enter into these disputes, as it is for the courts having competent jurisdiction to examine these disputed questions of fact.

73. Point No. 1 :

Taking up the issue regarding maintainability of the company petition, it is pointed out that the company petitions have been filed invoking section 433(f) of the Companies Act, 1956, namely, winding up the respondent-company as just and equitable.

74. Section 433(f) provides that a company may be wound up if the court is of the opinion that it is just and equitable that the company should be wound up. In this respect, sub-section (2) of section 443 of the Companies Act provides that where the petition is presented on the ground that it is just and equitable, the court may refuse to make an order of winding up, if it is of the opinion that some other remedy is available to the petitioner and that they are acting unreasonably in seeking to have the company wound up instead of pursuing such remedy. The court has a discretion to ask the petitioner to pursue the alternate remedy available to the petitioner and the court has to satisfy itself whether such an alternate remedy is available and also address the question as to whether the petitioner is acting unreasonably in seeking for winding up.

75. In the present case, in respect of a substantial portion of the dispute, which has been raised by the petitioner in C.P. No. 199 of 1998, already civil suits have been filed either for probate or for seeking a declaration in respect of certain resolutions passed or other proceedings, which the petitioners have not chosen to disclose and it may be that during the pendency of the company petition or just at or about the time of filing the company petition they came to be instituted. Yet, it is clear that there are prosecuting the alternative remedies, which are available. Alternative remedy is definitely available to the petitioner and the petitioners cannot contend that there is no alternative remedy at all.

76. That apart, the petitioners mainly seek the relief in respect of their personal rights, shares in the father’s estate. The probate proceeding is pending at the very instance of one of the petitioners. Such issues cannot be gone into in a winding up petition. Such issue can be decided only by a competent civil court before which probate has been applied for and it cannot be the subject-matter of adjudication before the company court.

77. The petitioner has already filed C.S. No. 477 of 2000 on the original side of this court seeking for a declaration with respect to the number of shares which he claims to hold. The petitioner has also filed T.O. S.No. 23 of 1998 seeking for a probate of the alleged will, which is the subject-matter of serious challenge on the original side of this court. O.S. No. 5560 of 1996 is pending on the file of the City Civil Court, where a declaration has been sought for that K.S. Damodaran is not the chairman of the company and he has no right to deal with the property of the company and for other consequential reliefs. The said suit is also pending. The petitioner in C.P. No. 274 of 1998, Mrs. Mangala Vijayalakshmi, had already instituted Suit C.S. No. 372 of 2001 for partition of all her properties, including the company properties, which would show that the said petitioner and one or two of the family members have been treating the company properties as if they are the family properties and that each one of them is entitled to a share. These are the alternative remedies, which the respective petitioners, who had come before this court have already instituted, availed of and which are pending before the competent court.

78. Further, the petitioners in both the company petitions have nowhere pleaded that they have no other alternative remedy other than the present company petition, which is a primordial requirement in a company petition filed under section 433(f).

79. If for any reason the interest of the petitioners as shareholders is affected or prejudiced, under section 397 of the Companies Act, the shareholders could move the Company Law Board. If the board of directors of the first respondent-company act in any manner prejudicial to the company or suppress one set of shareholders, a relief under section 398 is also very much available to them by moving the Company Law Board. The Company Law Board has been conferred with requisite powers under section 402 of the Companies Act. These aspects, in my considered view, would disable the petitioners from maintaining the company petitions.

80. In Hind Overseas (P.) Ltd.’s case (supra), the Apex Court had emphasised that when alternative remedies are available, the company court may refuse to exercise the jurisdiction under section 433(f). In that context, it has been held thus :

“Section 433(f) under which this application has been made has to be read with section 443(2) of the Act. Under the latter provision where the petition is presented on the ground that it is just and equitable that the company should be wound up, the court may refuse to make an order of winding up if it is of opinion that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy.

Again under sections 397 and 398 of the Act there are preventive provisions in the Act as a safeguard against oppression in management. These provisions also indicate that relief under section 433(f) based on the just and equitable clause is in the nature of a last resort when other remedies are not efficacious enough to protect the general interests of the company.” (p. 106)

81. In Malabar Industrial Co. Ltd. v. A. John Anthrapper [1985] 57 Comp. Cas. 717, a Division Bench of the Kerala High Court held thus :

“Section 433(f) enables the court in appropriate cases to order winding up of the company only when the court is of opinion that it is just and equitable so to do. If the court finds that the petitioner before it has other efficacious remedy, the court will refuse to make an order of winding up. It is, therefore, necessary for a contributory seeking the discretionary powers of the court under section 433(f) not only to establish that the circumstances obtaining in the company are such that a winding up of the company is the only alternative but also to show that he has no other remedies available.”

In Hind Overseas (P.) Ltd. v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp. Cas. 91, the Supreme Court has observed as follows (page 106 of 46 Comp. Cas.) :

“Section 433(f) under which this application has been made has to be read with section 433(2) of the Act. Under the latter provision where the petition is presented on the ground that it is just and equitable that the company should be wound up, the court may refuse to make an order of winding up if it is of opinion that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy.

Again under sections 397 and 398 of the Act, there are preventive provisions in the Act as a safeguard against oppression in management. These provisions also indicate that relief under section 433(f) based on the just and equitable clause is in the nature of a last resort when other remedies are not efficacious enough to protect the general interests of the company.

It is necessary to bear in mind that the relief under section 433(f) is in the nature of a last resort, thus obliging the court to give relief to the party when moved under the section only under compelling circumstances.” (p. 723)

This court is in respectful agreement with the above two pronouncements and the same squarely apply to the facts of the present winding up petitions.

82. In V.V. Projects & Investments (P.) Ltd. v. 21st Century Constructions (P.) Ltd. [1997] 90 Comp. Cas. 346, the Andhra Pradesh High Court had occasion to consider the scope of section 433(f) and held that an alternative remedy of approaching the Company Law Board either under section 397 or 398 or section 325 for causing investigation by the Central Government, if available, then such a petition cannot be admitted. In that context, it has been held thus :

“Mr. Kannabhiran, learned senior counsel for the respondent, raised a preliminary objection that the petition cannot be admitted for two reasons, namely, (i) that the petitioner is not a shareholder and, hence, has no locus standi to move under section 433(f) of the Act, and (ii) that there is alternative remedy available under sections 397 and 235 for investigation by the Central Government. Regarding the first contention, the parties are at issue regarding the shareholding. While it is the case of the petitioner that it is still holding 5,730 shares, the respondent-company says that the petitioner has transferred all its shares for Rs. 9,00,000. The question whether the petitioner holds 5,730 or for that matter any shares at all in the respondent-company cannot be decided unless full enquiry is made. For this reason, the first objection fails. But, the respondent has to succeed on the second objection. The respondent relies on section 443(2) which says :

‘443(2) Where the petition is presented on the ground that it is just and equitable that the company should be wound up, the court may refuse to make an order of winding up, if it is of opinion that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy.’

As the petitioner has alternative remedy of approaching the Company Law Board either under sections 397 and 398 or under section 235 for causing investigation by the Central Government, the petition cannot be admitted.

In Lokenath Gupta v. Credits Pvt. Ltd. [1968] 38 Comp. Cas. 599 (Cal.), it was held that mere mismanagement or misappropriation or misconduct on the part of the directors or the managing director, by itself or general allegation or oppression of minority shareholders is not a ground for winding up. It was also held that the petition for winding up has to be rejected on the ground that the petitioner has alternative remedy.

In Atul Drug House Ltd., In re [1971] 41 Comp. Cas. 352 (Guj.), it was held that at the time of admission of a petition for winding up under section 433(f), the petitioner must convince the court not only of a just and equitable ground for so doing but also that there is no alternative remedy open to the petitioner, that this is because if such a petition is admitted and there is a public advertisement it could cause irreparable harm to a solvent company even if the company succeeds ultimately.

The next decision is Jose J. Kadavil v. Malabar Industrial Co. Ltd. [1986] 59 Comp. Cas. 969 (Ker.). There it was held that the court can refuse to make an order of winding up, if it is of opinion that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing the other remedy. The court, while interpreting section 433(f) of the Act, held that there is no restriction or limitation to the effect that an order under section 433, sub-section (2), can be made only after taking evidence at the time of the enquiry or at the conclusion of the enquiry. As against these authorities, Mr. S. Ravi, learned counsel for the petitioner, has relied on a Division Bench decision of the Bombay High Court in Jeeva Bai Munga Bai Patel v. Extrusion Processes (P.) Ltd. [1966] 2 Comp. LJ. 74. But, neither the said report is available nor a copy of the judgment filed. Hence, it is not considered.

In view of the above, I have no hesitation in dismissing the petition on the ground of alternative remedy either under section 397 or under section 235 or any other provision of the Act. No costs.” (p. 348)

This court is in respectful agreement with the above pronouncements, which apply to the facts of these two petitions.

83. When alternative remedies are definitely available and in fact for substantial portion of the grievance alternative remedy has already been invoked and are pending, the petitioner in each of the company petitions cannot maintain an application under section 433(f) of the Companies Act apart from the fact that there are no pleadings on this aspect by the respective petitioner. Failure even to suggest that there are no other alternative remedy in the company petition is also fatal since admittedly the petitioner in each of the company petitions has already invoked the other remedies available to them. It is also not in dispute that the petitioner in each of the company petitions has a remedy under sections 397, 398 and/or 402 of the Companies Act, as the case may be. Therefore, on this ground also, this court holds that both the petitions are not maintainable.

84. There has been much controversy and allegations as well as suggestion and challenge either with respect to the land owned by the company or the attempt to dispossess the same. The company’s properties cannot be dispossessed to all the liking of the individual shareholders, whether he be an ordinary shareholder or a director unless the procedure prescribed in this behalf is followed. Definitely in respect of the petitioner, K.S. Damodaran, there is no resolution signed nor even a copy of the resolution has been placed nor been pleaded before this court to support his action. One party claims that the value of the land is Rs. 32 lakhs per acre, while the other claims it to be Rs. 70 lakhs per acre. Be that Rs. 70 lakhs or Rs. 32 lakhs per acre as the case may be, this court is not called upon to examine the issue relating to sale agreement or as to what is the market value or as to whether it is beneficial for the company to dispose of its assets.

85. A notice from K.S. Damodaran, petitioner in C.P. No. 199 of 1998, which finds place with the enclosed agenda would show how some of the shareholders, namely, the family members of the promoter the late Shanmugasundaram Nadar, had attempted to divide the company property and as to how the arrangement is sought to be entered into and this will show not only the approach, but also the mind of the said petitioner and others who support him. It is only the board that has the power to sell and not the individual directors, much less, treating it to be their property or property of their own.

86. In the circumstances, on a consideration of the entire matter, this court holds that there are no merits and all the company petitions deserve to be dismissed. In the light of the above discussions, the points are answered as hereunder :

“(a)    On the first point, this Court holds that C.P. No. 199 of 1998 and C.P. No. 274 of 1998 filed under section 433(f) seeking for winding up of K.S. Kasimari Ceramique Pvt. Ltd. as just and equitable are not maintainable.

(b)      On the second point, this court holds that section 443(2) is a bar with respect to both the company petitions.

(c)      On the third point, this court holds that the substratum of the first respondent-company has not been lost.

(d)      On the fourth point, this court holds that the petitioner in each of the company petitions has not made out a case to order winding up of the company under the just and equitable clause.

(e)      On the fifth point, this court holds that the filing of the company petitions is an abuse of the process, besides being a misconception of shareholders’ right.

(f)       On the sixth point, this court holds that the petitioner in each of the company petitions has come before this court with unclean hands and the company petitions are not bona fide action and are liable to be dismissed on that score.

(g)      On the seventh point, this court holds that the petitioner in each of the company petitions by their conduct are disentitled to seek for winding up of the company.

(h)      On the eighth point, this court holds that the dispute with respect to the claim of testamentary succession or otherwise with respect to the shares left by the late Shanmugasundaram Nadar could not be the subject matter of adjudication before the company court.

(i)       On the ninth and tenth points, this court holds that the petitioner in each of the company petitions and the contesting respondents are mere shareholders, who have got a right to share the income or in the case of winding up, share what remains ultimately of the assets of the company and they cannot claim any interest in the company’s assets such as movable and immovable properties. The attempt on the part of the petitioner as to claim a share in the company’s property, as if the property of the company is divisible among the shareholders of the company, is totally unknown to corporate law.

(j)       On the eleventh point, this court holds that the first respondent-company is not liable to be wound up in these company petitions.

(k)      On the twelfth point, this court holds that C.P. No. 60 of 1996 is dismissed as not pressed. C.P. Nos. 199 of 1998 as well as 274 of 1998 are dismissed on merits.”

87. In the result, C.P.No. 60 of 1996 is dismissed as not pressed. C.P. Nos. 199 of 1998 and 274 of 1998 are dismissed. Consequently, the connected company applications are also dismissed. Though these petitions are eminently fit cases where this court would be justified in awarding costs, but, however taking into consideration the relationship between the parties, this court directs that the parties shall bear their respective costs.

 

[1952] 22 COMP CAS 306 (BOM.)

HIGH COURT OF BOMBAY

Dhulia-Amalner Motor Transport Ltd.

v.

Raychand Rupsi Dharamsi

VYAS, J.

Second Appeal Nos. 805 and 809 and Civil Application No. 1155 of 1949

OCTOBER 10, 1951

 

 R.B. Kotwal, for the Appellants.

Purshottam Tricumdas, G.A. Desai, G.N. Vaidya, S.A. Desai, S. A. Kher and M. A, Kharkar, for the Respondents.

 

JUDGMENT

Vyas, J.—These appeals arise out of an appellate decision of the Civil Judge (Senior Division) with appellate powers at Dhulia by which he disposed of two appeals, namely, Appeals Nos. 144 and 145 of 1943, which had arisen out of suits Nos. 82 and 63 respectively of 1942. In Appeal No. 144 of 1943 the learned Judge of the lower appellate Court set aside the Judgment and decree of the trial Court and granted a declaration that the partnership firm known by the name of the Dhulia-Amalner Motor Owners' Union had not been dissolved but had merely changed its name to the Dhulia-Amalner Motor Transport, Limited. He allowed an option to the plaintiff and his colleagues, the minority members of the partnership firm, of paying a share capital of Rs. 800 each with interest at 6 per cent. from February 21, 1942, onward and "participating in the income and profits obtained by the Dhulia-Amalner Motor Transport, Limited, up to the date of the decree." On the plaintiff failing to make the option, the appellate decree directed the accounts of the Dhulia-Amalner Motor Transport, Limited, to be made on the basis of the said company "making such profits as may be attributable to the use of the permit, furniture, goodwill, etc., of the Union." The learned Judge went on to say; "For either sort of accounts a preliminary decree for taking accounts by a Commissioner is passed."

In the other appeal (No. 145 of 1943) which arose out of Suit No. 63 of 1942 the learned Judge directed a preliminary decree to be drawn up for taking accounts of the plaintiff's share in the Dhulia-Amalner Motor Owners' Union from July 22, 1941, up to the date of the suit. The plaintiff in the said suit (defendant No. 13 of the other suit No. 82 of 1942) was also given an option to become a shareholder of the limited company on payment of Rs. 800 together with interest at 6 per cent. per annum from February 21, 1942, onward.

Now, the facts from which these appeals have arisen may briefly be stated: Originally individual bus owners used to ply their buses on hire on the Dhulia-Amalner route and the Amalner-Marwad route. That used to be done under the superintendence of the District Superintendent of Police. In due course the Regional Transport Authorities were established for the various regions and the control and supervision over the buses plying on hire in the various regions passed to the respective Regional Transport Authorities. The two routes in question—the Dhulia-Amalner route and the Amalner-Marwad route—were situated within the jurisdiction of the Regional Transport Authority, Nasik, A certain amount of correspondence ensued between the Regional Transport Authority, Nasik, and the manager of the motor service which used to ply buses of the individual bus owners on the above mentioned routes. Exhibits 148, 149 and 146 are amongst some of the letters which passed between the two. The Regional Transport Authority strongly recommended the formation of collective bodies in preference to individual enterprise for carrying on the passenger transport by roads. Ultimately on November 8, 1940, a partnership firm consisting of 17 partners and known by the name of the Dhulia-Amalner Motor Owners' Union was formed. It was registered on November 11, 1940. The partnership deed is Exhibit 107. In the words of the learned trial Judge the terms of the said partnership were:

"It was one of the fundamental terms of the partnership agreement (Exhibit 167) that the dispute between the partners inter se were to be decided by a two-third majority, with a right to appeal to an independent tribunal of three persons to be appointed by the Union from time to time. The individual owners of the buses were to remain the owners and were liable to spend for any repairs to their buses, or for such spare parts and accessories as were necessary to maintain their buses in a roadworthy condition. Such was in brief the constitution of the union.....................The Union had decided to run ten buses at a time. After every one of the ten buses had made one trip and a touring car had completed two return trips on these roads, 'a circle' was said to become complete and after 4 or 5 such circles, accounts were made and the income distributed among the partners. Out of the earnings a Reserve Fund at the rate of one anna per rupee was set apart and out of this collection one-half was to remain as the Reserve Fund for the Union and the other half was to go towards the payment by way of remuneration. Two owners of cars were to attend for duty at the Dhulia and the Amalner stands...................."

It is to be remembered that it was a partnership at will. Within a short time difficulties were experienced in the working of the partnership business and, on July 23, 1941, what Mr. Kotwal for the appellant calls a kararnama was passed. That document is Exhibit 166. It describes itself as a kararnama but in fact is a letter which was written by 13 partners of the firm to the manager of the firm.

Therein, amongst other things, it was suggested in this kararnama that in future the partnership firm should not be carried on in accordance with the partnership deed, that the said partnership deed should be cancelled and that a private limited company should be formed. Thereafter a notice, Exhibit 136 dated August 19, 1941, was sent out to the members of the Union for convening a general meeting. On August 24, 1941, the general meeting was held. It was attended by ten out of the seventeen partners of the firm and an important resolution which was unanimously passed by the members present was resolution No. 4 which stated amongst others:

In that as a kararnama signed by the majority of the parters of the firm had been received by the manager of the firm suggesting dissolution of the partnership, enquires should be made and information collected on the subject of the formation of a private limited company, where after the necessary permission of the Regional Transport Officer should be obtained and steps should be taken to form a private limited company as quickly as possible. It is to be noted at this stage that if we turn to the resolution there is nothing to show that the plaintiff and his colleagues who constituted a minority of the members of the partnership attended this general meeting. If we turn to the notice Exhibit 136 by which this meeting was convened, we find again the signatures thereon of those who had received the notice in token of the receipt. A curious circumstance in this connection is that whereas the signatures of all the members who constituted the majority in the Union were written in ink, only the alleged signatures of the plaintiff and his colleagues are to be found in pencil. Whereas all the other signatures are to be found at the foot of the notice itself, the five alleged signatures of the plaintiff and his colleagues are to be found on the reverse of the notice. The least that may be said about these features is that the circumstance of these five signatures only being in pencil and appearing on the reverse is a suspicious circumstance. It is categorically alleged by the plaintiff that this notice was never received by him.

On a careful consideration of the above mentioned circumstances I am not really satisfied that the plaintiff and his colleagues who were in a minority in the partnership firm on the question of its dissolution did really know that a general meeting was to be convened on August 24, 1941, and I think it was therefore that they could not attend that meeting. This aspect of the case will have an important bearing when we shall proceed to the consideration of the question whether the resolution passed at the meeting of August 24, 1941, could amount to a statutory notice within the meaning of Section 43 of the Indian Partnership Act. The next general meeting of the partnership firm was held on December 25, 1941, and the pertinent resolution was resolution No. 1 which stated that immediate steps should be taken for making a valuation of the buses and for taking possession of the buses. The next general meeting of the Union was held on January 5, 1942, and it is contended for the appellant that it was an important meeting. My attention was drawn to resolution No. 1 which was passed then and which stated: that a company was to be formed, the buses were to be handed over to the company after making the valuatoion and shares were to be issued on the basis of the said valuation. It may be noted that this meeting was attended by all the partners of the firm. Eleven persons were in favour of the resolution and five remained neutral. Those who remained neutral were the present plaintiff and his colleagues. The last general meeting of the Union, which was referred to in the arguments in these appeals, was held on January 31, 1942, and resolution No. 3 which was passed then is said to be an important one. It stated that the reserve fund should be distributed amongst the partners of the firm and account of the business of the firm should be made up to January 31, 1942, and the amounts should be distributed to the partners according to their shares. On these facts regard being had to the kararnama Exhibit 166 dated July 23, 1941, the notice Exhibit 136 dated August 19, 1941, and the resolutions passed at the general meetings dated August 24, 1941, December 25, 1941, January 5, 1942, and January 31, 1942, it is contended by Mr. Kotwal for the appellant that the partnership firm had ceased to do its business from January 31, 1942, onward, i.e., the firm was dissolved from that date and the private limited company had begun its business from February 1, 1942.

(3) Mr. Purshottam for the respondents who constitute a minority Section in the partnership firm has strenuously contended that the partnership firm has not been dissolved but is still continuing, that the requisite procedure for the dissolution of a partnership as prescribed by Sections 40 and 43 of the Indian Partnership Act was not followed, that the business which was done by the private limited company was the same business which was done by the Union and that the company was really the same entity as the Union but under a different name. Relying on Section 37 of the Indian Partnership Act Mr. Purshottam has contended that the majority section of the partnership firm are using the artificial creation of the company as their agent for doing the business with the property of the partnership firm and are therefore liable to render to the minority section an account of the profits made by them and attributable to the use of the shares of the minority section in the property of the firm which is used by them (majority section). In the alternative Mr. Purshottam has relied on Section 67 of the Indian Trusts Act and has contended that as the majority section of the members of the partnership firm who have promoted the private limited company were trustees of the partnership property and as they had wrongfully employed the said trust property in doing a business of their Own under the name of the artificially created company, they were liable to render accounts to the minority section of the profits made by them in the business done under the name of the company.

His Lordship agreed with the view of the learned Judge of the lower appellate court that the Union (partnership firm) was continuing to exist and was never dissolved. Although on the question of the alleged dissolution of the Union which goes by the name of the Dhulia-Amalner Motor Owners' Union my decision is thus against the appellant, it is impossible to confirm the decree of the. lower appellate court which is based on a complete ignorance of the legal position. It is ignorance of law embodied in the statute.—the Indian Companies Act—to say that the difference between the Union and the private limited company in this case lay merely in the change of name from "the Dhulia-Amalner Motor Owners' Union" to "the Dhulia-Amalner Motor Transport Limited." The fundamental basis, which was a wrong basis of the decree passed by the lower appellate court was as though the business done by the private limited company was a continuation of the business done by the Union; or else the decree for accounts which has been passed would be a manifestly absurd decree. Now, it is to be noted that the limited company, in substance and in form, was 'not' the same entity as the Union with merely a changed name. The company has a distinct entity of its own, quite different from the entity of the Union and the entities of the shareholders, and the business which was done by it was not the same business as was done by the Union, nor was it a continuation of the same business. The business which was done by the company was distinctly its own business. It was not the business of its shareholders either. What happened in this case was this: After the partnership firm worked its way for sometime, some of the partners, i.e., defendants Nos. 1 to 12 and defendant No. 15, formed a private limited company, which they could do under the law even while the partnership continued to be a running concern, Such of the partners of the Union, who formed a limited company, sold to the company their buses which were hithertofore being used by the Union.

Under the terms of the partnership deed (vide Clause 6 of Exhibit 167) it was perfectly competent to a partner to sell to a third person his bus or buses which he had given to the Union for use for the business of the Union. The company was the said third person to whom defendants Nos. 1 to 12 and defendant No. 15 who were partners in the Union, sold their buses after withdrawing them from the Union. Now, if two parties fall out, how can one of them call upon the other to render to it the accounts of a business done by a third party? The buses, with which the company was doing its business, were the property of its own. They were not the property of the Union. They were never the property of the Union. The Union had only the use of them. The proprietary interest in them had always belonged to such partners as were the owners thereof before the Union was formed. The said buses had become the property of the company by purchase from defendants Nos. 1 to 12 and defendant No. 15, to whom it was open under the partnership agreement to sell their buses to any person they liked after withdrawing their use from the partnership firm. Therefore it is a crux of the matter to remember (1) that the buses which the company was plying were not the property of the partnership firm, nor the property of any of the partners of the firm, nor the property of the shareholders, but the property of the company itself; (2) that the business of the company was not the business of the Union; and (3) that the company was a corporate body whose entity was entirely different from the entities of its shareholders or the entities of the Union and its members. Such being the position in law which the learned Judge of the lower appellate Court failed completely to appreciate, how can one set of partners of the partnership firm call upon another set of partners to render accounts of a business done by a third person altogether, and yet that is what in substance and effect has been done by the decree of the lower appellate Court.

Now, it is a well settled principle of law that a limited company has a distinct entity of its own, which is created by the statute, in this case the Indian Companies Act. If we turn to the Indian Companies Act, Section 23 thereof lays down:

"(1)  On the registration of the memorandum of a company, the registrar shall certify under his hand that the company is incorporated, and in the case of a limited company that the company is limited.

(2)    From the date of incorporation mentioned in the certificate of incorporation, the subscribers of the memorandum, together with such other persons as may from time to time become members of the company, shall be a body corporate by the name contained in the memorandum, capable forthwith of exercising all the functions of an incorporated company, and having perpetual succession and a common seal, but with such liability on the part of the members to contribute to the assets of the company in the event of its being wound up as is mentioned in this Act."

It is thus clear that a limited company is a body corporate which has an entity of its own, with a perpetual succssion and a seal of its own.

It is contended for the plaintiff Raychand Rupsi Dharmsi Shet that the private limited company's name "the Dhulia-Amalner Motor Transport Limited" is merely an alias for "the Dhulia-Amalner Motor Owners' Union", that in reality the company is no different concern and is not a different entity from the Union itself and that the business which was done by the company was the same as was done by the Union, and on that basis he has asked for certain declarations and injunction's and also for accounts of the business done by the company and for a share in the profits made by the company and attributable to the use, by the company, of the vehicles, etc., which, says the plaintiff, are the property of the Union which has not been dissolved. Now, in Salomon v. Salomon & Co. Lord Halsbury, L.C, in his address to the House of Lords said (page 29):

"My Lords, the important question in this case, I am not certain it is not the only question, is whether the respondent company was a company at all —whether in truth that artificial creation of the Legislature had been validly constituted in this instance; and in order to determine that question it is necessary to look at what the statute itself has determined in that respect. I have no right to add to the requirements of the statute, nor to take from the requirements thus enacted. The sole guide must be the statute itself.

Now, that there were seven actual living persons who held shares in the company has not been doubted. As to the proportionate amounts held by each I will deal presently; but it is important to observe that this first condition of the statute is satisfied, and it follows as a consequence that it would not be competent to any one—and certainly not to these persons themselves—to deny that they were shareholders.

Still less is it possible to contend that the motive of becoming shareholders or of making them shareholders is a field of inquiry which the statute itself recognises as legitimate................

I am simply here dealing with the provisions of the statute, and it seems to me to be essential to the artificial creation that the law should recognise only that artificial existence—quite apart from the motives or conduct of individual corporators. In saying this, I do not at all mean to suggest that if it could be established that this provision of the statute to which I am adverting had not been complied with, you could not go behind the certificate of incorporation to shew that a fraud had been committed upon the officer entrusted with the duty of giving the certificate, and that by some proceeding in the nature of scire facias you could not prove the fact that the company had no real legal existence. But short of such proof it seems to me impossible to dispute that once the company is legally incorporated it must be treated like any other independent person with its rights and liabilities appropriate to itself, and that the motives of those who took part in the promotion of the company, are absolutely irrelevant in discussing what those rights and liabilities are...............I can only find the true intent and meaning of the Act from the Act itself; and the Act appears to me to give a company a legal existence with, as I have said, rights and liabilities of its own, whatever may have been the ideas or schemes of those who brought it into existence.

Either the limited company was a legal entity or it was not. If it was, the business belonged to it and not to Mr. Salomon. If it was not, there was no person and no thing to be an agent at all; and it is impossible to say at the same time that there is a company and there is not."

Now, with great respect, these are very weighty observations which establish beyond any doubt the fact that the Dhulia-Amalner Motor Transport Limited (the private limited company) was an independent person in the eye of law, a legal entity, and the business of plying motor buses on Dhulia-Amalner route and Amalner-Marwad route belonged to it and not to its shareholders. Here also, the sole guide for determining whether the Union and the company are the same entity or different entities is the statute itself, namely, the Indian Companies Act, and all that we have got to see is whether the "artificial creation of the legislature", i.e., the company, was validly constituted or not. Here also, it is not disputed that several actual living persons are holding shares in the company. We are not concerned with the proportionate amounts held by each, but the important point is that the first condition of the statute is satisfied, and it would be futile for any one to deny that some of the partners of the partnership firm are shareholders in the company. The plaintiff alleges dishonesty of motive against defendants Nos. 1 to 12 and defendant No. 15 who were responsible for promoting the company, but the motive for becoming shareholders is not a field of inquiry which is recognised as legitimate by the Indian Companies Act. The law recognises the existence of the company, quite irrespective of the motives, intentions, schemes or conduct of the individual shareholders. There is no allegation whatever in this case that any fraud had been committed upon the officer who gave the certificate of registration of the company and therefore the following observations of Lord Halsbury are particularly appropriate (page 30):

"..................But short of such proof (i.e., proof of fraud in getting the certificate of registration) it seems to me impossible to dispute that once the company is legally incorporated it must be treated like any other independent person with its rights and liabilities appropriate to itself, and that the motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are."

As his Lordship put it tersely (page 31):

"Either the limited company was a legal entity or it was not. If it was, the business belonged to it and not to Mr. Salomon. If it was not, there was no person and no thing to be an agent at all; and it is impossible to say at the same time that there is a company and there is not."

There is thus no substance in the argument urged for the plaintiff that those who promoted an artificial creation in the shape of this company did so to employ the said creation as an agent for their own business. There is also no force in the plaintiff's contention that there is a company in the sense that the majority section of the partners of the partnership firm are employing it as an agent to do their own business and that there is no company in the sense that the entity of the Union and the company is the same with only a change in the name. As Lord Halsbury said, you cannot say at the same time that there is a company and there is not.

In Ramkanai Singh v. Mathewson, a patni lease actually granted was challenged and one of the grounds of the challenge was that the transaction which was sanctioned was a transaction of a grant of a patni lease to Robert Watson & Co., in other words, to a firm of individual men, and not to Robert Watson & Co., Limited, i.e., a different and incorporated persona. In considering that objection to the grant of the patni lease their Lordships of the Privy Council observed (page 101):

"This demands careful consideration. There is this to be said for the objection, that the persona in the latter case (i.e., in the case of Robert Whatson & Co., Limited) is different from the persona in the former (i.e., in the case of Robert Watson & Co.,) and that a change in the lessee or patnidar ought to be treated as a change in essentials."

On the authority of this decision also, there would be no difficulty in holding that the persona of the company is different from the persona of the partnership firm (Union), in other words the company is a persona altogether different from the partners in the firm or from the shareholders who promoted the company. It is a third person.

In E. B. M. Company Ltd. v. Dominion Bank, also it was held:

"The distinction should be clearly marked, observed and maintained between an incorporated company's legal entity and its actions, assets, rights and liabilities on the one hand, and the individual shareholders and their actions, assets, rights and liabilities on the other hand."

It is thus clear that the legal entity, actions, assets, rights and liabilities of the company are quite different from those of the individual shareholders. The business of plying motor buses on the routes in question and the assets of the said business (buses, etc.) belong thus to the company and not to the shareholders. That being so, on the two sets of partners in the Union falling out on any question one set cannot call upon the other set, who may have promoted a limited company, to render accounts of the business, which is neither the business of the first set of partners nor the business of the second set of them, bat is the business of the company, a third person altogether.

Mr. Purshottam for the plaintiff has referred the court to Section 37 of-the Indian Partnership Act, Section 67 of the Indian Trusts Act, certain observations at pages 444 and 448 of Aggarwala's Indian Trusts Act and decisions in Ahmed Musaji Saleji v. Hashim Ebrahim Saleji, and Ramlal Thakursidas v. Lakhmichand Muniram. In my opinion, however, the references to the above sections and authorities are altogether beside the point. Section 37 of the Partnership Act can obviously not apply to the facts of this case for the simple reason that the business of the company is not the business of the shareholders who are partners in the partnership firm and are also the promoters of the company. It is impossible to say in this case that the business which is done by the company is the business which certain of the partners of the partnership firm are doing with the property of the firm or that the profits which accrue from the business are the profits of the above-mentioned partners or the firm attributable to the use, by them, of the property of the firm. Section 67 of the Indian Trusts Act also has no relevance here, since there is no question at all of any trust or fiduciary relationship between the company and the minority section of the partners in the firm (plaintiff and his colleagues defendants Nos. 13, 14 and 16) and no question at all of any breach of trust by the company.

In Ahmed Musaji Saleji v. Kashim Ebrahim Saleji, on which Mr. purshottam has relied, it was observed by their Lordships of the Privy Council (page 96):

".................It is well-settled that in certain cases, when on the dissolution of a firm one of the partners retains assets of the firm in his hands without any settlement of accounts and applies them in continuing the business for his own benefit, he may be ordered to account for these assets with interest thereon, and this apart from fraud or misconduct in the nature of fraud."

These observations, weighty as they are with great respect, have no relevance in the present case. In the first place, this is not a case in which the dissolution of the firm has taken place. Secondly, this is not a case in which any of the partners of the Union are continuing the business, with the assets of that firm, for their own benefit. There is hardly and need to repeat that the business of the private limited company is its own and could not be called the business of any of the partners of the partnership firm. Clearly, therefore, the decision in Ahmed Musaji v. Hashim Ebrahim, has no application to the facts of this case.

The next case which was relied upon by Mr. Purshottam was the case of Ramlal Thakursidas v. Lakhmichand Muniram, and I fail to understand how this decision could possibly apply in the present instance. It was a case where the surviving partners of a firm, in the absence of a representative of a deceased partner, adjusted the partnership accounts and agreed to hand over a portion of the partnership property to one of the partners in compromise of his claim, and the partner whose claim was so agreed to be compromised prayed for a dissolution of the firm upon the basis of such compromise; it was held that a representative of the deceased partner was a necessary party to the suit, and it was further observed that surving partners were treated as trustees of the partnership property for the benefit of the representative of a deceased partner; and an agreement entered into by such surviving partners in the absence of the representative of the deceased partner which was inconsistent with the nature of such trust—to deal with the partnership assets only by way of sale—would not be specifically enforced. There is no question in this case of defendants Nos. 1 to 12 and defendant No. 15 employing the company as their agent for doing business as trustees of the partnership property for the benefit of the remaining partners of the partnership firm. That being so the decision in Ramlal Thakursidas v. Lakhmichand Muniram, is beside the point for the purpose of these appeals.

At page 444 of Aggarwala's Indian Trusts Act we find that this is what is stated:

"If a trustee pay trust-money into a bank to the account of himself, not in any way earmarked with the trust, and also keep private money of his own to the same account, the Court will disentangle the account, and separate the trust from the private money, and award the former specifically to the cestui que trust. In the case of a person occupying a fiduciary position, although not an express trustee, as a factor or agent, the same rule is equally applicable".

Here again it is to be noted that defendants Nos. 1 to 12 and defendant No. 15 as promoters of the company and shareholders thereof did not occupy any fiduciary position in relation to the plaintiff and defendants Nos. 13, 14 and 16 and therefore also the observations relied upon by Mr. Purshottam would not help him.

For the above-mentioned reasons, although I am in agreement with the conclusion of the learned Judge of the lower appellate Court that the partnership firm has not been dissolved in this case, I find myself unable to confirm the judgment and decree of the learned Judge.

The plaintiff has no legal right, and cannot sue, for accounts of the business done by the Dhulia-Amalner Motor Transport Limited. If he has any remedy at all, and I am expressing no opinion on that point, against any of the partners of the firm for breaches, if any, of the terms of the partnership agreement, that remedy is to sue in damages such partners as may have committed a breach of the terms of the agreement. But surely the remedy is not to sue an altogether third person, an independent person, namely, the company, for accounts of the business done by it, a business which does not belong to any of the members of the partnership firm and does not also belong to any of the shareholders of the company. In these circumstances, therefore, Appeal No. 805 of 1949 is allowed, although I hold, on a question of fact, that the partnership firm known as the Dhulia-Amalner Motor Owners' Union has not been dissolved. On the question of costs, I think it would be proper to make no order as to costs in this appeal, since on a point on which a very considerable amount of argument was advanced by both sides, namely, a point of alleged dissolution of the partnership firm, the appellant has lost.

 

[1970] 40 COMP. CAS. 1154 (MYS)

HIGH COURT OF MYSORE

International Cotton Corpn. (P.) Ltd.

v.

Bank Of Maharashtra

G. K. GOVINDA BHAT AND M. SADANANDASWAMY, JJ.

ORIGINAL SIDE APPEAL NO. 9 TO 10 1968

APRIL 11, 1969

 

JUDGMENT

SADANANDASWAMY, J.—These two appeals are filed against an order made by the learned company judge on Company Application No. 143/67 and No. 20 of 1968 in Company Petition No. 4 of 1967 in the matter of Sree Yellamma Cotton, Woollen & Silk Mills Company Ltd. (in liquidation). The appellant in O.S.A. No. 9/68 is the International Cotton Corporation (Private) Ltd., an unsecured creditor; respondent No. 1 is the Bank of Maharashtra Ltd., Poona; which claims to be a secured creditor, and the second respondent is the official liquidator. The Bank of Maharashtra Ltd. filed Company Application No. 143/67 praying for permission to continue to retain its possession of the properties mortgaged to it and to allow it to remain outside the winding-up proceedings and to enforce its rights as mortgagee. The Company Application No. 20/68 was filed by the official liquidator praying for an order declaring that the mortgages and hypothecations by the company of its properties in favour of the bank are invalid and not binding on the company, that the bank has no power of sale of the land and building belonging to the company in liquidation, to direct the bank to deliver possession of the properties of the company to the official liquidator, and for ancillary reliefs.

2. The learned company judge framed the following points for consideration:

"1.    Whether the liquidator's Application No. 20 of 1968 is incompetent or unsustainable either because the liquidator should have filed a suit or because the court fee should have been paid on it as for a suit;

2.     Is the bank entitled to sell the lands and buildings, machinery, spares and parts mortgaged or hypothecated to it, without the intervention of court?

3.     Is the bank entitled to retain possession of the said properties, immovable and movable, for the purpose of exercising the right of private sale claimed by it?

4.     Are the mortgages and hypothecations claimed by the bank invalid for contravention of the provisions of section 293 of the Companies Act?"

On the first point he held that the official liquidator's Application No. 20/68 is competent and sustainable, and points Nos. 2, 3 and 4 were decided in favour of the bank. He, accordingly, held that the bank is a mortgagee of the immovable properties and hypothecatee of the movable properties of the company described in exhibits R-8, R-15, R-21, R-31, R-34 and R-39, and that in exercise of the rights and powers conferred upon it by the said documents, it is entitled to take and retain possession of the properties described in the said documents for the purpose of recovering monies due to it by enforcing its security against the said properties, that it has also the power of selling the said properties without the intervention of court for the purpose of recovering the moneys due to it in accordance with the provisions of the Transfer of Property Act and the Contract Act, that the bank will be accountable to the company in liquidation as a mortgagee in possession and if it exercises its power of sale without the intervention of court, it will be accountable for the moneys realised by sale in accordance with the terms of section 69 of the Transfer of Property Act. He expressed no opinion as to the exact amount due to the bank and directed the bank to deliver all articles of furniture belonging to the company now in its possession to the official liquidator. It is against that common order in the above two applications that the present appeals have been filed.

The Bank of Maharashtra Ltd. has filed cross-objections in O.S.A. No. 9/68 against the decision of the learned company judge on point No. 1 above said.

We now deal with O.S.A. No. 9/68. The first contention urged by Sri Sundaraswamy, the learned counsel for the appellant, is that the power of sale given to the bank under the mortgage deeds is invalid since there is a contravention of section 69(1)(a) of the Transfer of Property Act. His contention is that the mortgage deeds are executed not only by the company in liquidation, but also by its eight directors who are Hindus. In the several documents, the company is described as the mortgagor and the eight directors as the sureties. It is admitted that the properties mortgaged belonged only to the company and none of the properties belonged to any of the directors. The directors, therefore, have been correctly described as sureties and the mortgagor is only the company whose properties constituted the mortgage security. Hence, there is no contravention of the provisions of section 69(1)(a) of the Transfer of Property Act, and this contention of the appellant must be rejected.

The next point urged on behalf of the appellant is that the mortgagor under section 69 of the Transfer of Property Act must be a natural person since under clause (1)(a) of that section neither the mortgagor nor the mortgagee may be a Hindu, Muhammadan or Buddhist or a member of any other race, sect, tribe or class, specified in this behalf by the State Government. But we are unable to see how such an inference can be drawn. Section 69(1) refers to the powers of a mortgagee or any person acting in his behalf and the property dealt with in that section is the mortgaged property and what is referred to is the mortgage money. A mortgage is defined under section 58(a) of the Transfer of Property Act as the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt or the performance of an engagement which may give rise to a pecuniary liability. The transferor is called a mortgagor, and the transferee a mortgagee; the principal money and interest of which payment is secured for the time being is called the mortgage money and the instrument by which the transfer is effected is called a mortgage deed. Section 69 forms part of Chapter IV of the Transfer of Property Act. Section 69(1)(a) deals with an English mortgage and an English mortgage is defined in section 58(e) of the Act. Under the definition there is no prohibition for an incorporated company from being a mortgagor. Hence, we are unable to see how a company can be said to be precluded from being a mortgagor under English mortgage or how the power to sell the mortgaged property becomes invalid in the case of a company executing an English mortgage in favour of the mortgagee. Hence, this contention of the appellant must also be negatived.

The next point urged on behalf of the appellant is that the mortgages and hypothecations claimed by the bank are invalid since they contravene the provisions of section 293(1)(a) of the Companies Act. Section 293(1)(a) provides that the board of directors shall not sell, lease or otherwise dispose of the whole, of substantially the whole, of the undertaking of the company without the consent of such public company. It is admitted that no such consent has been taken, but what is pleaded on behalf of respondent No. 1 is that consent of the company has been taken under clause (d) of section 293(1) of the Companies Act. That clause provides that the board of directors shall not borrow moneys after the commencement of this Act, where the moneys to be borrowed, together with the moneys already borrowed by the company, will exceed the aggregate of the paid-up capital of the company and its free reserves without the consent of the company. Section 293(1)(a) of the Companies Act will apply when the whole or substantially the whole of the undertaking of the company is sold, leased or otherwise disposed of. Webster's New Standard Dictionary describes the word "undertaking" as meaning a business or project engaged in. The word "undertaking" has been defied as "any business or any work or project which one engages in or attempts as an enterprise analogous to business or trade", according to the decision in Madras Gymkhana Club Employees' Union v Management. The business or undertaking of the company must be distinguished from the properties belonging to the company. In this case, it is only the properties belonging to the company that have been dealt with by the board of directors under the deeds of hypothecation and mortgage in favour of the bank. Hence, the learned company judge was right in holding that no part of the undertaking of the company was disposed of in favour of the bank.

It was contended on behalf of the appellant that clause 5(i) of the deed of mortgage (exhibit 15) empowers the bank not merely to take possession of the properties as mortgagee for the purpose of realising its dues from out of the properties expressly given as security but also actually to take over the management of -the business of the company, and that therefore the transactions under exhibits R-15 and R-35, which has a similar clause also, have the effect of disposal of the undertaking of the company within the terms of clause (a) of section 253(1). The learned company judge has held this clause to be invalid and that except to the extent of clause 5(i) of exhibit R-15 and the corresponding clause of exhibit R-34 which empowered the bank to take over the management of the business of the company, neither the mortgages nor the hypothecations are invalid for contravention of clause (a) of sub-section (1) of section 213 of the Companies Act, 1956, and that the said offending clauses are invalid and unenforceable. The said clauses in the document are severable. Hence, it cannot be said that they invalidate the transactions themselves. We are in agreement with the learned company judge on this point also, and reject the contention of the appellant.

For the reason stated above both the appeals are dismissed. In view of the opinion expressed by us on the abovesaid points, Sri G. S. Ullal, the learned counsel for the respondents did not find it necessary to urge the cross-objections in O.S.A. No. 9/68. The appellant will pay the costs of respondent No. 1. The costs shall be paid in one set out of the assets of the company. We fix the advocate's fee at Rs. 250.

 

[1986] 60 COMP. CAS. 568 (AP)

HIGH COURT OF ANDHRA PRADESH

Vali Pattabhirama Rao

v.

Sri Ramanuja Ginning and Rice Factory P. Ltd

JAYACHANDRA REDDY and KODANDARAMAYYA JJ.

APPEAL NO. 67 OF 1979

DECEMBER 26, 1983

 

 T. Veerabhadrayya for the Appellant.

P. Ramachandra Reddy and A. Venkatrami Reddy for the Respondent.

JUDGMENT

Kodandaramayya J.—Among numerous questions of law, two interesting company law problems are raised in this civil appeal by Sri T. Veerabhadraiah, the learned counsel for the appellants :

(1)            Whether a conveyance is necessary to vest the property of a firm when the same was converted into a company ?

(2)            Similarly whether such conveyance is necessary to claim title by the company in respect of property acquired by the promoter before its incorporation ?

A considerable time and lengthy debate had taken place and, hence, we are impelled to state this in the forefront. Now, we shall state the facts.

The plaintiffs in O. S. No. 36 of 1969 on the file of the Subordinate Judge's Court, Vijayawada, are the appellants in this appeal. The suit is laid for eviction of the defendants from the plaint schedule site after declaring the suit lease as duly terminated, removing the structures and deliver vacant possession of the same. The plaintiffs are grandsons of one Vali Subbarayudu and it is averred that the said Subbarayudu granted a lease to one Nidumukkala Subbarayudu the suit lands for the purpose of constructing and running a ginning and rice and oil factory under a lease deed dated July 10, 1903, and the said lease though called a permanent lease was a tenancy at will and the said lease will enure for the life of the original lessee only and the original lessee constituted the first defendant firm with himself and other sharers and erected the factory of the first defendant and the first defendant paid the rents due till January 1, 1969, and committed default in payment of half-yearly rents and the first defendant also committed breach of covenants of the aforesaid lease described in paragraph 7 in detail and the lease aforesaid offends the rule of perpetuities and consequently void. It was further alleged that handing over of the leased premises by the original lessee to the first defendant is unauthorised and, hence, the first defendant cannot claim to continue to be in possession and, hence, the plaintiffs terminated the tenancy in respect of the plaint schedule properties and, hence, the defendants should deliver possession of the property and that the second defendant maliciously set up the claim to a portion of the plaint schedule site and the first defendant failed to set off the rents due against the decretal dues in O. S. No. 1 of 1966 and, hence, the suit.

The first defendant, a private limited company, registered under the Indian Companies Act, 1913, filed a written statement contending that the lease dated July 10, 1903, was a permanent lease in favour of Nidumukkala Subbarayudu and the said property is continuously under the possession and enjoyment of the lessee and his successor-in-interest and is being used for the purposes contemplated in the original lease and there is no default in payment of rent and the allegation of breach of covenants of the lease deed is incorrect. The original lessor, his son and the present plaintiffs know that the first defendant is running the factory and acquiesced in the manner of enjoyment by the first defendant and, hence, they are estopped from questioning the rights by the first defendant and the plaintiffs have taken considerable amounts by way of advance from the first defendant and having committed default in payment of those amounts, the first defendant obtained a decree in O. S. No. 1 of 1966 on the file of Principal Subordinate Judge's Court, Vijayawada, against the plaintiffs and the same is being executed and the plaintiff's suit for the adjacent land on the basis of trespass passed in O. S. No. 79 of 1969 is frivolous and vexatious and the second defendant has no rights in the property and is not a necessary party and the same is liable to be dismissed.

Second defendant is the former managing director of the first defendant firm and after his death, defendants Nos. 3 to 12 were added as his legal representatives. 13th defendant was added by the plaintiffs themselves as adopted son of the original lessor. 14th defendant was also a supplemental defendant. The second defendant set up a claim for a portion of the land and filed a separate written statement. But his claim for that land was dismissed in O. S. No. 139 of 1973 which was tried along with this suit and the same has become final and, hence, it is unnecessary to examine his defence in this appeal. The present suit was also tried along with the other suit, O. S. No. 79 of 1967, filed by the very same plaintiffs claiming that the first defendant trespassed into the adjacent land belonging to them and not covered by the original lease deed. The court below dismissed the said suit holding that the first defendant is in possession of less than the original extent mentioned in the lease deed and hence no question of trespass would arise and that judgment and decree have become final and hence we are concerned only with the controversy in O. S.No.36 of 1969.

On the material issues framed by the trial court, it found that the lease deed dated July 10, 1903, is a permanent lease and it can enure beyond the lifetime of the original lessee and the first defendant did not commit any breach of covenants of the lease, the plaintiffs and their predecessors-in-interest have acquiesced in the mode of enjoyment of the plaint schedule property by the first defendant and, hence, they are estopped from filing the present suit and there is no default in payment of the rent by the first defendant, and the second defendant and their legal representatives have no rights in the suit property and the plaintiffs have no right to terminate the lease and obtain possession of the property and consequently dismissed the suit. Issues Nos. 4 and 6 were deleted and issue No. 11 was found to be unnecessary which relates to the validity of lease deed as being opposed to public policy and the rule of perpetuity, and the termination of the lease, and validity of the quit notice, issued by the plaintiff respectively.

Sri T. Veerabhadraiah, the learded counsel for the appellants, raised questions Nos. 1 to 8, some of them not raised in the court below. Sri P. Ramachandra Reddy, appearing for the respondents, besides refuting those questions raises questions Nos. 9 and 10 and they are :

        (1)            Exhibit A-1 is not a permanent lease.

(2)            The rights under exhibit A-l are only heritable but not transferable and, hence, section 108 (j), proviso, of the Transfer of Property Act, 1882, is attracted.

(3)            No transfer of original lessee's interest in fact took place under the terms of exhibit B-53 to the firm formed by the said lessee, and, if so, the said transfer is void as section 14 of the present Partnership Act 9 of 1932 has no application.

(4)            The partnership entered into by the original lessee consisting of more than 20 persons is illegal under the Indian Companies Act, 1913, and any transfer of his interest to the said firm is illegal and inoperative.

(5)            When the previous firm was converted into first defendant company, a conveyance is necessary to vest the property of the firm in the company.

(6)            Similarly, a conveyance is necessary for the first defendant-company to claim title in the leasehold interest acquired by the original lessee under exhibit A-l.

(7)            The possession of the first defendant is only that of a tenant holding over after the death of the original lessee and the tenancy is terminable on quit notice.

(8)            The first defendant is liable to be evicted as there is a breach of covenant for non-payment of rent and for committing waste.

(9)            The plaintiffs and their predecessors-in-interest had acquiesced in the enjoyment by the first defendant company of the suit property and, hence, they are estopped from seeking eviction.

(10)            The first defendant has perfected title by adverse possession for permanent lessee's interest.

Before examining these questions, let us notice the facts that are not in controversy. Under exhibit A-1 dated July 10, 1903, which is a registered deed, a permanent lease was granted by the grandfather of the plaintiffs one Vali Subbarayudu of an extent of 16,423 sq. yards situate in Vijayawada town to one Nidumukkala Subbarayudu for a sum of Rs. 180 to be paid in two half-yearly instalments of Rs. 90 each. The lessee under the said document entered into a partnership, exhibit B-53, dated November 12, 1906, with 47 other persons for constructing the factory. The said deed recites that the partners obtained the lease under exhibit A-l for the purpose of constructing a factory jointly and they constructed the buildings and installed machinery and were carrying on the business since May 4, 1904. Subsequently, those partners and the lessee, under exhibit B-54, converted the said firm into a private limited company named as Sri Ramanuja Ginning and Rice Factory (P.) Ltd., Vijayawada, the first defendant herein in the year 1920. The original lessor, Vali Subbarayudu, died in the year 1921 and the original lessee, Nidumukkala Subbarayudu, died in the year 1951, It appears that the lessee, Nidumukkala Subbarayudu, has no children. The thirteenth defendant was added as a party defendant by the plaintiffs but subsequently they disputed his right in the suit property and the court below also held that he is not entitled to any rights in the suit property on additional issue No. 1 framed on January 28, 1974. During the lifetime of Vali Subbarayudu, he collected the rent from the first defendant and, subsequently, his son, Raghavaiah, collected the rent from the first defendant till 1956. It is admitted that the rent was paid till January 1, 1960, and, subsequently, the first defendant filed Suit, O.S. No. 1 of 1966, on the file of Principal Subordinate Judge's Court obtained a decree against the plaintiffs and brought their interest (lessor's interest) in the suit property for sale. The present suit was filed to interdict the sale of further proceedings in execution. It is also not disputed that the subsequent rents are deposited in the court by the first defendant. The plaintiffs having failed to satisfy the money decree obtained against them instituted the present suit in order to avert the sale of their interest in the suit property and issued quit notice dated February 24, 1967, terminating the tenancy and filed the present suit. This narrative clearly discloses that since 1903, the plaintiffs and their predecessors-in-title are receiving the rents from the firm created by the original lessee under exhibit B-53 on November 12, 1906, and also from the first defendant company which came into force in 1920 till the present suit is filed terminating the tenancy. The first defendant categorically stated in the written statement that the plaintiffs took advances and loans from the first defendant which are far higher than the aggregate of total amount of rents payable to the plaintiffs and having failed to pay those loans, the plaintiffs did not care to take any interest either in discharging the aforesaid debts payable by them or with regard to the collection of the rents from the first defendant and they are willing to pay the rents and the plaintiffs are at liberty to collect the actual rents due to them. Hence, we have to examine under the facts and circumstances whether the plaintiffs are entitled to evict the defendants from the suit land on the contentions now raised before us.

[After stating the facts and the case-law, the court held (i) that the lease, exhibit A-1, was a permanent lease and it was heritable and transferable].

**        **        **

Questions Nos. 3 and 4: We must say that these two questions are not raised in the trial court. In fact, the plaint states that the original lessee constituted the first defendant firm with himself and other sharers and erected the first defendant factory in the plaint schedule property and since then carried on business therein under the name and style, "Sri Ramanuja Ginning and Rice Factory (P.) Ltd., Vijayawada". This statement clearly discloses that the plaintiffs are aware of the fact that the original lessee joined the third parties as partners and a firm was created and, subsequently, it was converted into a private limited company, the first defendant. The terms of exhibit B-53 dated November 12, 1906, a registered partnership deed state that the suit site was taken in the name of Nedumukkala Subbarayudu for the purpose of erecting a factory jointly. It also recites that the lease amount payable under the said permanent lease shall be payable out of the income of the firm and it shall be the responsibility of the person who will be the managing partner from time to time. It is not permissible to dispute the recital of this document which is an ancient one of more than thirty years old and no material is placed to displace the correctness of those recitals and hence we are proceeding on the basis that the original lessee brought into the stock of the firm his leasehold interest and has become the part of the firm's property.

The second limb of the argument of the learned counsel is that in the absence of a registered deed conveying interest of the original lessee to the firm, the title will not pass to the firm and inasmuch as the firm was formed prior to the Indian Partnership Act 9 of 1932 and section 14 of the said Act has no application and the decisions rendered by courts on the construction of section 14 have no application as the transaction in question is governed by section 253 of the Indian Contract Act of 1872. It is true that the partnership in question is governed by the provisions of the Indian Contract Act of 1872 that embodied the rules of partnership in sections 239 to 266. The section corresponding to section 14 of the Partnership Act is section 253(1) of the Indian Contract Act, 1872. It is necessary to notice the said provision:

"S. 253. In the absence of any contract to the contrary the relations of partners to each other are determined by the following rules :

(1)    all partners are joint owners of all property originally brought into the partnership stock, or bought with money belonging to the partnership, or acquired for purposes of the partnership business. All such property is called partnership property. The share of each partner in the partnership property is the value of his original contribution, increased or diminished by his share of profits or loss."

We do not find any material difference for the purpose of this question between section 14 and section 253(1). In fact, the Statement and Objects of the Indian Partnership Act recites thus ;

"Sections 14 and 15 contain the substance of sub-section (1) of section 20 and of section 21 of the English Act, and of section 253(1) of the Indian Act, but the matter has been re-arranged. An important difference is the introduction of the goodwill of the business, which is now specifically included among the property of the firm. It will, subject to contract between the partners, be included automatically in all accounts for the determination of shares."—S.O.R.

"In the second paragraph, we have substituted the word 'acquired' for the word 'purchased' in order to cover the acquisition of leases, mortgages, etc. We have also assimilated the wording in this paragraph to that in the first."—S.O.R.

It is clear that the main principle is that the property brought into the stock of the firm by the partner becomes the property of the firm. On the other hand, the previous section 253(1) is more specific in stating that all partners are joint owners of all properties originally brought into the partnership stock and thus we have no doubt in our mind that the construction placed by the Supreme Court on section 14 of the present Partnership Act in Addanki Narayanappa v. Bhaskara Krishnappa, AIR 1966 SC 1300, holding (at p. 1303) that "whatever may be the character of the property which is brought in by the partners when the partnership is formed or which may be acquired in the course of the business of the partnership, it becomes the property of the firm, and..... since a firm has no legal existence, the partnership property will vest in all the partners and in that sense every partner has an interest in the property of the partnership. During the subsistence of the partnership, however, no partner can deal with any portion of the property as his own. " would usually apply to a firm formed prior to the coming into force of the present Partnership Act and governed by the provisions of the Contract Act. In fact, no words of dispositive character are necessary to bring the property to the common stock (Vide State v. Chidambaram, AIR 1970 Mad 5 [FB]. The declaration of the rights of partners in exhibit B-53 is enough to make the property as the property of the firm. This answers the third question.

Question No. 4: Realising this, the learned counsel raised yet another limb of this argument, the fourth question stating the partnership formed under exhibit B-53 is illegal as it contravened section 4 of the Companies Act, 1913, as it admittedly consists of the original lessee and 47 other partners and, as such, section 14 of the Partnership Act or the corresponding earlier provision of section 253(1) of the Contract Act cannot be invoked as in law there is no firm as such. It must be remembered that the partnership was formed on May 4, 1904, as recited in the registered partnership deed, exhibit B-53, dated November 12, 1906.

It is necessary to trace the history of the company law in our country. In this country, following the English Companies Act of 1844, an Act for the registration of joint stock companies was for the first time enacted as Act 43 of 1850. The Indian Companies Act, 1913 (7 of 1913), was passed which is said to be almost a verbatim reproduction of English Companies (Consolidation) Act, 1908. Though a provision similar to section 4(2) of the Indian Companies Act 7 of 1913 prescribing the upper limit for any trading associations to carry on a business was found in existence in previous Indian Acts since 1866, sub-sections (3), (4) and (5) were added to section 4 of the Act 7 of 1913 by the Amending Act 22 of 1936. It is sub-section (4) that declared that a company, association or partnership carrying on business shall be personally liable for all liabilities incurred in such business and it is sub-section (5) that declared that any person who is a member of the company, association or partnership firm in contravention of the said section shall be punishable with fine not exceeding Rs. 1,000. Thus, it is clear the contravention is made illegal and punishable as an offence by virtue of the Amending Act 22 of 1936. In the present case, as exhibit B-54, the 1st defendant company was formed on December 6, 1928, as per the certificate of incorporation and hence it is not permissible for the appellants to contend that the partnership was illegal either on the date of its formation or 1904 or subsequently by the provisions of the 1913 Act as the offending clauses (3) to (5) of the said section came into force on January 15, 1936, as per the notification dated November 28, 1936, in the Gazette of India, dated November 28, 1936, Part I, page 1492. Hence, we overrule this objection.

We may also add in this connection that even assuming that the property in question was in the hands of the firm which was illegal for some time before it was converted into a limited company, the rights cannot be adjudged on the basis of the past event which is no longer in existence for deciding the rights of the parties at present. It is enough if we note that courts have ruled that the members of partnership or a company hit by this section can, however, have beneficial interest in the property. (Vide Queen v. Tankard [1894] 1 QB 548 and Nibaran Chandra v. Lalit Mohan, AIR 1939 Cal 187). If the partnership agreement is illegal the court cannot adjudicate in respect of such contract which the law declares to be illegal. (Vide Seth Badriprasad v. Seth Nagar Mal [1959] 29 Comp Cas 229 (SC)). This legal position would not in any way advance the case of plaintiffs.

Questions Nos. 5 and 6: We must again say that these questions were not raised in the court below.

We have already held that the partnership firm in which the original lessee is a partner was legally constituted, and the firm continues to be lawful and the properties belonging to all the partners have become the, properties of the firm. The question is whether the property of the said firm had vested in the first defendant company when the firm was registered under the provisions of the Indian Companies Act, 1913. For that it is necessary to notice the terms of section 263 of the Indian Companies Act, 1913, that corresponds to section 575 of the present Companies Act, 1956. Section 263 reads as follows:

"All property, movable and immovable, including all interests and rights in, to and out of the property, movable and immovable, and including obligations and actionable claims as may belong to or be vested in a company at the date of its registration in pursuance of this part, shall, on registration, pass to and vest in the company as incorporated under this Act for all the estate and interest of the company therein."

The word "company" occurring in section 263 is not a company registered under the Act. It is used in the sense of a group, assembly or association of persons. In fact, throughout the Act the word "company" was used in several sections in the general sense of association of persons. In fact, section 11 of the present Companies Act (section 4 of the previous Act) itself which enacted the prohibition of associations exceeding a certain members for carrying on trade starts with saying that no company or association or partnership consisting of more than ten members shall be formed. Section 253 of the previous Act corresponds to section 565 of the present Act. Section 565(1)(b) of the present Act corresponds to section 253(1)(ii) of the 1913 Act, which permits any company otherwise duly constituted according to law consisting of seven or more members to be registered as a company. A partnership must be one such. This is made clear by the provisions of section 255 of the 1913 Act (present Act section 567) and section 256 of the 1913 Act (present Act section 568) whereunder a deed of partnership has to be filed before the Registrar before seeking the registration. Hence, a partnership which was treated as a company for the purposes of the Companies Act can be registered under Part 8 of the previous Act (Part 9 of the present Act) and the vesting is provided by section 263 of the 1913 Act (section 575 of the present Act). The provision is mandatory and there will be statutory vesting in the corporation so incorporated under the provisions of the Companies Act. The Registrar is bound to give a certificate of registration under section 262 (present section 574) which is a conclusive proof of incorporation, vide section 35 of the present Act that corresponds to section 24 of the previous Act. Hence, it is clear that no conveyance is necessary when a partnership is converted and registered as a company. However, it is not possible to acquire such title statutorily under this section if the previous firm purports to convey title to the company in which event a separate deed of conveyance is necessary. Thus, we hold that if the constitution of the partnership firm is changed into that of a company by registering it under Part 9 of the present Act (Part 8 of the previous Act), there shall be statutory vesting of title of all the property of the previous firm in the newly incorporated company without any need for a separate conveyance. A similar view was taken in Ramasundari Ray v. Syamendra Lal Ray, ILR [1947] 2 Cal 1.

D. W. 2 deposed that in 1920 the partnership was converted into a private limited company and filed the articles of association, exhibit B-54. This evidence stood uncontradicted. In fact, the plaintiffs and their pre-decessors-in-title treated the first defendant as successor-in-interest of the previous firm and hence we are of the opinion that the leasehold interest that has become firm's property by virtue of the original lessee bringing into the firm has vested in the first defendant company after its registration.

Question No. 6: Sri Veerabhadrayya, the learned counsel for the appellants, argued that the terms of exhibit B-54 do not show that the partnership was converted into a company but it reads as if for the first time the company was formed and in which event it cannot be treated that the partnership as such was converted into a company and hence a conveyance is required to confer title on the first defendant. For this he relied upon Alapati Venkataramaiah v. CIT [1965] 57 ITR 185 (SC). But that was a case where a third party purported to sell his property to the company and it is clear in such event a conveyance is necessary. But if a promoter acquires property before the incorporation of the company, the legal position is different.

The original lessee undoubtedly played the part of a promoter of the company. We have already noticed that lease deed, exhibit A-1, recited that the land was taken for purpose of constructing the factory and the necessary buildings for running the same. Exhibit B-53, the deed of partnership, recited that the original lessee took the permanent lease of the land in his name for the benefit of erecting the ginning factory and the firm was carrying on business for the benefit of the members of the firm since 1904. Exhibit B-65 is the first list of shareholders of the first defendant company signed by all the shareholders and the original lessee is one of the signatories and four shares were given to him. Exhibit B-54, the articles of association, recites that the permanent lease was taken by the original lessee on behalf of all the shareholders and, hence, the permanent leasehold rights in the said lease and also the buildings constructed in the land, machinery and other equipment shall be treated as property of the factory. The capital of the factory was declared at Rs 41,600 divided into 104 shares each valued at Rs. 400 and this arrangement was adopted by a special resolution of the directors. It was also recited that this capital can be enhanced further by a special resolution by the directors. Exhibit B-54 is the latest copy of the articles of association adopted in the general body meeting of the company dated December 30, 1955, and the company itself is called Sri Ramanuja Ginning and Rice Factory (Private) Limited. The question is whether this leasehold interest in the factory has become the property of the first defendant private limited company. In view of the part played by the original lessee in securing the lease for the purpose of the first defendant as promoter we have to see the legal consequences. For this purpose we have to examine : (1) The nature of jural relationship between the promoter and the company. (2) The rights of the company in respect of contracts before its incorporation. (3) Whether this transaction comes under the purview of section 5 of the Transfer of Property Act.

The word "promoter" is not defined by the Companies Act, 1956 (1 of 1956), or by its predecessor Act VII of 1913. It is said that it is not a term of law but of business. The earliest definition given in Phosphate Sewage Co. v. Hartmount [1876] 5 Ch D 394, as a person who as principal procures or aids in procuring the incorporation of a company, was generally accepted as the correct definition which was subsequently approved by the House of Lords in Official Receiver and Liquidator of Jubilee Cotton Mills Ltd. v Lewis [1924] AC 958 (HL).

A person although is not a director may be a promoter of a company. The promoter stands in a fiduciary position towards the company and his position was defined so in Emile Erlanger v. New Sombrero Phosphate Co. [1877-78] 3 AC 1218 (HL), by the House of Lords. Halsbury's Laws of England, fourth edition, paragraph 38, states :

"A promoter stands in a fiduciary position with respect to the company which he promotes from the time when he first becomes until he ceases to be a promoter thereof; but his relation to the company is not that of trustee and beneficiary, or agent and principal."

Lord Cairns L.C. observes in the above case (at p. 1236 of [1877-78] 3 AC):

"They (promoters) stand, in my opinion, undoubtedly in a fiduciary position. They have in their hands the creation and moulding of the company ; they have the power of defining how, and when, and in what shape, and under what supervision, it shall start into existence and begin to act as a trading corporation. If they are doing all this in order that the company may, as soon as it starts into life, become, through its managing directors, the purchaser of the property of themselves, the promoters, it is, in my opinion, incumbent upon the promoters to take care that in forming the company they provide it with an executive, that is to say, within a board of directors, who shall both be aware that the property which they are asked to buy is the property of the promoters, and who shall be competent and impartial judges as to whether the purchase ought or ought not to be made. I do not say that the owner of property may not promote and form a joint stock company, and then sell his property to it, but I do say that if he does, is bound to take care that he sells it to the company through the medium of a board of directors who can and do exercise an independent and intelligent judgment on the transaction, and who are not left under the belief that the property belongs, not to the promoter, but to some other person."

Again Lord Blackburn, at page 1269, observes :

"They must make a reasonable use of the powers which they accept from the Legislature with regard to the formation of the corporation, and that requires them to pay some regard to its interests. And consequently they do stand with regard to that corporation when formed, in what is commonly called a fiduciary relation to some extent."

He further observes : (at p. 1269):

"Where, as in the present case, the company is formed for the purpose of becoming purchasers from the promoters as vendors, the interests of the promoters and of the company clash. It is the vender's interest to get as high a price as possible, and they have a strong bias to overvalue the property which they are selling ; it is the purchasers' interest to give as low price as possible, and to secure that the price actually given is not more than the property is really worth to them."

Thus, it is seen that they have got both fiduciary relationship and at the same time they have individual interest to be served in the process of floating the company and hence it is ruled that a promoter cannot therefore retain any profit made out of a transaction to which the company is a party without full disclosure. It is necessary in this connection to see the binding nature of the contracts entered into by them before the incorporation. The law in our country varies from that obtained in England. Again Halsbury states in fourth edition at page 435, paragraph 727 :

"A company is not bound by contracts purporting to be entered into on its behalf by its promoters or other persons before its incorporation. After incorporation, it cannot ratify or adopt any such contract because in such cases there is no agency and the contract is that of the parties making it The adoption and confirmation by a director's resolution of a contract made before the incorporation of the company by persons purporting to act on its behalf does not create any contractual relation between it and the other party to the contract or impose any obligation on it towards him."

Hence, the commentator states in paragraph 728 that:

"In order that the company may be bound by agreements entered into before its incorporation, there must be a new contract to the effect of the previous agreement."

The editors of Palmer's Company Law, in their 22nd edition, volume 1, at page 271, state regarding pre-incorporation contracts :

"In common law. Before its incorporation a company has no capacity to contract. Consequently, in common law, nobody can contract for it as agent because an act which cannot be done by the principal himself cannot be done by him through an agent, nor can a pre-incorporation contract be ratified by the company after its incorporation. There is, however, nothing to prevent the company, when incorporated, from entering into a new contract to put into effect the terms of the pre-incorporation contract. But the mere acting after incorporation on the preliminary contract does not in itself constitute sufficient evidence of the creation of a new contract."

Thus, virtually a new contract has to be entered into in order to bind the company in respect of contracts entered before its incorporation. But, in India, both the Specific Relief Acts 1 of 1877 and 47 of 1963, made provisions making the pre-incorporation contracts binding on the company. Section 21(f) of the 1877 Act which corresponds to section 14 of the 1963 Act did not retain in the said provision as the said clause is covered by section 9. The present section 15 (h) corresponds to section 23(h) of the previous Act and section 19 (e) of the present Act corresponds to section 27 (e) of the previous Act. Section 15(h) provides that the company can enforce pre-incorporation contracts, if such contract is warranted by the terms of the incorporation and the company has accepted the contract and has communicated such acceptance to the other party. The converse position is covered by section 19 (e) where a third party can enforce the contract against the company if such contract is warranted by the terms of the incorporation of the company and the company has accepted the contract and communicates such acceptance to the other party to the contract, and, hence, the dicta in Natal Land and Colonization Co. Ltd. v. Pauline Colliery Syndicate Ltd. [1904] AC 120,126 (PC) of Lord Davey speaking for the Judicial Committee "that a company could not by adoption or ratification obtain the benefit of a contract purporting to have been made on its behalf before the company came into existence", cannot be invoked in our country. No doubt it is true that the sections in the Specific Relief Act are concerned with the executory contracts and cannot be applied to conveyances of immovable property and, hence, we have to see whether the title has passed to the company and whether the provisions of the Transfer of Property Act stand in the way.

For this purpose we have to examine sections 5 and 9 of the Transfer of Property Act. Sections 5 and 9 are in the following terms :

"Section 5. In the following sections, 'transfer of property' means an act by which a living person conveys property, in present or in future, to one or more other living persons, or to himself, or to himself and one or more other living persons; and to transfer property is to perform such act.

In this section, ' living person ' includes a company or association or body of individuals, whether incorporated or not, but nothing herein contained shall affect any law for the time being in force relating to transfer of property to or by companies, associations or bodies of individuals."

"Section 9. A transfer of property may be made without writing in every case in which a writing is not expressly required by law."

We shall divide section 5 into component parts and examine. It lays down that if a living person conveys property in present or in future, to—

        (1)            one or more other living persons ; or

        (2)            to himself; or

(3)            to himself and one or more other living persons. The words "living person" are said to include—

        (i)     a company, or

        (ii)    association or body of individuals, whether incorporated or not.

So it is clear that the transfer must be by one living person to another living person. It must be inter vivos (During life : between living persons). Though a company is a living person for the purpose of this section before its incorporation, it is not a company. The words "whether incorporated or not" in the second paragraph applies to other associations or body of individuals that are unincorporated. The second conspicuous element of this definition is that a transfer to oneself is contemplated. Thus, a person may create a trust and constitute himself the first trustee so that the legal estate in the property continues to vest in him though in his capacity as a trustee. (Vide Tulsidas Kilachand v. CIT [1961] 42 ITR 1 (SC). It is necessary in this connection to state that the Transfer of Property Act is not exhaustive of the law relating to a transfer of property by act of parties. The preamble itself indicates two things. (1) It purports to define and amend certain parts of law relating to transfer or property. (2) It relates to the transfer of property by act of parties. Thus, it excludes from its purview sales in execution of decrees, insolvency proceedings, testamentary and intestate succession. The word "convey" occurring in the first paragraph of the section is of wider import. The sweep of this expression can usefully be gathered from the definition given in section 205(1)(ii) of the Law of Property Act of England. "'Conveyance' includes a mortgage, charge, lease, assent, vesting declaration, vesting instrument, disclaimer, release and every other assurance of property or of any interest therein by any instrument except a will."

Let us turn to section 9 which states that a transfer of property may be made without writing in every case in which a writing is not expressly required by law. The said provision is enacted as ex abundanti cautela though it is really unnecessary. The Act did not deal with all types of transfers. It deals only with enumerated and specified transactions of sale, mortgage, lease, exchange and gift. That is why the inclusion of Chapter 8 relating to transfer of actionable claims in this Act was criticised by jurists as being not consistent with the scheme of the Act. It is true that other than the provisions of this Act also require certain documents to be in writing such as Indian Trusts Act and the Indian Succession Act. But section 9 lays down that if a transaction is transfer of property and there is no express provision of law requiring it to be in writing, section 9 will enable it to be made without writing. But, if on the other hand, the transaction is not a transfer of property and there is no express provision of law requiring it to be in writing, then it can also be done without writing. Thus, there are innumerable instances where courts recognised oral transfers such as release, relinquishment, surrender, compromise, partition, transfer of easementary rights, settling maintenance claims, creating charge, dedication to an idol and family settlements to name a few. Further, in view of section 5, a transfer to an unborn person can be made only by a machinery of trust and hence section 13 of the Act used the expression " transfer " for the benefit of an unborn person.

Thus, we see a promoter of a company though fulfils some fiduciary duties, he cannot be described as a trustee as there is no beneficiary as defined under section 3 of the Indian Trusts Act. He cannot also be an agent as there is no principal born by that time. Hence, the promoter occupies a peculiar position of a quasi-trustee. Hence, the question is whether the declaration made by him constitutes transfer of property and whether the company can claim any interest in the property so declared belonging to it by the promoter. The declaration of the promoter that the property is held by him for the company to be formed does not constitute either a sale, mortgage, lease, exchange or gift and the company before its incorporation is not a living person and, hence, section 5 is not attracted. Such declaration also does not constitute a transfer to himself and the company has not come into force as a beneficiary and, hence, it will not become a trust. Hence, the transaction is outside the purview of section 5 of the Transfer of Property Act and also the Trusts Act and it does constitute a conveyance as a vesting instrument or other assurance of property and can be made orally under section 9 of the Transfer of Property Act.

If he purchases property from a third party, he will be acquiring the title though apparently in his name for the benefit of the company yet to be formed. The property vests in him for the benefit of the company though his assurance is sufficient to clothe the company after its birth to claim full title. Hence, we hold that the property acquired by a promoter can become the property of the company by its acceptance and adoption after its birth. A Division Bench of the Madras High Court had an occasion to consider in an unreported judgment in Writ Appeals Nos. 85 and 86 of 1963 dated August 5, 1964, whether a promoter of a private limited company prior to its incorporation can make a valid application on its behalf for the grant of a stage carriage permit and it was held that if the company came into existence before the actual determination by the authorities, it can be justified either on principle of adoption or novation by a subsequent application. But if the company is incorporated subsequent to the last date of consideration, it cannot ratify the application of the promoter. In that case, section 57(2) of the Motor Vehicles Act requires an application to be made on behalf of the legal person. So their Lordships had some difficulty in sustaining the claim on behalf of the company before its incorporation as the application itself must be made on behalf of a legal person. In Weavers Mills v. Balkis Ammal, AIR 1969 Mad 462, Justice Veeraswami, as he then was, held that the benefit of the purchase made by the promoter passed to the company on its incorporation without any registered deed. But, in that case, the claim of the company was negatived on the ground that the previous proceedings operate as res judicata and, hence, the company lost its claim for the said property. We find from the reasoning of the learned judge a clear supportable legal principle to sustain the claim of a company in respect of the property acquired by a promoter on its behalf.

Hence, we hold that the property acquired by the promoter can be claimed by the company after its incorporation without any need for conveyance.

However, we may add even assuming that the legal position is, otherwise as the promoter is a quasi trustee, he can be compelled to convey the property to the company and if necessary on payment of consideration in view of the part played by him for obtaining the benefit before its incorporation.

Hence, we hold that the leasehold interest obtained by the original lessee would enure for the benefit of the first defendant company without any separate conveyance. Further, we are of the opinion that if the original lessee or his successor-in-interest disputes the assignment of leasehold Interest so made by him, he can be compelled to convey the said interest specifically to the company in view of the benefit obtained by him.

Question No.7: TENANCY HOLDING OVER AND TERMINATION OF TENANCY :

The plaint as originally filed stated that the lease deed dated July 10, 1903, purported to be a permanent lease and the said Subbarayudu constituted the first defendant firm with himself and other sharers and erected the first defendant factory in the plaint schedule property and since then carried on business therein under the name and style of Sri Ramanuja Ginning and Rice Factory (Private) Limited. As per the orders in I. A. No. 3370 of 1973 dated December 31, 1973, the plaint was amended and the word "purporting" was struck off and the word "calling" was used and a new paragraph was added stating that the said lease though called a permanent lease was really a tenancy at will of either party under law, as the lessee was given the right to give up the leasehold right if he did not require the lease hold property and, as such, the lessor was also entitled to the same right to cancel the lease and take back the leasehold property at his will and even if otherwise the lease can enure only for the lifetime of the lessee and not beyond his lifetime and the use of the word "putra, poutra" in the lease deed are superfluous and would have no legal effect. In the court below, it was contended by the defendants that the plaintiffs filed this application purporting to be a consequential amendment petition arising out of the order of the court permitting the thirteenth defendant to be added as a party and they were not aware of these insertions and consequently they filed an application to receive the additional written statement in I. A. No. 1090 of 1974. Two more applications are filed to strike off the amendment portion in the plaint (LA. No. 842 of 1975) and for striking of the pleading relating to the version that the lease would enure only for the lifetime (I. A. No. 1973 of 1974). Though the defendants were permitted to file additional written statement, the later two applications were dismissed permitting them to raise the contentions at the time of the arguments. So it is seen that in the original plaint, the plaintiffs stated that the lease deed, exhibit A-1, is a permanent lease but urged forfeiture of the lease as there is violation of the covenants of the lease as stated in paragraph 7. In fact, even in the registered notice issued by the plaintiffs in exhibit A-2 to the first defendant, it was categorically admitted that the lessee and his representatives were carrying on the business of the said premises for manufacturing purposes under the name of Sri Ramanuja Ginning and Rice Factory (Private) Limited, Vijayawada (first defendant), and the lessee and his representatives paid the rent till January 1, 1959, but subsequently committed default in payment of rent and also committed breach of covenants of the lease and hence liable to be evicted. The theory that the tenancy under exhibit A-l is a tenancy at will is built upon those line of cases where lessees were to hold for such time as they require or wish, the tenancy was construed as tenancy at will of the lessee and by implication of law, such tenancy is tenancy at will of the lessor also. The earliest authority is K.R. Manicka Mudaliar v. T. Chinnappa Mudaliar [1912-13] ILR 36 Mad 557. In an ordinary lease, such term stood by itself and was construed to be tenancy at will but when the document was construed as a permanent lease considering the other terms of the lease, the term in the lease that a lessee can surrender if he does not want to continue cannot be construed as tenancy at will. In fact, we have already held on question No. 1 on the authority of the judgment of Sivayogeswara Cotton Press v. Panchaksharappa, AIR 1962 SC 413, that this term is not destructive of the lease being a permanent lease. Once we hold the lease is a permanent one, it is not possible to contend that exhibit A-l creates only a tenancy at will. Realising this, the learned counsel argued that the first defendant has become a tenant holding over as after the death of the original lessee, the lessor and his successors have accepted the rents and hence the first defendant has become a tenant holding over and his tenancy was terminated under exhibit A-2. This is again a new question raised.

Hence we have to examine whether the first defendant can be described as a tenant holding over. We must look to section 116 of the Transfer of Property Act, 1882, which defines the effect of holding over which is in the following terms :

"If a lessee or underlessee of property remains in possession thereof after the determination of the lease granted to the lessee, and the lessor or his legal representative accepts rent from the lessee or underlessee, or otherwise assents to his continuing in possession, the lease is, in the absence of an agreement to the contrary, renewed from year to year, or from month to month, according to the purpose for which the property is leased, as specified in section 106."

For the application of section 116 as held by the Supreme Court in Karnani Industrial Bank Ltd. v. Province of Bengal, AIR 1951 SC 285, two things are necessary. (1) The lessee should be in possession after the termination of a lease. (2) The lessor or his representative should accept the rent or otherwise assent to his continuing in possession. The contention of the learned counsel is that the tenancy is for life of the original lessee or heritable but not transferable and once the original lessee has no progeny, the tenancy came to an end and the acceptance of the rent from the first defendant would only mean that the first defendant is a tenant holding over. We have already held that exhibit A-1 is heritable and transferable, and also held that the first defendant is the assignee from the original lessee and the rent is being received by the plaintiffs and their predecessors-in-title and consequently there is no termination of the lease. In fact, there is no determination of lease in any of the modes contemplated under section 111 of the Transfer of Property Act. But if the lease is determined on the death of the original lessee and the assignment is not valid, there might arise the question of termination of the tenancy. But the plaintiffs did not plead any fresh lease after the death of the original lessee. Hence, it is not possible to hold that there is a termination of lease and the continuance of the tenancy thereafter with the first defendant. Issue No. 6 which was framed on this question is in the following terms. "Whether the plaintiff is entitled for the declaration that the suit lease dated July 10, 1903, was duly terminated and not binding on the plaintiffs ?" That issue was deleted by the court as per the order dated January 9, 1974, in I.A. No. 8901 of 1973 and hence it is not a case of termination of tenancy and a subsequent creation of jural relationship by acceptance of rent. In view of the foregoing, we hold that the first defendant is not a tenant holding over and such a tenancy is not terminated.

Question No. 8. The forfeiture of lease due to non-payment of rent and waste.

In the plaint in paragraph 7, seven grounds were urged to show that the defendants committed breach of covenants of the aforesaid lease and hence liable to be evicted. This pre-supposes that the first defendant is a tenant. This contention is on the basis even assuming that the first defendant is successor-in-interest, he forfeited the tenancy right. The learned counsel urged before us only two grounds. Forfeiture due to nonpayment of rent and waste. It is admitted in the plaint that the rent was paid up to January 1, 1959. The court below found that the subsequent rent due has been deposited in the court during the pendency of the suit and hence this ground is factually baseless. Further, exhibit A-1 provides 12% interest for non-payment of rent till the date of payment and there is no clause entitling the lessor to evict the defendants for nonpayment of rent and hence this ground is factually incorrect.

The ground of waste pleaded in the trial court is causing material damage to the leased premises by wasteful and destructive acts due to gross negligence. The court below found in paragraph 43 of its judgment that there is no proof that any material damage to the leased premises was done by wasteful acts or destructive acts. Under this ground, the learned counsel argues that there is deficiency in the extent of land leased out as found by the court below in the connected suit in O. S. No. 79 of 1967 and hence a portion of the land is lost to the estate and hence it constitutes a waste and there shall be forfeiture of the lease. We must say that this is not the ground urged in the court below. However, we see under exhibit A-l property was described with specific boundaries. A commissioner was appointed in O. S. No. 79 of 1967 when these very plaintiffs filed the said suit on the ground that the first defendant trespassed on the adjacent land belonging to them. The Commissioner submitted a report along with a plan which were marked as exhibits A-28 and A-29. The court below found that there is no trespass on the part of the first defendant of the adjacent land as the first defendant was in possession of 15,092 sq. yards instead of 16,423 square yards as originally said to have been granted under exhibit A-l. The plaintiffs having failed in O. S. No. 79 of 1967 to establish trespass on the adjacent land raise the present contention that in view of the diminution of the extent of land in the possession of the first defendant, it should constitute a waste and that shall be a ground for forfeiture of the lease. The court below found that the lease was given by the boundaries and three plots of land were given. It found that when the lease deed, exhibit, A-1 was executed, some extent of land after measuring the three plots shown in the lease deed has not been measured and the first defendant was in possession of the original extent of land as given by the boundaries and hence the diminution of any extent cannot be ascribed as any loss to the estate. It is true as held by the Supreme Court permanent tenancies are within the rule of section 111 (g) of the Transfer of Property Act and are liable for forfeiture if there is a disclaimer of tenancy or denial of the landlord's title. (vide Raja Mohammad Amir Ahmad Khan v. Municipal Board of Sitapur, AIR 1965 SC 1923. But these two grounds now do not constitute forfeiture of permanent lease and we hold accordingly.

Question No. 9 : Estoppel by acquiescence: The term "acquiescence" is used when a person refrains from seeking redress when there is a violation of his rights to his knowledge. There is an element of laches in it. It is defined as "quiescence" to infer assent on the part of the owner. This doctrine of acquiescence operating as an estoppel was founded on fraud. Acquiescence differs from estoppel in that for acquiescence it is not necessary that a person should have made any representation by words or conduct that he did not intend to enforce his rights. (See Proctor v. Bennis, [1887] 36 Ch 740 Bown L.J. This doctrine is intended to relieve persons against fraud when a person refrains from interfering when his legal rights are being violated. Let us see the facts to apply this principle.

We have already referred to the allegations in the original plaint and also the quit notice, exhibit A-2, wherein the first defendant was described as a successor-in-interest of the original lessee. In fact, in the connected suit filed in O. S. No. 79 of 1967, the plaintiffs themselves have admitted that the first defendant is a representative-in-interest of the original lessee. That suit relates not to the leased property but an adjacent land and no doubt the first defendant denied the said allegation. Now, in the present suit, the first defendant pleaded that they are the successors-in-interest of the original lessee. Even the amended plaint in paragraph 4 as already extracted, earlier portion of our judgment states that Nidumukkala Subbarayudu, the original lessee, took the plaint schedule property for constructing and running a ginning, rice and oil factory and it is he who constituted the first defendant firm with other sharers. So the plaintiffs and their predecessors-in-title are fully aware that the purpose of lease is for raising of the factory and that the lessee himself constituted the first defendant firm. Though the first defendant is now a private limited company, the plaintiffs and their predecessors-in-title were still treating it as a firm not knowing the legal significance of conversion of the firm into a company.

D. W. 1,one Malladi Satyanarayana, was examined to bear out the circumstances under which the first defendant became the representative of the original lessee. This witness is aged about 76 years. He states that Nidumukkala Subbarayudu executed the lease for the benefit of the partners and his father was the first managing director and this witness wrote accounts for the firm even since 1920. The court below accepted his evidence which is not challenged before us that the firm itself paid the amount to Vali Subbarayudu and Nidumukkala Subbarayudu was not paying the rent in his personal capacity. After the death of Vali Subbarayudu, the plaintiff's father accepted the rent. This witness filed a certified copy of the first list of the shareholders of the first defendant company, exhibit B-165, in which his father was shown as a shareholder against serial No. 32 and the original lessee, Nidumukkala Subbarayudu, was shown as serial No. 25. He also states that the original shareholders have sold away their respective shares and the present shareholders are the assignees of the original shareholders constituting the first defendant firm. Therefore, the plea that the first defendant is not successor-in-interest of Nidumukkala Subbarayudu is opposed to the very plaint case. The original lessor is fully aware that the lease was taken for the purpose of raising a factory. D. W. 2 deposed the value of building is Rs. 4,00,000 and factory is Rs. 2,00,000 and rent was received by lessor initially from the firm consisting of original lessee as per exhibit B-53 since 1906 and from the first defendant since. 1920 till suit notice was issued on February 24, 1967, for over a period of six decades. The account books of the first defendant firm show that the rent was received by the plaintiffs and their predecessors from the first defendant company. They have also borrowed from the first defendant. D. W. 1 deposed that he is prepared to deposit arrears with interest or adjust the amount towards the decree debt due from the plaintiffs. The evidence is clear that the first defendant was treated as successor-in-interest of the original lessee. These facts clearly disclose that this is not a case of a mere acquiescence without any representation by words or conduct but the plaintiffs and their predecessors-in-title have accepted the assignment in whatever manner the original lessee did to the first defendant and received the rent from the first defendant and hence they are estopped from contending that the first defendant is not a successor-in-interest and no leasehold interest was passed to it and consequently we hold that all principles of equitable and legal estoppel are attracted to the facts of the present case, and we accordingly affirm the finding of the trial court on issue No. 3 that the plaintiffs and their pre-decessors-in-interest have acquiesced in the mode of enjoyment of the plaint schedule property by the first defendant and they are now estopped from contending to the contrary.

QUESTION NO. 10 ADVERSE POSSESSION

In view of the fact that we have permitted the plaintiffs to raise new grounds challenging that the first defendant is not a successor-in-interest of the original lessee, we have to permit the defendent to urge the ground of adverse possession. It is true that there is no plea of adverse possession raised by the first defendant. Facts forming the basis of this ground are not in controversy or at least found by the court below and further no evidence is necessary while examining questions 7 and 9 relating to the tenancy holding over and also the estoppel. We have already stated that the plaintiffs and their predecessors-in-title are fully aware of the fact that the leasehold interest is being enjoyed by the first defendant after it is formed and before that by the firm consisting of the original lessee. If the lease stood terminated on the death of the original lessee and the assignment in favour of the first defendant is invalid and inoperative for any reason as there is no conveyance in its favour, and the principle of estoppel also is not attracted to the facts of this case, then we have to alternatively see whether the lessee's interest is acquired by the first defendant by prescription.

Now, it is well settled that a permanent tenancy may be acquired by prescription. Mulla on Transfer of Property Act, sixth edition, states that 3

"A permanent tenancy may be acquired by prescription, for it is a well established rule that there can be adverse possession of a limited interest in property as well as of the full title of the owner."

The Supreme Court ruled in Raja Rameshwar Rao v. Raja Govind Rao, AIR 1961 SC 1.442, that there is no doubt that there can be adverse possession of a limited interest in property as well as of the full title as owner. The learned counsel for the appellants argued that the legal position is altered after the death of the original lessee and a new tenancy must be deemed to have been created after the death of the original lessee as the original lessor accepted the rent subsequent to the death of the original lessee. We have already held that no fresh tenancy was created and the jural relationship between the first defendant and the original lessor cannot be that of a tenant holding over. If we proceed on the basis that the tenancy was terminated on the death of the original lessee and no fresh tenancy was created, the first defendant is in possession of the property paying the rent claiming under the original lessee, for over the statutory period and hence the question is whether the first defendant had perfected title by adverse possession for a limited interest of permanent lessee.

It is fairly settled that when a tenant dies and the rent is accepted by the landlord from a person claiming to be the heir of the original tenant for a period of twelve years, the relationship of landlord and tenant is not effected and the heir acquires the status of the tenant: Sadanand Mandal v. Jyotish Kanta Ray, AIR 1926 Cal 952. Recently in a case arising under the Andhra Pradesh Buildings (Lease, Rent and Eviction) Control Act of 1960 our learned brother, Seetharam Reddy J., held that when a person continues in possession in a building after the death of his grandfather who is the original tenant for over a statutory period, he prescribes interest of tenancy. (Vide M. Vijaya Ram v. Kamaran [1983] 1 AP LJ 45 ; [1983] 1 ALT 79. The rule that a landlord's cause of action to recover possession from a tenant or any one claiming under the tenant only accrues from the time when he determines the tenancy was first enunciated by Sir Barnes Peacock C. J. in Davis v. Kazee Abdool Hamed [1867] 8 Suth WR 55 which is followed in several decisions and was finally accepted by their Lordships of the Privy Council in Katyayani Debi v. Udoy Kumar Das, AIR 1925 PC 97. In Davis v. Kazee Abdool Hamed [1867] 8 Suth WR 55. Sir Barnes Peacock C.J. observed at page 58 :

"When the forfeiture is committed, and the landlord elects to put an end to the lease on the ground of forfeiture, the landlord's title to recover possession accrues. He could not, pending the lease, recover possession from the tenant or any one claiming under the tenant, nor even from a trespasser."

This view was reiterated by Vivian Bose J., delivering a judgment as a member of the Full Bench in Punjaram Jagoba Teli v. Ramu Chintoo Gond, AIR 1940 Nag 49, 64 stating that:

"...in England the landlord cannot sue for possession during the continuance of a tenancy even if there is a trespasser on the land. His rights in that respect do not accrue until the tenancy is determined. Until then all he can do is to sue in respect of injuries to his reversionary interest ; and this of course entails the right to institute a declaratory suit under section 42 of the Specific Relief Act but not one for possession. The law in India is the same."

This dicta that the cause of action will not accrue even in a case of trespass during the continuance of tenancy is not accepted by Sundara Iyer J. in Ambalavana Chetty v. Singaravel Udayar [1912] MWN 669; 15 IC 146, contrary to views expressed in a number of cases. We are not concerned with the case of trespass. (See page 1704 of U. N. Mitra's Law of Limitation and Prescription, 9th edition).

In Kumar Kamakhya Narayan Singh v. Ram Raksha Singh, AIR 1928 PC 146, it was ruled that where after the death of the original lessee to whom a life estate alone was given, the heirs remained in possession and paid rent to the lessor but receipts are given in the name of the original lessee, the case is not governed by section 116 of the Transfer of Property Act and the suit for recovery of possession brought beyond 12 years is barred. Hence, it is seen in this case, if the assignment is void after the death of the original lessee, the possession of the first defendant becomes adverse and subsequent payment of rent creates in them a limited title of permanent tenancy.

Sri Veerabhadraiah, the learned counsel, very strongly relied upon Datto v. Babasaheb, AIR 1934 Bom 194, to show that when the tenant is shown to have paid rent, the presumption, in the absence of evidence, is, he is yearly or monthly tenant. That was a case where the permanent lease deed granted was held to be inadmissible for want of registration and the terms also could not be looked into in view of section 92 of the Evidence Act. Mulla's on Transfer of Property Act, sixth edition, at page 657, remarks about this case as a clear case of permanent tenancy acquired by prescription. The tenant came into possession in 1865 under a permanent lease which was inadmissible as evidence of a lease for want of registration and hence that case is of no assistance to the appellants. In fact that was distinguished in In re Vadasseri Tharawattil Karnavan and Manager Ittichathara Valia Mannadiar, AIR 1957 Mad 73, where a Division Bench held that the said case cannot be an authority for the proposition that the right of permanent lessee cannot be acquired by prescription.

Sri Veerabhadraiah next contends on the strength of Nainapillai Marakayar v. Ramanathan Chettiar [1924] ILR 47 Mad 337, that no tenant of land in India can obtain right of permanent tenancy by prescription against his landlord. But this case was already explained in a number of decisions and the earliest judgment is Periyanan Chetty v. Govinda Rao [1932] 62 MLJ 496; AIR 1932 Mad 328, holding that the dicta in Nainapillai Marakayar v. Ramanathan Chettiar [1924] ILR 47 Mad 337, that permanent right of occupancy can only be obtained by a tenant by custom or by grant from an owner of the land who happens to have power to grant such right or under an Act of Legislation, means that a tenant who has entered into possession under a valid lease which is not permanent, cannot by his own assertion or act during the tenancy enlarge his rights into a permanent tenancy. (Also see page 757 of Rustomji on Law of Limitation and Adverse Possession, sixth edition), In Atyam Veerraju v. Pecheti Venkanna, AIR 1966 SC 629, the Supreme Court refrained from pronouncing upon the correctness of the observation of the Full Bench of the Patna High Court when a tenant can prescribe permanent rights of prescription. The Full Bench of the Patna High Court in Bastacolla Colliery Co. Ltd. v. Bandhu Beldar, AIR 1960 Pat 344 [FB], observed regarding the acquisition of permanent tenancy by prescription (at p. 348):

"There are, however, some cases in which a lessee can acquire the right of a permanent tenant by prescription in spite of payment and acceptance of rent. Those are cases where the lessee pays rent on the basis of a notorious claim of permanent tenancy to the knowledge of the owner. The acceptance of rent by the owner on the basis of the lessee's claim as a permanent tenant will not prevent the acquisition of such a right by the lessee. If the lessee tenders the rent on the basis of permanent tenancy and the owner refuses to accept it on that basis, the parties are at arm's length and no relationship of landlord and tenant can come into existence between them. Hence, the lessee's possession is adverse to the lessor, and he may acquire a limited right of permanent tenancy by being in adverse possession for the statutory period."

The Supreme Court observed adverting to this passage (at p. 634 of AIR 1966 SC):

"As we did not hear any argument on that point, we do not also decide whether this passage lays down the correct law. This passage must be read with the following observation of the Patna High Court in the same case. If once a tenancy of some kind comes into existence either under an express lease or under a lease implied by law, the tenant cannot convert his tenancy into a permanent one by doing any act adverse to the landlord."

The view expressed by the Supreme Court was again considered by the same High Court in Administrator of District Board, Gaya v. Shri Deonath Sahay, AIR 1970 Pat 256, holding that once a tenancy of some kind has come into existence, any subsequent assertion of permanent tenancy right by the tenant cannot create any such right in his favour by adverse possession. So it is clear that if an ordinary tenant got into possession by his mere assertion, he cannot convert the tenancy into one of permanent tenancy. But exhibit A-1 created a permanent tenancy, and we hold so and hence we conclude that if the assignment of interest of the original lessee, in whatever form, to the first defendant is invalid and inoperative, the possession of the first defendant becomes adverse to the original lessor and the acceptance of the rent for over the statutory period of 12 years makes the assignee to prescribe for the limited title of permanent interest. In fact, the possession of the first defendant had all the qualities of adequacy, continuity, exclusiveness and publicity to constitute its possession as adverse. There is clear animus on the part of the first defendant under the colour of assignment of the interest under exhibit A-1 to it. It is true that there is no lease granted to the first defendant but the first defendant is claiming under the colour of title, viz., the lease granted to one of its shareholders. We have already held that the interest under exhibit A-l has become part of the firm's property, and it was declared to be the property of the company under exhibit B-54. Assuming that the declaration does not convey any title to the first defendant, the first defendant continued in possession of suit property for over a statutory period to the knowledge of the plaintiffs and their predecessors-in-title and thus perfected title by adverse possession to the limited interest of the permanent lessee.

We have completed the bundle of inconsistent and incongruous pleas and reject the claim of the plaintiffs for possession as clearly unsustainable.

Now, we state the result of our discussion. It is clear that the lessee can transfer his interest by way of an assignment. We have already examined the scope of section 108(j) of the Transfer of Property Act and held that the lessee can transfer absolutely his interest and there is no prohibition on such alienation. It is well-settled that an absolute assignment of the whole interest of a lessee creates privity of estate between the lessor and the assignee and the assignee becomes liable to the lessor of covenants running with the land including the covenants to pay the rent. In fact, the present suit was filed treating the first defendant as successor-in-interest on the basis of such assignment paying court fee on the basis of annual rent. If the plaintiffs consider that the first defendant is not the representative-in-interest of the original lessee, the suit should not have been framed as one for eviction of tenant paying court fee on yearly rent. They should treat him as trespasser and the suit must be based on title. The plaintiffs did not plead any fresh tenancy and once the assignment is found to be true and valid and there is no forfeiture of permanent lease and the first defendant continues to be successor-in-interest of the original lessee and so long as he is willing to pay the rent stimulated in the lease deed, the present suit for eviction is not maintainable. We also held that the plaintiffs are precluded from contending that the first defendant is not a successor-in-interest as the principle of estoppel stands in the way.

Even assuming that the assignment in favour of the first defendant by the original lessee is not valid for want of conveyance or otherwise, so long as the permanent lease is not forfeited and validly terminated, even the licensee or any one claiming from the permanent lessee can continue in possession. This is not a case of abandonment of estate by the lessee. Hence, a permissive possession from the lessee cannot be removed so long as the lease is not validly terminated. The suit is not maintainable without terminating the lease. The grounds of forfeiture of lease are found to be factually incorrect and legally untenable. The plaintiffs have not sued any heir of the lessee and we cannot accept that he died heirless though he may not have any progeny and hence the suit against the first defendant must be treated as one based on privity of estate. We also alternatively hold that even assuming that the assignment is invalid and inoperative, the first defendant perfected title by adverse possession for permanent lessee's interest as he continued in possession of the property since the death of the original lessee in 1951 till the date of suit. Hence, we see no legal basis on which the plaintiffs' suit can be decreed and hence the appeal is dismissed but, in the circumstances, without costs.

The appeal coming on for further consideration on the oral application of the counsel for the appellant, Mr. T. Veerabhadrayya, for leave to appeal to the Supreme Court and upon hearing the arguments on both sides, the court made the following order:

After the judgment is pronounced, the learned counsel for the appellant made an oral application for grant of leave to appeal to the Supreme Court.

This appeal involves a substantial question of law of general importance and in our opinion it requires to be decided by the Supreme Court of India. Accordingly the certificate will be issued under article 133(1) of the Constitution.

 

[1951] 21 COMP. CAS. 297 (MAD.)

HIGH COURT OF MADRAS

Narasaraopeta Electric Corpn. Ltd.

v.

State of Madras

RAJAMANNAR, C.J.

AND SATYANARAYANA RAO, J.

C.M.P. NOS. 975 AND 4697 OF 1951

APRIL 27, 1951

 

 C.V. Dikshitulu, N. Rajeswara Rao, K.V.R. Sarma, D. Narasaraju, K.P. Krishnamurthi and A. Krishnaswami. for the Petitioner.

V.K. Thiruvenkatachari, Counsel on behalf of the State.

 

JUDGMENT

Satyanarayana Rao. J.—These two petitions raise the question of the validity of the Madras Electricity Supply Undertakings (Acquisition) Act, 1949 (Act XLIII of 1949) (hereinafter called the impugned Act) and they were therefore heard together. In C.M.P. . No. 975 of 1951 the petitioner is the Narasaraopeta Electric Corporation, Ltd , by its managing director V. V. Sastry, and the company was incorporaced under the Indian Companies Act. The petitioner in C.M.P. No. 4697 of 1951 is the Rajahmundry Electric Supply Corporation, Ltd., by its Vice-Chairman, Appana Rangarao, and this company was also incorporated under the Indian Companies Act. The petitioners in both the petitions obtained licences for the supply of electricity under the provisions of the Indian Electricity Act, 1910. The memorandum of association of the two companies authorised each company not only to carry on the business of electricity supply but also several other objects enabling the company to carry on trade or business of various kinds. In G.O. No. Misc. 3496, dated 18th September, 1950 the Government issued a notification under Section 4(1) of the Act declaring that the undertaking of the Narasaraopeta Electric Corporation under the licence shall vest in the Government of the State of Madras from 25th January, 1951 and called upon the Corporation to appoint an accredited representative under Section 8 of the Act and also to submit inventories and all other particulars required under Section 17 of the Act. A similar notification dated 2nd September, 1950, under Section 4(1) of the Act was issued by the Government in respect of the Rajahmundry Electric Supply Corporation, Ltd., also fixing the date of vesting. In the first of the petitions the petitioner prayed for the issue of a writ of mandamus or other appropriate writ or directions restraining the State of Madras from taking over the undertaking in pursuance of the notification. The relief in the second petition is for the issue of a writ of certiorari or other appropriate writ calling for the records and quashing the orders of the Government issued under Section 4(1) of the Act. The grounds on which the notification is impugned are substantially the same in both the petitions.

The contentions raised are:—

(1)            that the Act is beyond the legislative power of the Provincial Legislature as it is in substance and in effect a law in respect of companies which is within the exclusive jurisdiction of the Central Legislature;

(2)            that the Act offends Section 299(2) of the Government of India Act, 1935, and the fundamental rights recognised and guaranteed, under Articles 19(f) and 31 of the Constitution; and

(3)            that even if the whole of the Act is not void, at least some of its provisions are invalid.

It was faintly argued that the impugned Act is inconsistent with Article 14 of the Constitution; but the argument was not elaborated and pursued and therefore may be left out of consideration.

I shall now proceed to consider the first contention The impugned Act was enacted at a time when the Government of India Act, 1935, as modified and adapted by the Indian Independence Act, 1947, and the Indian Provisional Constitution Order, 1947, were in force. The competence, therefore, of the Provincial Legislature to enact the Act must be decided by reference to the provisions of the Government of India Act, 1935 . The Indian Electricity Act, 1910, enacted the law relating to supply and use of electrical energy in India by individuals or Corporations under a licence obtained from the Local Government. As part of the post-war reconstruction and development schemes, the Central Government decided in 1947 to develop electricity in India on a regional basis and as there was no co-ordinated system of development of electricity in India, it was decided to introduce what is known as the "grid system" which came into vogue in the United Kingdom under the Electricity Act, 1926. The need for extending the benefits of electricity to semi-urban and rural areas in an efficient and economic manner was also felt; but it was found that the Electricity Act of 1910 was wholly inadequate to achieve the object and legislative power was needed to link together under one control electrical development in the country With this object in view, the Electric Supply Act of 1948 (Act LIV of 1948) was placed on the Statute Book in September, 1948, its main object being to constitute a central electricity authority and to enable the Provincial Governments to constitute electricity boards. The powers and duties of these boards were defined by the Act. In 1949, the Government of Madras felt that the supply of electricity should be nationalised in order to ensure supply to other areas and also to extend the benefit of the electric power to rural aras for agricultural and other purposes. The result was the passing of the Madras Electricity Supply Undertakings (Acquisition) Act (Madras Act XLIII of 1949) which is now impugned as invalid. It received the assent of the Governor-General on 18th January, 1950, and after the Constitution came into force, was also certified by the President under Article 31(6) of the Constitution.

The Act applies to all undertakings of licensees whether they belong to individual owners or firms or corporations or companies or local authorities. Section 4 of the Act empowers the Government to take over any undertaking by order in writing declaring that the undertaking shall vest in the Government on a specified date which should not however be earlier than four months from the date of the declaration. The Government is given the power to postpone the date of vesting from time to time. Section 5 provides for the compensation payable to a licensee who is not a local authority. The basis of compensation is divided into three classes, A, B and C, and option is given under Section 9 to the accredited representative of the undertaking to choose any one of the three basis of compensation. Under basis (A) the compensation payable is 20 times the average net annual profit of the undertaking during a period of five years preceding the vesting date. Basis (B) fixes the compensation on the aggregate value of the shares of the company constituting the share capital of the undertaking reckoned in the manner laid down in Section 5. Under basis (C) compensation is calculated on the book value of the assets of the undertaking computed in the manner indicated in sub-section (3) of Section 5. I have avoided the details as they are not relevant. Section 6 of the Act provides for the payment of compensation and the manner of determining it where the licensee is a local authority. Section 7 provides for the vesting of rights and liabilities of the undertaking in the Government in cases where the compensation is payable in respect of an undertaking under basis (A) or basis (B) and sub-section (2) to Section 7 provides for the vesting of the properties and liabilities if compensation is payable under basis (C). Section 8 of the Act requires that in cases where the licensee is not a local authority within three months of the receipt of an order under Section 4(1), intimating the vesting date, the licensee should appoint an individual as an accredited representative in connection with the handing over of the undertaking or the fixed assets as the case may be to the Government and performing on behalf of the licensee the functions specified in the Act. If the licensee is a company, however, under sub-section (2) to Section 8, the accredited representative is required to be appointed by the shareholders of the company at a meeting specially convened for the purpose. Power is conferred upon the Government to appoint an accredited representative if the licensee fails to appoint an accredited representative within the time specified. The accredited representative may be removed for causes specified in sub-section (4) to Section 8 and the remuneration is payable to him from the compensation deposited under the Act. Under sub-section (6) of Section 8 all assurances conveyed, and all statements made, by such representative shall be binding on the licensee. Section 10 empowers the Government to deduct from the compensation payable to the licensee under the Act the loss incurred by it by reason of certain transactions which are not bona fide and effected after 1st October, 1947. Section 11 deals with the deductions from the compensation and Section 15 relates to the termination of managing agency agreements between the licensee and the managing agent or managing director. Section 16 provides for the termination by the Government of the services of the existing staff after giving notice and Section 17 relates to inventories to be prepared and Section 18 confers power on any officer or servant authorised by the Government in that behalf to enter upon any land or premises in the possession of the licensee to make a survey or examination or investigation for the purposes of the Act after giving due notice. Section 19 deals with the penalties and Section 20 is a special provision relating to offences by corporations. Section 21 is the usual clause protecting persons acting in good faith under the Act or under any rule or order made thereunder. Section 22 provides for the rule-making power and Sections 23 and 24 provide for certain formal matters. There are two schedules to the Act, one relating to calculation of net profits under Section 5(1) and other details and the other dealing with certain deductions and the method of calculating them. I have given the general scheme and the purposes of the Act to better appreciate the arguments advanced.

Under the Government of India Act, 1935, the power to make laws with respect to corporations is conferred on the Federal Legislature as is evident from item 33 of List I of the Federal Legislative List, which is in these terms:—

"Corporations, that is to say, the incorporation, regulation and winding up of trading corporations, including banking, insurance and financial corporations, but not including corporations owned or controlled by a Federated State and carrying on business only within that State, or co-operative societies, and of corporations, whether trading or not, with objects not confined to one Unit."

"Electricity" is in the Concurrent List, List III, and is item 31. The short but a difficult question to decide is, is the impunged Act a law with respect to electricity or a law with respect to corporations. If the latter, undoubtedly, the Provincial Legislature has no power to enact the law aud the impugned Act must be declared ultra vires of the Provincial Legislature. If the former, the impugned Act must be upheld.

It is in my opinion wise to bear in mind and to adhere to the note of warning sounded by Sir Montague Smith in the judgment of the Judicial Committee in The Citizens Insurance Company of Canada v. Parsons and repeated by Viscount Haldane. L.C, in John Deere Plow Company Ltd. v. Wharton, that while discharging the difficult duty of arriving at a reasonable construction of the language of the sections relating to constitution to confine oneself to the interpretation of the particular provisions in the Statute on which the decision depends. Section 100 of the Government of India Act, 1935, defines the powers of the Federal and Provincial Legislatures:—

"With respect to any of the matters enumerated in List I (Federal Legislative List), List II (Provincial Legislative List) and List III (Concurrent Legislative List)."

The language employed is, it may be noted, "with respect to any of the matters enumerated." In the British North America Act, the expression used is "in relation to all matters." The language of the Government of India Act is analogous to the language employed in Section 51 of the Commonwealth of Australia Constitution Act where also the expression "with respect to" occurs. Notwithstanding this difference in language, the meaning of both the expressions is, in my opinion, not materially different. The matter enumerated in item 33 of the Federal Legislative List, List I of the VII Schedule to the Government of India Act, is "Corporations, that is to say, the incorporation, regulation and winding up of trading corporation, etc." The subject-matter, therefore, is "corporations" in item 33 of List I and "Electricity" in item 31 of the Concurrent List and these are the legislative subject-matters with which we are concerned. The consequential effects of legislation are not the same as the legislative subject-matter. A legislation may have many results but in order to determine the subject-matter of legislation, one has to look at its true nature and character not its ultimate effect: vide Russell v. The Queen. In other words, as has been repeatedly laid down, the pith and substance of the enactment must be considered to determine the nature and character of its subject-matter. It is impossible to conceive of a legislation which does not in some manner trench upon other fields reserved for a different legislature. In other words every legislation has got a double aspect, i.e., from one aspect and for one purpose the legislation may fall under one he; d but for another purpose and in another aspect, it may be possible to treat it as falling under a different head The solution in such cases in order to arrive at and determine the category under which it falls is to have regard to the true nature and character of the legislation in the particular instance to ascertain the class or subject to which it legitimately belongs and this is the pith and substance of it. To illustrate the difficulty in drawing the line and the correct approach to the problem, I am tempted to quote the observation of Higgins, J., in Huddart Parker & Co. Proprietary, Limited, v. Moorehead:—

"Now how are we to determine what is the subject of any law of any legislation, when two or more things that might be subjects of legislation are mentioned in it? The mere fact of mentioning corporation in these Sections 5 and 8 does not necessarily make them a law 'with respect to' the subject of corporations. If a Licensing Act provides that the Licensing Court shall not transfer the licence of a wife to her husband unless the husband be approved by the Court as a holder of a licence, we should not call it legislation 'with respect to' marriage or of marital relations. If an act provides that every marriage shall be celebrated in the presence of two witnesses of full age, and shall be registered, we should not call it legislation 'with respect to' witnesses, or 'with respect to' infancy or 'with respect to' registration. The first is a law 'with respect to' dealing in intoxicating liquors; the second is a law 'with respect to' marriage. To use the words of the Privy Council in Russell v. Reg., we must find what is 'the primary matter dealt with.' We must find 'the true nature and character of the legislation in the particular instance under discussion….. in order to ascertain the class of subject to which it really belongs'."

Is this is a law substantially with respect to corporations, or is it a law substantially with respect to trade? The regulation of trade combination is "the primary matter dealt with" (to use the phrase of Russel v. Reg.) As Lord Watson said during the argument of Attorney-General for Ontario v. Attorney General for Quebec:—

" 'that which it' (the Act) accomplished, and that which is its main object to accomplish, is the object of the Statute (as distinguished from the motives which influenced the Legislature)."

In that case, one of the questions for consideration was whether the Commonwealth Parliament was within its powers in enacting Sections 5 and 8 of the Australian Industries Preservation Act, 1906, which undoubtedly interfered with the domestic trade in a State. It was claimed on behalf of the Commonwealth Parliament that it had such a power under placitum 20 of Section 5 1 of the Commonwealth of Australia Constitution Act which is as follows:—

"Foreign corporations, and trading or financial corporations formed within the limits of the Commonwealth."

It was held that this power did not carry with it a power to legislate so as to interfere with the internal trade and commerce of the States. Section 5 and 8 of the Australian Industries Preservation Act, 1906, prohibited a foreign corporation or trading or financial corporation formed within the Commonwealth from making or entering into contracts or engaging in or continuing in combination with a view to restrain trade or commerce within the Commonwealth to the detriment of the public or with intent to destroy or injure by means of unfair competition any Australian industry the preservation of which is advantageous to the Commonwealth and also prevented such corporations from acquiring monopolies. As pointed out by Griffith, C.J., in Huddart Parker and Co, Proprietary, Ltd. v. Moorehead, it is necessary to distinguish between acts which are ultra vires of a corporation and acts which, though otherwise within the powers of a corporation, are prohibited by positive law. The result in either case is undoubtedly to prevent the corporation from effectually doing the act. But although the effect is identical, the cause is quite different. In one case there is no capacity in the corporation to enter into contracts relating to particular subject-matters because it is beyond its powers. In the other case, though it is within its powers, it is a thing which the law prohibits the corporation from entering into. At page 353 Griffith, C.J., says:

"The denial of capacity to the corporation to enter into contracts relating to the subject-matter of domestic trade or the particular branch of that trade may rest with the Commonwealth. But the conditions governing the validity of a contract relating to any subject-matter rests with the Legislature having control of that subject-matter which, in the case of domestic trade, is the State Legislature. The importance of this distinction is apparent when it is remembered that a particular intent is an element of the offences created by Sections 5 and 8. The entering into the contracts or combinations specified without that intent is not prohibited. The sections, therefore, are not directed to the capacity of the corporation, which is assumed, but to their behaviour while acting within their capacity."

The subject-matter of item 33 in the Federal List can only be interpreted as confined to the incorporation and the capacity and status of the companies or corporations and must be limited to the manner in which a corporation may be brought into existence and how its business is to be conducted and how it should be dissolved. The Indian Companies Act provides for these matters. The Constitution, the management and the winding up of the companies are within the purview of this item. The company may carry on any business which is within the objects of the memorandum of association, i.e., within its capacity, but a State Legislature may under the appropriate item impose restrictions regarding the method or the manner in which a particular business or businesses should be conducted. It might impose restrictions regarding licences in respect of particular businesses, may acquire part of the business and may provide for various other matters relating to its activities. The activities and the functions and the business of a corporation are outside its constitution and management and therefore not within the exclusive legislative power of the Central Legislature. Under this item the Federal Legislature has power to create, protect and destroy an artificial person put the power does not extend to its functions and activities. The law with respect to corporations, there, fore, must be a law on the subject of corporations.

Mr. Narasaraju, the learned Advocate for one of the petitioners, relied upon the decisions of the Judicial Committee which dealt with the. Constitution of Canada under the British North America Act, 1867. Under Section 91 of that Act, the Parliament of Canada has the power to make laws for the peace, order and good government of Canada in relation to all matters not assigned exclusively to the Legislatures of the Provinces. Section 91 gives a list of the matters which are within the exclusive legislative authority of the Parliament of Canada. Item 2 of the list relates to "the regulation of trade and commerce." Section 92 enumerates the subjects which are within the exclusive power of the Provincial Legislature and item 11 relates to "incorporation of companies with provincial objects." There is no express power conferred upon the Parliament of Canada to make laws in relation to corporations or companies with extra-provincial objects. It has been decided as early as 1881 in The Citizens Insurance Company of Canada v. Parsons that Parliament has the authority to incorporate companies for inter-provincial objects under the general power conferred upon the parliament in relation to all matters not coming within the class of subjects assigned exclusively to the Legislatures of the Provinces. This power, however, and the power to regulate trade and commerce under item 2 of Section 91 do not carry with it the exclusive right to regulate the contracts of such corporations in respect of matters within the Provinces.

The words "regulation of trade and commerce" have been so interpreted as to confer on the Dominion Parliament the power to make political arrangements in regard to trade which requires the sanction of Parliament, regulation of trade in matters of inter-provincial concern and perhaps also a general regulation of trade affecting the whole Dominion. This decision was considered and the principles enunciated therein have been followed and applied in later cases by the Judical Committee.

The scheme of distribution of the powers between the Dominion and the Provincial Legislatures as regards the incorporated companies came up for consideration before the Judicial Committee in John Deere Plow Company v. Wharton. In that case a Provincial Legislature passed an Act prohibiting companies which have not been incorporated in the Province from taking proceedings in the Courts of the Province in respect of contracts made within the Province and also imposed penalties if the company carried on business in the Province without obtaining a licence. The question that had to be determined was whether the particular legislation in the Province was valid under the British North America Act. The power of the Legislature to make laws in relation to matters in item II of Section 92, viz., "incorporation of companies with provincial objects," cannot extend to a Dominion company, the objects of which were extra-provincial. The Parliament of Canada, as laid down in The Citizens Insurance Company of Canada v. Parsons had the undoubted power under the subject "regulation of trade and commerce," to prescribe the limitations on the powers of companies the objects of which extend to the entire Dominion and the Provinces can only legislate without depriving a Dominion company of its status and powers which were conferred upon it by a Dominion legislation. As observed by viscount Haldane, L.C, at pages 340 and 341 of John Deere Plow Co. v. Wharton:—

"They do not desire to be understood as suggesting that because the status of a Dominion company enables it to trade in a province and thereby confers on it civil rights to some extent, the power to regulate trade and commerce can be exercised in such a way as to trench, in the case of such companies, on the exclusive jurisdiction of the Provincial Legislatures over civil rights in general. No doubt this jurisdiction would conflict with that of the Province if civil rights were to be read as an expression of unlimited scope. But, as has already been pointed out the expression must be construed consistently with various powers conferred by Sections 91 and 92, which restrict its literal scope. It is enough for the present purposes to say that the Province cannot legislate so as to deprive a Dominion company of its status and powers. This does not mean that these powers can be exercised in contravention of the laws of the Province restricting the rights of the public in the Province generally. What it does mean is that the status and powers of a Dominion company as such cannot be destroyed by Provincial legislation. This conclusion appears to their Lordships to be in full harmony with what was laid down by the Board in Citizens Insurance Company of Canada v. Parsons, Colonial Building and Investment Association v. Attorney-General for Quebec and Bank of Toron o v. Lambe,"

It was held that the law of the Province requiring the company to obtain a Provincial licence and to register it in the Province as a condition of exercising its powers conferred upon it by the Dominion legislation was invalid and inoperative. The Provincial legislation in that case affected the status and corporate capacity of a Dominion company and the powers which such status and capacity carried with it. The pecular position of the Canadian Parliament in respect of companies is that it possesses not only the power to incorporate but also the authority to legislate regulating the powers of those companies, under Section 91, item 2, "regulation of trade and commerce." Any provincial law therefore which trenches upon such power is undoubtedly invalid. To the same effect is the decision in Great, West Saddlery Company Limited v. King. There also a company was incorporated under the Dominion law with power to trade in any Province. A Provincial law required that such companies should not carry on their business of trading in the Province unless registered or licensed therein. The legislation of the Province was held invalid and ultra vires. Viscount Haldane, L.C., states the position at page 100 in these words:—

"If therefore in legislating for the incorporation of companies under Dominion law and invalidly endowing them with powers, the Dominion Parliament has by necessary implication given these companies a status which enables them to exercise these powers in the Provinces, they cannot be in terfered with by any Provincial law in such a fashion as to derogate from their status and their consequet capacities, or, as the result of this restriction, to prevent them from exercising the powers conferred on them by Dominion law. Their Lordships, however, observed that when a company has been incorporated by the Dominion Government with powers to trade in any Province it may nonetheless, consistently with the general scheme, be subject to Provincial laws of general application, such as laws imposing taxes, or relating to mortmain, or even requiring licences for certain purposes or as to the forms of contract; but they were careful not to say that the sanctions by which such Provincial laws might be enforced could validly be so directed by the Provincial Legislatures as indirectly to sterilize or even to effect, if the local laws were not obeyed, the destruction of the capacities and powers which the Dominion had validly conferred. To have said so would have been to misread the scheme of the British North America Act, which is one that establishes interlacing and independent legislative authorities. Within the spheres allotted to them by the Act, the Dominion and the Provinces are rendered on general principle co-ordinate Governments. As a consequence, where one has legislative power the other has not, speaking broadly, the capacity to pass laws which will interfere with its exercise. What cannot be done directly cannot be done indirectly. This is a principle which has to be kept closely in view in testing the validity of the Provincial legislation under consideration as affecting Dominion companies."

In Attorney-General for Manitoba v. Attorney-General for Canada, the Judicial Committee had to consider the validity of a Provincial law which prohibited the Dominion company from selling their own shares within the Province without the consent of the Provincial commissioner or Board. In the light of the decisions already referred to it was held by Viscount Sumner that the Provincial law affected the status and capacity conferred on the companies by Dominion legislation and it was ultra vires. It was observed at page 266 as follows:

"An artificial person, incorporated under the powers of the Dominion with certain objects, invested by these powers with capacities to trade in pursuit of those objects and with the status and capacities of a Dominion incorporation, is under these Acts liable in the most ordinary course of business to be still-born from the moment of incorporation, sterilized in all its functions and activities, thwarted and interfered with in its first and essential endeavours to enter on the beneficial and active employment of its powers, by the necessity of applying to a Provincial executive for permission to begin to act and to raise its necessary capital, a permission which may be subjected to conditions or refused altogether according to the view, which in their discretion that executive may take of the plans, promises and prospects of a creation of the Dominion."

These decisions clearly establish that the Provincial Legislature has no power to enact a law which affects the status and capacity of a Dominion company and also to sterilize and nullify such company from exercising its functions and activities in pursuance of the powers conferred upon it by a Dominion legislation. The two things, the status and capacity of a company on the one hand and the powers and activities and functions which it can exercise, are different and the power of the Dominion Parliament to legislate on these subjects is derived from two different sources, the former under the general power under Section 91 and the latter under the power to regulate trade and commerce.

But these decisions do not really help the petitioners in their contention that the impugned Act deprives a part of the business of the companies and therefore it is ultra vires the Provincial Legislature, as the subject-matter of legislation is within the exclusive competence of the Central Legislature under item 33. The preamble to the impugned Act states that the object is to make provision for the acquisition of undertakings in the Province of Madras engaged in the supply of electricity. The objects and reasons of the bill as published in the Fort St. George Gazette make it abundantly clear that the purpose of the acquisition was for the public benefit. It is no doubt true that legislative proceedings cannot be called in aid to interpret a statute or its provisions. They are however certainly not excluded from consideration when one has to determine the object and purpose of an Act—see Chiranjit Lal Chowdhury v. The Union of India. The Act applies to all undertakings of licensees whether the licensees are natural persons or artificial persons like companies or local authorities or partnerships. The subject-matter of the Act, in my opinion, is the acquisition of undertakings supplying electricity. It may be that as a result of the acquisition under the powers conferred by this Act some of the companies who happen to be licensees may be deprived of part of their business. But the Act in no way affects the capacity or the status of the company. It does not alter its constitution. It takes away only part of the business. In the light of the decisions already referred to it cannot be said that the subject-matter of the impugned Act is "Corporations" within item 33 of List I of the Seventh Schedule. On the other hand, it comes within the purview of "electricity" in the Concurrent List.

Reference was made by learned counsel for the petitioners to the decisions of the Judicial Committee interpreting "banking" which is item 15 in Section 91 of the British North America Act. I do not see how these decisions support the contention of the petitioners. It has been held in Tennant v. The Union Bank of Canada, that under this item the Dominion Parliament has the authority conferred upon it by the words, "Banking, Incorporation of Banks, and the Issue of Paper Money" not only to enact a law relating to incorporation of banks but also a law conferring upon such companies the power or the privilege of carrying on the business of bankers. The word "banking" is wide enough, it is said, to embrace "every transaction coming within the legitimate business of a banker." The power under this head therefore extends not only to the incorporation of banks but also to legislate in respect of the powers which a bank would exercise as appertaining to its business of banking. To the same effect is the decision in Attorney-General for Canada v. Attorney-General for the Province of Quebec. It was that the transaction of receiving from depositors bank deposits repaying such deposits to the depositors is within the purview of the legitimate business of banking. The pith and substance of the Act which was impugned in that case related to the business of banking and it was held ultra vires the Provincial Legislature. Of course, if the Subject-matter of the legislation in question is undoubtedly and in substance and in effect within the power exclusively assigned to the Dominion Legislature, it is not open to the Provincial Legislature to trench on such a field with immunity. A legislation which transgresses the limits of the Provincial field will undoubtedly be ultra vires. Of course, as pointed out by the Judicial Committee in Attorney-General for Alberta v. Attorney-General for Canada, it is not open to either the Dominion Parliament or the Province under the guise or the pretence of exercising a legislative power in relation to a subject or subjects assigned to their respective jurisdictions to carry out the object so as to trespass on the jurisdiction of another.

It follows that the impugned Act is intra vires the Provincial Legislature.

The next point for consideration is whether all or any of the provisions of the impugned Act offend Section 299(2) of the Government of India Act and Articles 19(1)(f) and 31 of the Constitution. The President certified the Act under Article 31(6) of the Constitution. The petitioners therefore are faced with an insuperable difficulty by reason of the certificate. Article 31(6) states:—

"Any law of the State enacted not more than eighteen months before the commencement of this Constitution may within three months from such commencement be submitted to the President for his certification; and thereupon, if the President by public notification so certifies it shall not be called in question in any Court on the ground that it contravenes the provisions of clause (2) of this article or has contravened the provisions of sub-section (2) of Section 299 of the Government of India Act, 1935."

On plain reading of this provision, it seems to me, that it is not open to the petitioners to urge before us any grounds based on the assumption that the Act contravenes the provisions of clause (2) of Article 31 or Section 299(2) of the Government of India Act, 1935. Under Section 299(2) of the Government of India Act.

"Neither the Federal nor a Provincial Legislature shall have power to make any law authorising the compulsory acquisition for public purposes of any land, or any commercial or industrial undertaking, or any interest in, or in any company owning, any commercial or industrial undertaking, unless the law provides for the payment of compensation for the property acquired and either fixes the amount of the compensation, or specifies the principles on which, and the manner in which, it is to be determined."

If the complaint therefore is that just compensation was not provided by the Act and even if this contention is well-founded, in view of the certificate granted by the President that ground is not open to the petitioners. If this clause however is construed as imposing a limitation on the Legislatures, Federal or Provincial to acquire only for a public purpose and as an essential condition for the acquisition, assuming the contention is correct, even such an objection is not open in view of the certificate. I do not for a moment agree with the contention that this sub-section imposes a condition that the acquisition should only be for a public purpose as on a plain reading of the clause it only requires that provision should be made for payment of compensation for the property acquired either by fixing the amount of compensation or at any rate specifying the principles and the manner in which it has to be determined. It is no doubt true as appears in the Joint Parliamentary Committee Report that the framers of the Government of India Act, 1935, originally intended that the power of acquisition should be confined only to public purposes. But while a limited restriction in respect of acquisition of land is imposed by sub-section (3) of that section, there is no express language requiring that the acquisition should be only made if it is required for a public purpose, a power analogous to the power of eminent domain under the American Constitution. If the contention is open, it should have necessitated the consideration of the question whether or not the acquisition is for a public purpose and whether the compensation should be just compensation as required under the Australian and American Constitutions. It has been held in Missouri Pacific Railway v. State of Nebraska, that taking by a State of the private property of one person or corporation without the owner's consent, for the private use of another, is not due process of law, and is a violation of the 14th Amendment of the Constitution of the United States. It was treated as a case of taking property for a purpose other than a public one and therefore was not covered by the power of eminent domain. That the purpose in the present case is a public purpose is beyond doubt in view of the objects and reasons stated when the bill was published and made clear in the course of the debate. It is therefore unnecessary to consider in this case, these interesting questions. The Act, therefore, cannot be attacked on the ground that it contravenes either Section 299(2) of the Government of India Act, 1935, or Article 31(2) of the Constitution.

It is however open notwithstanding the certificate, for the petitioners to challenge the validity of the Act on grounds other than those which are prohibited by the certificate. It does not prevent them from establishing that the Act is in fact beyond the competency of the Legislature or that even apart from Section 299(2), the Legislature could acquire property only for a public purpose. I do not wish to express any final opinion whether or not it is open to the Gevernment to acquire property for a purpose other than a public purpose under the provisions of the Constitution as it is unnecessary to decide that question in the present case.

The only other objection is that it takes away the fundamental right recognised and conferred by Article 19(1)(f) of the Constitution, in the first place that sub-clause applies only to "citizens" and a company incorporated under the Indian Companies Act does not satisfy the requirements of the definition of citizen in Article 5. The petitioners, therefore, are not entitled to invoke Article 19. This question was recently decided by my Lord the Chief Justice and myself in C.M.P. No. 4652 of 1951. Apart from that the right to acquire, hold and dispose of property is subject to the right to take away property under Article 31. Under Article 31(1) which corresponds to Section 299(1) of the Government of India Act, 1935, no person shall be deprived of his property save by authority of law and sub-clause (2) of that article provides for acquisition. Deprivation of property may be brought about for different reasons. It may be confiscation or may be forfeiture and not necessarily acquisition. Limits on the power of acquisition are prescribed by sub-clause (2) of Article 31 and sub-clauses (3) and (4) of the same article. Under the present Constitution in List I, the Union List, item 33 relates to "acquisition or requisitioning of property for the purposes of the Union" and in the State List, item 36 "acquisition or requisitioning of property, except for the purposes of the Union, subject to the provisions of entry 42 in List III (the Concurrent List)." Item 42 of that list is "principles on which compensation for property acquired or requisitioned for the purposes of the Union or of a State or for any other public purpose is to be determined, and the form and the manner in which such compensation is to be given." The legislative power to enact a law relating to acquisition of property is derived from these items in the various lists. A person may acquire for himself and hold and dispose of property subject to reasonable restrictions which may be imposed by legislation under sub-clause (5) of Article 19, but all this is subject to the overriding power of acquisition conferred and recognised by Article 31. The impugned Act is not in any manner inconsistent with the fundamental rights enumerated in Part III of the Constitution. It is not seriously disputed that some of the provisions of the Act are invalid as they encroach upon the rights of the shareholders and the directors of the company under the Indian Companies Act. It is not seriously disputed that rule 19 of the rules framed under the Act compelling the liquidation and winding up of a company whose undertaking is taken over under the powers conferred by the Act is beyond the legislative power of the Province. That rule must therefore be declared invalid. The provision authorising the government to appoint an accredited representative in case the shareholders of a company default in making the appointment seems to me to deprive altogether the rights of the company and the directors. The accredited representative nominated by the Government in such cases is given the power to bind by his assurances and by the statements and representations, the licensee. He is the person who has to choose the basis of compensation (a), (b) or (c), and is also the person authorised to bring about arbitration in respect of matters enumerated in Section 3. Practically a nominee of the Government is the person clothed with full authority to deal with all matters relating to the licensee on his behalf. 4 If the shareholders do not appoint the accredited representative within the time allowed it is open to the Government to proceed ex parte regarding the fixation of compensation and drive the licensee to a court for settling the amount of compensation or a machinary may be provided by which the directors or the shareholders may be compelled to appoint an accredited representative on their behalf. The power conferred on the Government to appoint an accredited representative where the shareholders fail to appoint one seems to me to be invalid. Section 15 of the Act terminates the managing agency agreement between the licensee and his managing agent and the managing director on the vesting date. The two companies have other businesses which they can legitimately carry on and there does not seem to be any necessity to put an end to the agency agreement in toto. It may be that this provision, as pointed out by the learned Advocate General, was enacted for the benefit of the managing agents, as otherwise they would not have been entitled to any remuneration or commission. But there is no reason to put an end to the agreement altogether. As suggested by my Lord the Chief Justice in the course of the arguments, the difficulty can be got over by reading Section 15 as terminating the managing agency agreement between the licensee on the one hand and his managing agent or managing director on the other, restricting it in so far as it relates to the undertaking covered by the licence and no more. In this view there is no necessity to hold that Section 15 is also invalid.

For these reasons, I am of opinion that subject to the modifications mentioned above, the petitions fail and must be dismissed with costs.

Rajamannar, C.J.—I agree entirely and have nothing to add.

 

[1951] 21 COMP CAS 33 (SC)

SUPREME COURT OF INDIA

Chiranjilal Chaudhari

v.

Union of India

KANIA, C.J.

FAZL ALI, PATANJALI SASTRI, MUKHERJEA AND DAS, JJ.

PETITION NO. 72 OF 1950

DECEMBER 4, 1950

V.K.T. Chart, J.S. Dawdo, Alladi Kuppuswami and C.R. Pattabhi Raman, M. S.K. Aiyengar, Agent, for the Petitioner.

M.C. Setalvad, G.N. Joshi, P.A. Mehta, G.N. Joshi and Rajinder Narain, for the Opposite Parties.

 

JUDGMENT

Kama, C. J.—This is an application by the holder of one ordinary share of the Sholapur Spinning and Weaving Co. Ltd. for a writ of mandamus and certain other reliefs under article 32 of the Constitution of India. The authorized capital of the company is Rs. 48 lakhs and the paid-up capital is Rs. 32 lakhs, half of which is made up of fully paid ordinary shares of Rs. 1,000. each.

I have read the judgment prepared by Mr. Justice Mukherjea. In respect of the arguments advanced to challenge the validity of the impugned Act under articles 31 and 19 of the Constitution of India, I agree with his line of reasoning and conclusion and have nothing more to add.

On the question whether the impugned Act infringes article 14, two points have to be considered. The first is whether one individual shareholder can, under the circumstances of the case and particularly when one of the respondents is the company which opposes the petition, challenge the validity of the Act on the ground that it is a piece of discriminatory legislation, creates inequality before the law and violates the principle of equal protection of the laws under article 14 of the Constitution of India. The second is whether in fact the petitioner has shown that the Act runs contrary to article 14 of the Constitution. In this case having regard to my conclusion on the second point, I do not think it is necessary to pronounce a definite opinion on the first point. I agree with the line of reasoning and the conclusion of Mr. Justice Mukherjea as regards the second point relating to the invalidity of the Act on the ground that it infringes article 14 of the Constitution and have nothing more to add.

In my opinion therefore this petition fails and is dismissed with costs.

Fazl Ali, J.—I am strongly of the opinion that this petition should be dismissed with costs.

The facts urged in the petition and the points raised on behalf of the petitioner before us are fully set forth in the judgment of my brethren, Sastri, Mukherjea and Das, JJ., and I do not wish to repeat them here. It is sufficient to say that the main grounds on which the Sholapur Spinning and Weaving Company (Emergency Provisions) Act, 1950 (XXVIII of 1950), which will hereinafter be referred to as "the Act", has been assailed, is that it infringes three fundamental rights, these being :—

        (1)            the right to property secured by article 31 of the Constitution ;

(2)            the right to acquire, hold and dispose of property, guaranteed to every citizen by article 19(1)(f); and

        (3)            the right to equal protection of the laws, guaranteed by article 14.

It has been held in a number of cases in the United States of America that no one except those whose rights are directly affected by a law can raise the question of the constitutionality of that law. This principle has been very clearly stated by Hughes, J.,in McCabe v. Atchison in these words :—

"It is an elementary principle that in order to justify the granting of this extraordinary relief, the complainant's need of it and the absence of an adequate remedy at law must clearly appear. The complainant cannot succeed because someone else may be hurt. Nor does it make any difference that other persons who may be injured are persons of the same race or occupation. It is the fact, clearly established, of injury to the complainant—not to others—which justifies judicial interference."

On this statement of the law, with which I entirely agree, the scope of the discussion on this petition is greatly restricted at least in regard to the first two fundamental rights. The company and the shareholders are in law separate entities, and if the allegation is made that any property belonging to the company has been taken possession of without compensation or the right enjoyed by the company under article 19(1)(f) has been infringed, it would be for the company to come forward to assert or vindicate its own rights and not for any individual shareholder to do so. In this view, the only question which has to be answered is whether the petitioner has succeeded in showing that there has been an infringement of his rights as a shareholder under articles 31 and 19(1)(f) of the Constitution. This question has been so elaborately dealt with by Mukherjea, J., that I do not wish to add anything to what he has said in his judgment, and all that is necessary for me to say is that I adopt his conclusions, without committing myself to the acceptance of all his reasonings.

The only serious point, which in my opinion, arises in the case is whether Article 14 of the Constitution is in any way infringed by the impugned Act. This article corresponds to the equal protection clause of the Fourteenth Amendment of the Constitution of the United States of America, which declares that "no State shall deny to any person within its jurisdiction the equal protection of the laws." Professor Willis dealing with this clause sums up the law as prevailing in the United States in regard to it in these words:—

"Meaning and effect of the guaranty.—The guaranty of the equal protection of the laws means the protection of equal laws. It forbids class legislation, but does not forbid classification which rests upon reasonable grounds of distinction. It does not prohibit legislation, which is limited either in the objects to which it is directed or by the territory within which it is to operate, 'It merely requires that all persons subjected to such legislation shall be treated alike under like circumstances and conditions both in the privileges conferred and in the liabilities imposed.' 'The inhibition of the amendment………….was designed to prevent any person or class of persons from being singled out as a special subject for discriminating and hostile legislation.' It does not take from the states the power to classify either in the adoption of police laws, or tax laws, or eminent domain laws, but permits to them the exercise of a wide scope of discretion, and nullifies what they do only when it is without any reasonable basis. Mathematical nicety and perfect equality are not required. Similarity, not identity of treatment, is enough. If any state of facts can reasonably be conceived to sustain a classification, the existence of that state of facts must be assumed. One who assails a classification must carry the burden of showing that it does not rest upon any reasonable basis". [Page 579, 1st Edition of Constitutional Law by Prof. Willis.]

Having summed up the law in this way, the same learned author adds :—"Many different classifications of persons have been upheld as constitutional. A law applying to one person or one class of persons is constitutional if there is sufficient basis or reason for it."

'There can be no doubt that article 14 provides one of the most valuable and important guarantees in the Constitution which should not be allowed to be whittled down, and, while accepting the statement of Professor Willis as a correct exposition of the principles underlying this guarantee, I wish to lay particular emphasis on the principle enunciated by him that any classification which is arbitrary and which is made without any basis is no classification and a proper classification must always rest upon some difference and must bear a reasonable and just relation to the things in respect of which it is proposed.

The petitioner's case is that the shareholders of the Sholapur Company have been subjected to discrimination vis a vis the shareholders of other companies, inasmuch as Section 13 of the Act subjects them to the following disabilities which the shareholders of other companies governed by the Indian Companies Act are not subject to :—

"(a)   It shall not be lawful for the shareholders of the Company or any other person to nominate or appoint any person to be a director of the Company.

(b)    No resolution passed at any meeting of the shareholders of the Company shall be given effect to unless approved by the Central Government.

(c)    No proceeding for the Winding up of the Company or for the appointment of a receiver in respect thereof shall lie in any court unless by or with the sanction of the Central Government."

Prima facie, the argument appears to be a plausible one, but it requires a careful examination, and, while examining it, two principles have to be borne in mind: (1) that a law may be constitutional even though it relates to a single individual, in those cases where on account of some special circumstances or reasons applicable to him and not applicable to others, that single individual may be treated as a class by himself; (2) that it is the accepted doctrine of the American courts, which I consider to be well-founded on principle, that the presumption is always in favour of the constitutionality of an enactment, and the burden is upon him who attacks it to show that there has been a clear transgression of the constitutional principles. A clear enunciation of this latter doctrine is to be found in Middleton v. Texas Power and Light Co., in which the relevant passage runs as follows:—

"It must be presumed that a legislature understands and correctly appreciates the need of its own people, that its laws are directed to problems made manifest by experience and that its discriminations are based upon adequate grounds."

The onus is therefore on the petitioner to show that the legislation which is impugned is arbitrary and unreasonable and there are other companies in the country which should have been subjected to the same disabilities, because the reasons which led the Legislature to impose State control upon the Sholapur Company are equally applicable to them. So far as article 14 is concerned, the case of the shareholders is dependent upon the case of the company and if it could be held that the company has been legitimately subjeted to such control as the Act provides without violation of the article, that would be a complete answer to the petitioner's complaint.

Now, the petitioner has made no attempt to discharge the burden of proof to which I have referred, and we are merely asked to presume that there must necessarily be other companies also which would be open to the charge of mismanagement and negligence. . The question cannot in my opinion be treated so lightly. On the other hand, how important the doctrine of burden of proof is and how much harm can be caused by ignoring it or tinkering with it, will be fully illustrated, by referring to the proceedings in the Parliament in connection with the enactment of the Act, where the circumstances which necessitated it are clearly set out. I am aware that legislative proceedings cannot be referred to for the purpose of construing an Act or any of its provisions, but I believe that they are relevant for the proper understanding of the circumstances under which it was passed and the reasons which necessitated it.

A reference to the Parliamentary proceedings shows that sometime ago, a representation was made on behalf of a section of the shareholders of the Sholapur Company to the Rigistrar of Joint Stock Companies in Bombay, against the conduct of the managing agents, and the Government of Bombay was moved to order a special inquiry into the affairs of the company. For the purpose of this inquiry, two special inspectors were appointed by the Bombay Government and their report revealed "certain astounding facts" and showed that the Mill had been grossly mismanaged by the Board of Directors and the managing agents. It also revealed that the persons who were responsible for the mismanagement were guilty of certain acts and omissions which brought them under the purview of the law. The Bombay Government accepted the report of the inspectors and instructed the Advocate-General of Bombay to take legal proceedings against certain persons connected with the management of the company. Thereafter, the Government of India was approched by the Provincial Government and requested to take special action in order to secure the early opening of the Mill. The Government of India found that they had no power to take over the management of a particular Mill, unless its working could be ensured through the existing managament acting under the direction of a Controller appointed under the Essential Supplies Act, but they also found that a peculiar situation had been created in this case by the managing agents themselves being unable or unwilling to conduct the affairs of the company in a satisfactory and efficient manner. The Government of India, as a matter of precaution and lest it should be said that they were going to interfere unnecessarily in the affairs of the company and were not allowing the existing provisions of the law to take their own course, consulted other interests and placed the matter before the Standing Committee of the Industrial Advisory Council where a large number of leading industrialists of the country were present, and ultimately it Was realized that this was a case where the Government could rightly and properly intervene and there would be no occasion for any criticism coming from any quarter. It appears from the discussion on the floor of the House that the total number of weaving and spinning Mills which Were closed down for one reason or other was about 35 in number. Some of them are said to have closed for want of cotton, some due to overstocks, some for want of capital and some on account of mismanagement. The Minister for Industry, who sponsored the Bill, in explaining what distinguished the case of the Sholapur Mill from the other Mills against whom there might be charges of mismanagement, made it clear in the course of the debate that "certain conditions had to be fulfilled before the Government can and should intervene," and he set out these conditions as follows:—

"(1)  The undertaking must relate to an industry which is of national importance. Not each and every undertaking which may have to close down can be taken charge of temporarily by Government.

(2)    The undertaking must be an economic unit. If it appears that it is completely uneconomic and cannot be managed at all, there is no sense in Government taking charge of it. If anything, it will mean the Government will have to waste money which belongs to the taxpayer on an uneconomic unit.

(3)    There must be a technical report as regards the condition of the plants, machinery, etc., which either as they stand, or after necessary repairs and reconditioning can be properly utilised.

(4)    Lastly,—and this is of considerable importance—there must be a proper enquiry held before Government take any action. The enquiry should show that the managing agents have so misbehaved that they are no longer fit and proper persons to remain in charge of such an important undertaking." (Pages 2394-5 of Vol. III, No. 14, Parliamentary Debates, 31st March, 1950).

It appears from the same proceedings that the Sholapur Mill is one of the largest Mills in Asia and employs 13,000 workers. Per shift, it is capable of producing 25 to 30 thousand pounds of yarn, and also one lakh yards of cloth. 'It was working two shifts when it was closed down on the 29th August, 1949. The closure of the Mill meant a loss of 25 lakhs yards of cloth and one and a half lakhs pounds of yarn per month. Prior to 1947, the highest dividend paid by the company was Rs. 525 per share and the lowest Rs. 100, and, in 1948, when the management was taken over by the managing agents who have been removed by the impugned Act, the accounts showed a loss of Rs. 30 lakhs, while other textile companies had been able to show very substantial profits during the same period.

Another fact which is brought out in the proceedings is that the managing agents had acquired control over the majority of the shares of the company and a large number of shareholders who were dissatisfied with the management had been rendered powerless and they could not make their voice heard. By reason of the preponderance of their strength, the managing agents made it impossible for a controller under the Essential Supplies Act to function and they also made it difficult for the company to run smoothly under the normal law.

It was against this background that the Act was passed, and it is evident that the facts which were placed before the Legislature with regard to the Sholapur Mill were of an extraordinary character, and fully justified the company being treated as a class by itself. There were undoubtedly other Mills which were open to the charge of mismanagement, but the criteria adopted by the Government which, in my opinion, cannot be said to be arbitrary or unreasonable, is not applicable to any of them. As we have seen, one of the criteria was that a mere allegation of mismanagement should not be enough and no drastic step such as is envisaged in the Act should be taken without there being a complete enquiry. In the case of the Sholapur Mill, a complete enquiry had been made and the revelations which were made as a result of such enquiry were startling.

We are familiar with the expression "police power" which is in vogue in the United States of America. This expression simply denotes that in special cases the State can step in where its intervention seems necessary and impose special burdens for general benefit. As one of the judges has pointed out, "the regulations may press with more or less weight upon one than upon another, but they are designed not to impose unequal or unnecessary restrictions upon anyone, but to promote, with as little individual inconvenience as possible, the general good." (Per Field, J., in Barbier v. Connolly). It need not be emphasized that the principles underlying what is known as police power in the United States of America are not peculiar to that country, but are recognized in every modern civilized State. Professor Willis dealing with the question of classification in exercise of police power makes the following observations :—

"There is no rule for determining when classification for the police power is reasonable. It is a matter for judicial determination, but in determining the question of reasonableness the Courts must find some economic, political or other social interest to be secured, and some relation of the classification to the objects sought to be accomplished. In doing this the Courts may consider matters of common knowledge, matters of common report, the history of the times, and to sustain it they will assume every state of facts which can be conceived of as existing at the time of legislation. The fact that only one person or one object or one business or one locality is affected is not proof of denial of the equal protection of the laws For such proof it must be shown that there is no reasonable basis for the classification." (Page 580 of "Constitutional Law", 1st Edition, by Professor Willis).

In this particular case, the Government initially took control of the Sholapur Company by means of an Ordinance (Ordinance No. II of 1950), of which the preamble runs as follows :—

"Whereas on account of mismanagement and neglect a situation has arisen in the. affairs of the Sholapur Spinning and Weaving Company, Limited, which has prejudicially affected the production of an essential commodity' and has caused serious unemployment amongst a certain section of the community ;

And whereas an emergency has arisen which renders it necessary to make special provision for the proper management and administration of the aforesaid company;

Now, therefore………………………"

In the course of the Parliamentary debate, reference was made to the fact that the country was facing an acute cloth shortage, and one of the reason which apparently influenced the promulgation of the Ordinance and the passing of the Act was that the mismanagement of the company had gravely affected the production of an essential commodity. The facts relating to the mismanagement of this Mill were carefully collected and the mischief caused by the sudden closing of the Mill to the shareholders as well as to the general public were fully taken into consideration. Therefore, it seems to me that to say that one particular Mill has been arbitrarily and unreasonably selected and subjected to discriminatory treatment would be an entirely wrong proposition.

Article 14 of the Constitution, as already stated, lays down an important fundamental right, which should be closely and vigilantly guarded, but, in construing it, we should not adopt a doctrinaire approach which might choke all beneficial legislation.

The facts to which I have referred are to be found in a public document, and, though some of them may require further investigation forming as they do part of a one-sided version, yet they furnish good prima facie grounds for the exercise of the utmost caution in deciding this case and for not departing from the ordinary rule as to the burden of proof. In the last resort, this petition can be disposed of on the simple ground that the petitioner has not discharged the onus which lies upon him, and I am quite prepared to rest my judgment on this ground alone.

I think that the petitioner has failed to make out any case for granting the writs or directions asked for, and the petition should therefore be dismissed with cost.

Patanjali Sastri, J.—This is an application under article 32 of the Constitution seeking relief against alleged infringement of certain fundamental rights of the petitioner.

The petitioner is a shareholder of the Sholapur Spinning and Weaving Co. Ltd., Sholapur, in the State of Bombay, (hereinafter referred to as "the company"). The authorised share capital of the company consisted of 1,590 fully paid up ordinary shares of Rs. 1,000 each, 20 fully paid up ordinary shares of Rs. 500 each and 32,000 partly paid up redeemable cumulative preference shares of Rs. 100 each of which Rs. 50 only was paid up. Of these, the petitioner held one ordinary share in his own name and 80 preference shares which, however, having been pledged with the Bank of Baroda Ltd., now stand registered in the Bank's name.

The company was doing flourishing business till disputes arose recently between the management and the employees, and in or about August, 1949, the Mills were temporarily closed and the company, Which was one of the largest producers of cotton textiles, ceased production. Thereupon, the Governor-General intervened by promulgating on the 9th January, 1950, an Ordinance called the Sholapur Spinning and Weaving Company (Emergency Provisions) Ordinance (II of 1950), which empowered the Government of India to take over the control and management of the company and its properties and effects by appointing their own directors and to delegate all or any of their powers to the Provincial Government. In exercise of the powers thus delegated, the Government of Bombay appointed respondents 3 to 9 as directors to take charge of the management and administration of the properties and affairs of the company. Subsequently, on 10th April, 1950, the Ordinance was repealed and was replaced by an Act of Parliament containing similar provisions, namely the Sholapur Spinning and Weaving Company (Emergency Provisions) Act (XXVIII of 1950) (hereinafter referred to as the “impugned Act").

The petitioner complains that the impugned Act and the action of the Government of Bombay pursuant thereto have infringed the fundamental rights conferred on him by articles 14, 19 and 31 of the Constitution, with the result that the enactment is unconstitutional and void, and the interference by the Government in the affairs of the company is unauthorised and illegal. He accordingly seeks relief by way of injunction and mandamus against the Union of India and the State of Bombay impleaded as respondents 1 and 2 respectively in these proceedings and against respondents 3 to 9 who are now in management as already stated. The company is impleaded pro forma as the 10th respondent.

Before discussing the issues involved, it is necessary to examine the relevant provisions of the impugned Act in order to see in what manner and to what extent the petitioner's rights have been affected thereby. The preamble to the repealed Ordinance stated that "on account of mismanagement and neglect a situation has arisen in the affairs of the Sholapur Spinning and Weaving Company, Limited, which has prejudicially affected the production of an essential commodity and has caused serious unemployment amongst a certain section of the community and that an emergency has arisen which renders it necessary to make special provision for the proper management and administration of the aforesaid company." This preamble was not reproduced in the impugned Act. Section 3 empowers the Central Government to appoint as many persons as it thinks fit to be directors of the company "for the purpose of taking over its management and administration." Section 4 states the effect of the order appointing directors to be that (1) the old directors shall be deemed to have vacated their office, (2) the contract with the managing agents shall be deemed to have been terminated, (3) that the properties and effects of the company shall be deemed to be in the custody of the new directors who are to be "for all purposes" the directors of the company and "shall alone be entitled to exercise all the powers of the directors of the company whether such powers are derived from the Companies Act or from the memorandum or articles of association or otherwise." Section 5 defines the powers of the new directors. They are to manage the business of the company "subject to the control of the Central Government" and shall have the power to raise funds offering such security as they think fit, to carry out necessary repairs to the machinery or other property in their custody and to employ the necessary persons and define the necessary conditions of their service. Section 12 provides for the restoration of the management to directors nominated by the shareholders when the purpose of the Government's intervention has been fulfilled. Section 13 is important and reads thus:

"13.       Application of the Companies Act.—(1) Notwithstanding anything contained in the Companies Act or in the memorandum or articles of association of the Company—

(a)    it shall not be lawful for the shareholders of the Company or any other person to nominate or appoint any person to be a Director of the Company;

(b)    no resolution passed by any meeting of the shareholders of the Company shall be given effect to unless approved by the Central Government;

(c)    no proceeding for the winding up of the Company or for the appointment of a receiver in respect thereof shall be in any Court unless by or with the sanction of the Central Government.

(2)  Subject to the provisions contained in sub-section (1) and to the other provisions of this Act, and subject to such exceptions, restrictions and limitations as the Central Government may, by notified order, specify, the Companies Act shall continue to apply to the Company in the same manner as it applied thereto before the issue of the notified order under Section 3."

By Section 14 the provisions of the Act are to have effect "notwithstanding anything inconsistent therewith contained in any other law or in any instrument having effect by virtue of any law other than this Act." Section 16 provides for delegation of powers to the Government of Bombay to be exercised subject to the directions of the Central Government, and Section 17 bars suits or other proceedings against the Central Government or the Government of Bombay or any director “for any damage caused or likely to be caused by anything which is in good faith done or intended to be done in pursuance of this Act."

As a result of these provisions all the properties and effects of the company passed into the absolute power and control of the Central Government or its delegate the Government of Bombay, and the normal functioning of the company, as a corporate body came to an end. The shareholders have been reduced to the position of interested, if helpless, onlookers while the business is carried on against their will and, may be, to their disadvantage by the Government's nominees. The declared purpose of this arrangement was, according to the preamble of the repealed Ordinance to keep up the production of an essential commodity and to avert serious unemployment amongst a certain section of the community.

The question accordingly arises whether the impugned Act, which thus affects the petitioner and his co-shareholders, while leaving untouched the shareholders of all other companies, including those engaged in the production of essential commodities, denies to the petitioner the equal protection of the laws under article 14 of the Constitution, The correct approach to this question is first to see what rights have been conferred or protection extended to persons similarly situated. The relevant protection is to be found in the provisions of the Indian Companies Act which regulates the rights and obligations of the shareholders of incorporated companies in India. Section 21 of that Act assures to the shareholders the protection of the stipulations contained in the memorandum and articles of association by constituting them a binding contract, so that neither the company nor the shareholders have the power of doing anything inconsistent therewith. The basic right of the shareholders to have their undertaking managed and conducted by the directors of their own choice is ensured by Section 83B. Their right to exercise control and supervision over the management by the directors by passing resolutions at their general meeting is regulated by various provisions of the Act. The important safeguard of winding up the company in certain unfavourable circumstances either through Court or by the shareholders themselves voluntarily is provided for in Sections 162 and 203. All these rights and safeguards, on the faith of which the shareholders embark their money in their undertaking, are abrogated by the impugned Act in the case of the shareholders of this company alone. In fact, the Central Government is empowered to exclude, restrict or limit the operation of any of the provisions of the Companies Act in relation to this company. It is thus plain that the impugned Act denies to the shareholders of this particular company the protection of the law relating to incorporated joint stock companies in this country as embodied in the Companies Act and is prima facie within the inhibition of article 14.

It is argued, however, that article 14 does not make it incumbent on the Legislature always to make laws applicable to all persons generally, and that it is open to the Legislature to classify persons and things and subject them to the operation of a particular law according to the aims and objects which that law is designed to secure. In the present case, Parliament, it was said, came to the conclusion on the materials placed before them, that the affairs of the company were being grossly mismanaged so as to result in the cessation of production of an essential commodity and serious unemployment amongst a section of the community. In view of the detriment thus caused to public economy, it was competent for Parliament to enact a measure applicable to this company and its shareholders alone, and Parliament must be the Judge as to whether the evil which the impugned Act was designed to remedy prevailed to such an extent in this company as to call for special legislation. Reliance was placed in support of this argument on certain American decisions dealing with the equal protection clause of the Fourteenth Amendment of the Federal Constitution. It is, however, unnecessary to discuss those decisions here, for it is undeniable that equal protection of the laws cannot mean that all laws must be quite general in their character and application. A legislature empowered to make laws on a wide range of subjects must of necessity have the power of making special laws to attain particular objects and must, for that purpose, possess large powers of distinguishing and classifying the persons or things to be brought under the operation of such laws, provided the basis of such classification has a just and reasonable relation to the object which the legislature has in view. While, for instance, a classification in a law regulating labour in mines or factories may be based on age or sex, it may not be based on the colour of one's skin. It is also true that the class of persons to whom a law is made applicable may be large or small, and the degree of harm which has prompted the enactment of a particular law is a matter within the discretion of the law-makers. It is not the province of the court to canvass the legislative judgment in such matters. But the issue here is not whether the impugned Act was ill-advised or not justified by the facts on which it was based, but whether it transgresses the explicit constitutional restriction on legislative power imposed by article 14.

It is obvious that the legislation is directed solely against a particular company and shareholders and not against any class or category of companies and no question, therefore, of reasonable legislative classification arises. If a law is made applicable to a class of persons or things and the classification is based upon differentia having a rational relation to the object sought to be attained, it can be no objection to its constitutional validity that its application is found to affect only one person or thing. For instance, a law may be passed imposing certain restrictions and burdens on joint stock companies with a share capital of, say, Rs. 10 crores and upwards, and it may be found that there is only one such company for the time being to which the law could be applied. If other such companies are brought into existence in future, the law would apply to them also, and no discrimination would thus be involved. But the impugned Act, which selects this particular company and imposes upon it and its shareholders burdens and disabilities on the ground of mismanagement and neglect of duty on the part of those charged with the conduct of its undertaking, is plainly discriminatory in character and is, in my judgment, within the constitutional inhibition of article 14. Legislation based upon mismanagement or other misconduct as the differentia and made applicable to a specified individual or corporate body is not far removed from the notorious parliamentary procedure formerly employed in Britain of punishing individual delinquents by passing bills of attainder, and should not, I think, receive judicial encouragement.

It was next urged that the burden of proving that the impugned yet is unconstitutional lay on the petitioner, and that, inasmuch as he has failed to adduce any evidence to show that the selection of this company and its shareholders for special treatment under the impugned Act was arbitary, the application must fail. Whilst all reasonable presumption must undoubtedly be made in support of the constitutional validity of a law made by a competent legislature, the circumstances of the present case would seem, to my mind, to exclude such presumption. Hostile discrimination is writ large over the face of the impugned Act and it discloses no grounds for such legislative intervention. For all that appears no compelling public interests were involved. Even the preamble to the original Ordinance was omitted. Nor did respondents 1 and 2 file any counter-statement in this proceeding explaining the circumstances which led to the enactment of such an extraordinary measure. There is thus nothing in the record even by way of allegation which the petitioner need take steps to rebut. Supposing, however, that the impugned Act was passed on the same grounds as were mentioned in the preamble to the repealed Ordinance, namely, mismanagement and neglect prejudicially affecting the production of an essential commodity and causing serious unemployment amongst a section of the community, the petitioner could hardly be expected to assume the burden of showing, not that the company's affairs were properly managed, for that is not his case, but that there were also other companies similarly mismanaged, for that is what, according to the respondents, he should prove in order to rebut the presumption of constitutionality. In other words, he should be called upon to establish that this company and its shareholders were arbitrarily singled out for the imposition of the statutory disabilities. How could the petitioner discharge such a burden? Was he to ask for an investigation by the Court of the affairs of other industrial concerns in India where also there were strikes and lockouts resulting in unemployment and cessation of production of essential commodities ? Would those companies be willing to submit to such an investigation ? And even so, how is it possible to prove that the mismanagement and neglect which is said to have prompted the legislation in regard to this company was prevalent in the same decree in other companies ? In such circumstances, to cast upon the petitioner a burden of proof which it is as needless for him to assume as it is impracticable to discharge is to lose sight of the realities of the case.

Lastly, it was argued that the constitutionality of a statute could not be impugned under article 32 except by a person whose rights were infringed by the enactment, and that, inasmuch as there was no infringement of the individual right of a shareholder, even assuming that there was an injury to the company as a corporate body, the petitioner was not entitled to apply for relief under that article. Whatever validity the argument may have in relation to the petitioner's claim based on the alleged invasion of his right of property under article 31, there can be little doubt that, so far as his claim based on the contravention of article 14 is concerned, the petitioner is entitled to relief in his own right. As has been pointed out already, the impugned Act deprives the shareholders of the company of important rights and safeguards which are enjoyed by the shareholders of other joint stock companies in India under the Indian Companies Act. The petitioner is thus denied the equal protection of the laws in his capacity as a shareholder, and none the less so because the other shareholders of the company are also similarly affected. The petitioner is therefore entitled to seek relief under article 32 of the Constitution.

In this view it becomes unnecessary to consider the questions raised under articles 19 and 31 of the Constitution.

In the result, I would allow the application.

Mukherjea, J.—This is application presented by one Chiranjilal Chowdhuri, a shareholder of the Sholapur Spinning and Weaving Co. Ltd., (hereinafter referred to as the company), praying for a writ of mandamus and certain other reliefs under article 32 of the Constitution. The company, which has its registered, office within the State of Bombay and is governed by the provisions of the Indian Companies Act, was incorporated with an authorised capital of Rs. 48 lakhs divided into 1,590 fully paid up ordinary shares of Rs. 100 each, 20 fully paid up ordinary shares of Rs. 500 each and 32,000 partly paid up cumulative preference shares of Rs. 100 each. The present paid up capital of the company is Rs. 32 lakhs, half of which is represented by the fully paid up ordinary shares and the other half by the partly paid up cumulative preference shares. The petioner states in his petition that he holds in his own right three ordinary shares and eighty preference shares in tree company, though according to his own admission the preference shares do not stand in his name but have been registered in the name of the Bank of Baroda Ltd., with which the shares are pledged. According to the respondents, the petitioner is the registered holder of one single ordinary share in the company.

It appears that on July 27, 1949, the directors of the company gave a notice to the workers that the Mills would be closed, and pursuant to that notice, the Mills were in fact closed on the 27th of August following. On January 9, 1950, the Governor-General of India promulgated an Ordinance which purported to make special provisions for the proper management and administration of the company. It was stated in the preamble to the Ordinance that "on account of mismanagement and neglect, a situation has arisen in the affairs of the Sholapur Spinning and Weaving Company Limited which has prejudicially affected the production of an essential commodity and has caused serious unemployment amongst a certain section of the community," and it was on account of the emergency arising from this situation that the promulgation of the Ordinance was necessary. The provisions of the Ordinance, so far as they are material for our present purpose, may be summarised as follows :

Under Section 3 of the Ordinance, the Central Government may, at any time, by notified order, appoint as many persons as it thinks fit, to be directors of the company for the purpose of taking over its management and administration and may appoint one of such directors to be the Chairman. Section 4 provides that on the issue of a notified order under Section 3 all the directors of the company holding 'office as such immediately before the issue of the order shall be deemed to have vacated their offices, and any existing contract of management between the company and any managing agent thereof shall be deemed to have terminated. The directors thus appointed shall be for all purposes the directors of the company duly constituted under the Companies Act and shall alone be entitled to exercise all the powers of the directors of the company. The powers and the duties of the directors are specified in Section 5 and this section inter alia empowers the directors to vary or cancel, with the previous sanction of the Central Government, any contract or agreement entered into between the company and any other person if they are satisfied that such contract or agreement is detrimental to the interests of the company. Section 10 lays down that no compensation for premature termination of any contract could be claimed by the managing agent or any other contracting party. It is provided by Section 12 that so long as the management by the statutory directors continues, the shareholders would be precluded from nominating or appointing any person to be a director of the company and any resolution passed by them will not be effective unless it is approved of by the Central Government. This section lays down further that during this period no proceeding for winding up of the company, or for appointment of a receiver in respect thereof could be instituted in any court, unless it is sanctioned by the Central Government, and the Central Government would be competent to impose any restrictions or limitations as regards application of the provisions of the Indian Companies Act to the affairs of the company. The only other material provision is that contained in Section 15, under which the Central Government may, by notified order, direct that all or any of the powers exercisable by it under this Ordinance may be exercised by the. Government of Bombay.

In accordance with the provisions of Section 15 mentioned above, the Central Government, by notification issued on the same day that the Ordinance was promulgated, delegated all its powers exercisable under the Ordinance to the Government of Bombay. On the next day, the Government of Bombay appointed respondents 3 to 7 as directors of the company in terms of Section 3 of the Ordinance. On the 2nd of March, 1950, respondent No. 9 was appointed a director and respondent No. 5 having resigned his office in the meantime, respondent No. 8 was appointed in his place. On the 7th of April, 1950, the Ordinance was repealed and an Act was passed by the Parliament of India, known as the Sholapur Spinning and Weaving Company (Emergency Provisions) Act, which re-enacted almost in identical terms all the provisions of the Ordinance and provided further that all actions taken and orders made under the Ordinance shall be deemed to have been taken or made under the corresponding provisions of the Act. The preamble to the Ordinance was not however reproduced in the Act.

The petitioner in his petition has challenged the constitutional validity of both the Ordinance and the Act. As the Ordinance is no longer in force and all its provisions have been incorporated in the Act, it will not be necessary to deal with or refer to the enactments separately. Both the Ordinance and the Act have been attacked on identical grounds and it is only necessary to enumerate briefly what these grounds are.

The main ground put forward by the petitioner is that the pith and substance of the enactments is to take possession of and control over the Mills of the company which are its valuable assets and such taking of possession of property is entirely beyond the powers of the Legislature. The provisions of the Act, it is said, amount to deprivation of property of the shareholders as well as of the company within the meaning of article 31 of the Constitution and the restrictions imposed on the rights of the shareholders in respect to the shares held by them constitute an unjustifiable interference with their rights to hold property and as such are void under article 19(1)(f). It is urged that there was no public purpose for which the Legislature could authorise the taking possession or acquisition of property and such acquisition or taking of possession without payment of compensation is in violation of the fundamental rights guaranteed by article 31(2) of the Constitution, It is said further that the enactment denies to the company and its shareholders equality before the law, and equal protection of laws and thus offends against the provisions of article 14 of the Constitution. The only other material point raised is that the legislation is beyond the legislative competency of the Parliament and is not covered by any of the items in the legislative lists.

On these allegations, the petitioner prays, in the first instance, that it may be declared that both the Act and the Ordinance are ultra vires and void and an injunction may be issued restraining the respondents from exercising any of the powers conferred upon them by the enactments. The third and the material prayer is for issuing a writ of mandamus, "restraining the respondents 1 to 9 from exercising or purporting to exercise any powers under the said Ordinance or Act and from in any manner interfering with the management or affairs of the company under colour of or any purported exercise of any powers under the Ordinance or the Act." The other prayers are not material for our purpose.

Before I address myself to the merits of this application it will be necessary to clear up two preliminary matters in respect to which arguments were advanced at some lengths from the Bar. The first point relates to the scope of our enquiry in the present case and raises the question as to what precisely are the matters that have to be investigated and determined on this application of the petitioner. The second point relates to the form of relief that can be prayed for and granted in a case of this description.

Article 32(1) of the Constitution guarantees to everybody the right to move this Court by appropriate proceeding, for enforcement of the fundamental rights which are enumerated in Part III of the Constitution. Clause (2) of the article lays down that the Supreme Court shall have the power to issue directions or orders or writs including writs in the nature of habeas corpus, mandamus, prohibition, quo waranto and certiorari which ever may be appropriate for the enforcement of any of the rights conferred by this Part.

Thus anybody who complains of infraction of any of the fundamental rights guaranteed by the Constitution, is at liberty to move the Supreme Court for the enforcement of such rights and this Court has been given the power to make orders and issue directions or writs similar in nature to the prerogative writs of English law as might be considered appropriate in particular cases. The fundamental rights guaranteed by the Constitution are available not merely to individual citizens but to corporate bodies as well except where the language of the provision or the nature of the right compels the inference that they are applicable only to natural persons. An incorporated company, therefore, can come up to this Court for enforcement of its fundamental rights and so may the individual shareholders to enforce their own; but it would not be open to an individual shareholder to complain of an act which affects the fundamental rights of the company except to the extent that it constitutes an infraction of his own rights as well. This follows logically from the rule of law that a corporation has a distinct legal personality of its own with rights and capacities, duties and obligations separate from those of its individual members. As the rights are different and inhere in different legal entities, it is not competent to one person to seek to enforce the rights of another except where the law permits him to do so. A well known illustration of such exception is furnished by the procedure that is sanctioned in an application for a writ of habeas corpus. Not only the man who is imprisoned or detained in confinement but any person, provided he is not an absolute stranger, can institute proceedings to obtain a writ of habeas corpus for the purpose of liberating another from an illegal imprisonment.

The application before us under article 32 of the Constitution is on behalf of an individual shareholder of the company. Article 32, as its provisions show, is not directly concerned with the determination of constitutional validity of particular legislative enactments. What it aims at, is the enforcing of fundamental rights guaranteed by the Constitution, no matter whether the necessity for such enforcement arises out of an action of the executive or of the legislature. To make out a case under this article, it is incumbent upon the petitioner to establish not merely that the law complained of is beyond the competence of the particular legislature as not being covered by any of the items in the legislative lists, but that it affects or invades his fundamental rights guaranteed by the Constitution, of which he could seek enforcement by an appropriate writ or order. The rights that could be enforced under article 32 must ordinarily be the rights of the petitioner himself who complains of infraction of such rights and approaches the court for relief. This being the position, the proper subject of our investigation would be what rights, if any, of the petitioner as a shere holder of the company have been violated by the impugned legislation. A discussion of the fundamental rights of the company as such would be outside the purview of our enquiry. It is settled law that in order to redress a wrong done to the company, the action should prima facie be brought by the company itself. It cannot be said that this course is not possible in the circumstances of the present case. As the law is alleged to be unconstitutional, it is open to the old directors of the company who have been ousted from their position by reason of the enactment to maintain that they are directors still in the eye of law, and on that footing the majority of shareholders can also assert the rights of the company as such. None of them, however, have come forward to institute any proceeding on behalf of the company. Neither in form nor in substance does the present application purport to be one made by the company itself. Indeed, the company is one of the respondents, and opposes the petition.

As regards the other point, it would appear from the language of article 32 of the Constitution that the sole object of the article is the enforcement of fundamental rights guaranteed by the Constitution. A proceeding under this article cannot really have any affinity to what is known as a declaratory suit. The first prayer made in the petition seeks relief in the shape of a declaration that the Act is invalid and is apparently inappropriate to an application under article 32, while the second purports to be framed for a relief by way of injunction consequent upon the first. As regards the third prayer, it has been contended by Mr. Joshi, who appears for one of the respondents, that having regard to the nature of the case and the allegations made by the petitioner himself, the prayer for a writ of mandamus in the form in which it has been made, is not tenable. What is argued is that a writ of mandamus can be prayed for, for enforcement of statutory duties or to compel a person holding a public office to do or forbear from doing something which is incumbent upon him to do or forbear from doing under the provisions of any law. Assuming that the respondents in the present case are public servants, it is said that the statutory duties which it is incumbent upon them to discharge are precisely the duties which are laid down in the impugned Act itself. There is no legal obligation on their part to abstain from exercising the powers conferred upon them by the impeached enactment which the Court can be called upon to enforce. There is really not much substance in this argument, for according to the petitioner the impugned Act is not valid at all and consequently the respondents cannot take their stand on this very Act to defeat the application for a writ in the nature of a mandamus. Any way, article 32 of the Constitution gives us very wide discretion in the matter of framing our writs to suit the exigencies of particular cases, and the application of the petitioner cannot be thrown out simply on the ground that the proper writ or direction has not been prayed for.

Proceeding now to the merits of the case, the first contention that has been pressed before us by the learned counsel for the petitioner is that the effect of the Sholapur Spinning and Weaving Company Limited (Emergency Provisions) Act, has been to take away from the company and its shareholders, possession of property and other interests in commercial undertaking and vest the same in certain persons who are appointed by the State, and the exercise of whose powers cannot be directed or controlled in any way by the shareholders. As the taking of possession is not for any public purpose and no provision for compensation has been made by the law which authorises it, such law, it is said, violates the fundamental rights guaranteed under article 31 of the Constitution.

To appreciate the contention, it would be convenient first of all to advert to the provisions of the first two clauses of article 31 of the Constitution. The first clause of article 31 lays down that "no person shall be deprived of his property save by authority of law." The second clause provides: "No property, movable or immovable, including any interest in, or in any company owning, any commercial or industrial undertaking, shall be taken possession of or acquired for public purposes under any law authorising the taking of such possession or such acquisition, unless the law provides for compensation for the property taken possession of or acquired and either fixes the amount of the compensation, or specifies the principles on which, and the manner in which, the compensation is to be determined and given.

It is a right inherent in every sovereign to take and appropriate private property belonging to individual citizens for public use. This right, which is described as eminent domain in American law, is like the power of taxation, an off-spring of political necessity, and it is supposed to be based upon an implied reservation by Government that private property acquired by its citizens under its protection may be taken or its use controlled for public benefit irrespective of the wishes of the owner. Article 31(2) of the Constitution prescribes a two-fold limit within with such superior right of the State should be exercised. One limitation imposed upon acquisition or taking possession of private property which is implied in the clause is that such taking must be for public purpose. The other condition is that no property can be taken, unless the law which authorises such appropriation contains a provision for payment of compensation in the manner laid down in the clause. So far as article 31(2) is concerned, the substantial question for our consideration is whether the impugned legislation authorises any act amounting to acquisition or taking possession of private property within the meaning of the clause.

It cannot be disputed that acquisition means and implies the acquiring of the entire title of the expropriated owner, whatever the nature or extent be that title might be. The entire bundle of rights which were vested in the original holder would pass on acquisition to the acquirer leaving nothing in the former. In taking possession on the other hand, the title to the property admittedly remains in the original holder, though he is excluded from possession or enjoyment of the property. Article 31(2) of the Constitution itself makes a clear distinction between acquisition of property and taking possession of it for a public purpose, though it places both of them on the same footing in the sense that a legislation authorising either of these acts must make provision for payment of compensation to the displaced or expropriated holder of the property. In the context in which the word "acquisition" appears in article 31(2), it can only mean and refer ta acquisition of the entire interest of the previous holder by transfer of title and I have no hesitation in holding that there is no such acquisition either as regards the property of the company or of the shareholders in the present case. The question, therefore, narrows down to this as to whether the legislation in question has authorised the taking of possession of any property or interest belonging to the petitioner.

It is argued by the learned Attorney-General that the taking of possession as contemplated by article 31(2) means the taking of possession of the entire bundle of rights which the previous holder had, by excluding him from every part or item thereof. If the original holder is still left to exercise his possession with regard to some of the rights which were within the folds of his title, it would not amount to taking possession of the property for purposes of article 31(2) of the Constitution. Having laid down this proposition of law, the learned Attorney-General has taken us through the various provisions of the impugned Act and the contention advanced by him substantially is, that neither the company nor the shareholders have been dispossessed from their property by reason of the enactment. As regards the properties of the company, the directors, who have been given the custody of the property, effects and actionable claims of the company, are, it is said, to exercise their powers not in their own right but as agents of the company, whose beneficial interest in all its assets has not been touched or taken away at all. No doubt the affairs of the company are to be managed by a body of directors appointed by the State and not by the company, but this, it is argued, would not amount to taking possession of any property or interest within the meaning of article 31(2). Mr. Chari, on the other hand, has contended on behalf of the petitioner that after the management is taken over by the statutory directors, it cannot be said that the company still retains possession or control over its property and assets. Assuming that this State-management was imposed in the interests of the shareholders themselves and that the statutory directors are acting as the agents of the company, the possession of the statutory directors could not, it is argued, be regarded in law as possession of the company so long as they are bound to act in obedience to that dictates of the Central Government and not of the company itself in the administration of its affairs. Possession of an agent, it is said, cannot juridically be the possession of the principal, if the agent is to act not according to the commands or dictates of the principal, but under the direction of an exterior authority.

There can be no doubt that there is force in this contention, but as I have indicated at the outset, we are not concerned in this case with the larger question as to how far the inter-position of this statutory management and control amounts to taking possession of the property and assets belonging to the company. The point for our consideration is a short one and that is whether by virtue of the impugned legislation any property or interest of the petitioner himself, as a shareholder of the company, has been taken possession of by the State or an authority appointed under it, as contemplated by article 31(2) of the Constitution.

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 incidents 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 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 winding up of the company which may result in a distribution of the net assets among the shareholders.

It cannot be disputed that the petitioner has not been dispossessed in any sense of the term of the shares he holds. Nobody has taken the shares away from him. His legal and beneficial interest in respect to the shares he holds is left intact. If the company declares dividend he would be entitled to the same. He can sell or otherwise dispose of the shares at any time at his option. The impugned Act has affected him in this way that his right of voting at the election of directors has been kept in abeyance so long as the management by the statutory directors continues; and as a result of that, his right to participate in the management of the company has been abridged to that extent. His rights to pass resolutions or to institute winding up proceedings have also been restricted though they are not wholly gone; these rights can be exercised only with the consent or sanction of the Central Government. In my opinion, from the facts stated above, it cannot be held that the petitioner has been dispossessed from the property owned by him. I may apply the test which Mr. Chari himself formulated If somebody had taken possession of the petitioner's shares and was clothed with the authority to exercise all the powers which could be exercised by the holder of the shares under law then even if he purported to act as the petitioner's agent and exercise these powers for his benefit, the possession of such person would not have been the petitioner's possession if he was bound to act not under the directions of the petitioner or in obedience to his commands but under the directions of some other person or authority. There is no doubt whatsoever that that is not the position in the present case. The State has not usurped the shareholder's right to vote or vested it in any other authority. The State appoints directors of its own choice but that it does not in exercise of the shareholder's right to vote but in exercise of the powers vested in it by impugned Act. Thus there has been no dispossession of the shareholders from their right of voting at all. The same reasoning applies to the other rights of the shareholders spoken of above, namely, their right of passing resolutions and of presenting winding up petition. These rights have been restricted undoubtedly and may not be capable of being exercised to the fullest extent as long as the management by the State continues. Whether the restrictions are such as would bring the case within the mischief of article 19(1)(f) of the Constitution, I will examine presently; but I have no hesitation in holding that they do not amount to dispossession of the shareholders from these rights in the sense that the rights have been usurped by other people who are exercising them in place of the displaced shareholders.

In the view that I have taken it is not necessary to discuss whether we can accept as sound the contention put forward by the learned Attorney-General that the word ''property" as used in article 31 of the Constitution connotes the entire property, that is to say the totality of the rights which the ownership of the object connotes. According to Mr. Setalvad, if a shareholder is not deprived of the entirety of his rights which he is entitled to exercise by reason of his being the owner or holder of the share and some rights, however insignificant they might be, still remain in him, there cannot be any dispossession as contemplated by article 31(2). It is difficult, in my opinion, to accept the contention formulated in such broad terms. The test would certainly be as to whether the owner has been dispossessed substantially from the rights held by him or the loss is only with regard to some minor ingredients of the proprietary right. It is relevant to refer in this connection to an observation made by Rich, J., in a Full Bench decision of the High Court of Australia, (Minister of State for the Army v. Dalxiel), where the question arose as to whether the taking of exclusive possession of a property for an indefinite period of time by the Commonwealth of Australia under Reg. 54 of the National Security Regulation amounted to acquisition of property within the meaning of placitum 31, section 51, of Commonwealth Constitution. The majority of the Full Bench answered the question in the affirmative and the main reason upon which the majority decision was based is thus expressed in the language of Rich, J.:

"Property, in relation to land, is a bundle of rights exercisable with respect to the land. The tenant of an unencumbered estate in fee simple in possession has the largest possible bundle. But there is nothing in the placitum to suggest that the legislature was intended to be at liberty to free itself from the restrictive provisions of the placitum by taking care to seize something short of the whole bundle owned by the person whom it was expropriating."

It is not, however, necessary for my purpose to pursue the matter any further, as in my opinion there has been no dispossession of the rights of a shareholder in the present case.

Mr. Chari in course of his opening relied exclusively on clause (2) of article 31 of the Constitution. During his reply, however, he laid some stress on clause (1) of the article as well and his contention seems to be that there was deprivation of property in the present case in contravention of the terms of this clause. It is difficult to see what exactly is the contention of the learned counsel and in which way it assists him for purposes of the present case. It has been argued by the learned Attorney-General that clause (1) of article 31 relates to a power different from that dealt with under clause (2). According to him, what clause (1) contemplates is confiscation or distruction of property in exercise of what are known as police powers in American law, for which no payment of compensation is necessary. I do not think it proper for purposes of the present case to enter into a discussion on this somewhat debatable point which has been raised by the learned Attorney-General. In interpreting the provisions of our Constitution, we should go by the plain words used by the constitution-makers and the importing of expressions like "police power", which is a term of variable and indefinite connotation in American law can only make the task of interpretation more difficult. It is also not necessary to express any opinion as to whether clauses (1) and (2) of article 31 relate to exercise of different kinds of powers or they are to be taken as cumulative provisions in relation to the same subject-matter, namely, compulsory acquisition of property. If the word "deprived" as used in clause (1) connotes the idea of destruction or confiscation of property obviously no such thing has happened in the present case. Again if clauses (1) and (2) of article 31 have to be read together and "deprivation" in clause (1) is given the same meaning as compulsory acquisition in clause (2), clause (1), which speaks neither of compensation nor of public purpose, would not by itself, and apart from clause (2), assist the petitioner in any way. If the two clauses are read disjunctively, the only question that may arise in connection with clause (1) is whether or not the deprivation of property is authorised by law. Mr. Chari has raised a question relating to the validity of the legislation on the ground of its not being covered by any of the items in the legislative list and to this question I would advert later on; but apart from this, clause (1) of article 31 of the Constitution seems to me to be altogether irrelevant for purposes of the petitioner's case.

This leads me to the consideration of the next point raised by Mr. Chari, namely, whether these restrictions offend against the provision of the article 19(1)(f) of the Constitution.

Article 19(1) of the Constitution enumerates the different forms of individual liberty, the protection of which is guaranteed by the Constitution. The remaining clauses of the article prescribe the limits that may be placed upon these liberties by law, so that they may not conflict with public welfare or general morality. Article 19(1)(f) guarantees to all citizens "the right to acquire, hold or dispose of property." Any infringement of this provision would amount to a violation of the fundamental rights, unless it comes within the exceptions provided for in clause (5) of the article. That clause permits the imposition of reasonable restrictions upon the exercise of such right either in the interests of general public or for the protection of interests of any scheduled tribe. Two questions, therefore, arise in this connection: first, whether the restrictions that have been imposed upon the rights of the petitioner as a shareholder in the company under the Sholapur Act amounts to infringement of his right to acquire, hold or dispose of property within the meaning of article 19(1)(f) of the Constitution, and secondly, if they do interfere with such rights, whether they are covered by the exceptions laid down in clause (5) of the article.

So far as the first point is concerned, it is quite clear that there is no restriction whatsoever upon the petitioner's right to acquire and dispose of any property. The shares, which he holds, do remain his property and his right to dispose of them is not fettered in any way. If to "hold" a property means to possess it, there is no infringement of this right either for as I have stated already, the acts complained of by the petitioner do not amount to dispossession of him from any property in the eye of law. It is argued that "holding" includes enjoyment of all benefits that are ordinarily attached to the ownership of the peoperty. The enjoyment of the fruits of a property is undoubtedly an incident of ownership. The pecuniary benefit, which a shareholder derives from the shares he holds, is the dividend and there is no limitation on the petitioner's right in this respect. The petitioner undoubtedly has been precluded from exercising his right of voting at the election of directors so long as the statutory directors continue to manage the affairs of the company. He cannot pass an effective resolution in concurrence with the majority of shareholders without the consent or sanction of the Central Government and without such sanction, there is also a disability on him to institute any winding up proceedings in a court of law.

In my opinion, these are rights or privileges which are appurtenant to or flow from the ownership of property, but by themselves and taken independently they cannot be reckoned as property capable of being acquired, held or disposed of as is contemplated by article 19(1)(f) of the Constitution. I do not think that there has been any restriction on the rights of a shareholder to hold, acquire or dispose of its share by reason of the impugned enactment and consequently article 19(1)(f) of the Constitution is of no assistance to the petitioner. In this view, the other point does not arise for consideration, but I may state here that even if it is conceded for argument's sake that the disabilities imposed by the impugned legislation amount to restrictions on proprietary right, they may very well be supported as reasonable restraints imposed in the interests of general public, viz., to secure the supply of a commodity essential to the community and to prevent a serious unemployment amongst a section of the people. They are, therefore, protected completely by clause (5) of article 19. This disposes of the second point raised by Mr. Chari.

The next point urged on behalf of the petitioner raises an important question of constitutional law which turns upon the construction of article 14 of the Constitution. It is urged by the learned counsel for the petitioner that the Sholapur Act is a piece of discriminatory legislation which offends against the provision of article 14 of the Constitution. Article 14 guarantees to all persons in the territory of India equality before the law and equal protection of the laws and its entire object, it is said, is to prevent any person or class of persons from being singled out as a special subject of discriminatory legislation. It is pointed out that the law in this case has selected one particular company and its shareholders and has taken away from them the right to manage their own affairs, but the same treatment has not been meted out to all other companies or shareholders situated in an identical manner.

Article 14 of the Constitution, it may be noted, corresponds to the equal protection clause in the Fourteenth Amendment of the American Constitution which declares that "no State shall deny to any person within its jurisdiction the equal protection of laws." We have been referred in course of the arguments on this point by the learned counsel on both sides to quite a number of cases decided by the American Supreme Court, where questions turning upon the construction of the "equal protection" clause in the American Constitution came up for consideration. A detailed examination of these reports is neither necessary nor profitable for our present purpose but we think we can cull a few general principles from some of the pronouncements of the American Judges which might appear to us to be consonant with reason and help us in determining the true meaning and scope of article 14 of our Constitution.

I may state here that so far as the violation of the equality clause in the Constitution is concerned, the petitioner, as a shareholder of the company, has as much right to complain as the company itself, for his complaint is that apart from the discrimination made against the company, the impugned legislation has discriminated against him and the other shareholders of the company as a group vis a vis the shareholders of all other companies governed by the Indian Companies Act who have not been treated in a similar way. As the discriminatory treatment has been in respect to the shareholders of this company alone, any one of the shareholders, whose interests are thus vitally affected, has a right to complain and it is immaterial that there has been no discrimination inter se amongst the shareholders themselves.

It must be admitted that the guarantee against the denial of equal protection of laws does not mean that identically the same rules of law should be made applicable to all persons within the territory of India in spite of differences of circumstances and conditions. As has been said by the Supreme Court of America " equal pretection of laws is a pledge of the protection of equal laws," (see Yick Wo v. Hopkins), and this means "subjection to equal laws applying alike to all in the same situation." (vide Southern Railway Company v. Greene). In other words, there should be no discrimination between one person and another if as regards the subject-matter of the legislation their position is the same. I am unable to accept the argument of Mr. Chari that a legislation relating to one individual or one family or one body corporate would per se violate the guarantee of the equal protection rule. There can certainly be a law applying to one person or to one group of persons and it cannot be held to be unconstitutional if it is not discriminatory in its character. (See Willis Constitutional Law, p. 580). It would be bad law "if it arbitrarily selects one individual or a class of individuals, one corporation or a class of corporations and visits a penalty upon them, which is not imposed upon others guilty of like delinquency". (See Gulf, C. & S.F. Railway Co. v. Ellis), The legislature undoubtedly has a wide field of choice in determining and classifying the subject of its laws, and if the law deals alike with all of a certain class, it is normally not obnoxious to the charge of denial of equal protection; but the classification should never be arbitrary. It must always rest upon some real and substantial distinction bearing a reasonable and just relation to the things in respect to which the classification is made; and classification made without any substantial basis should be regarded as invalid. (See Southern Railway Co. v. Greene).

The question is whether judged by this test the impugned Act can be said to have contravened the provision embodied in article 14 of the Constitution. Obviously the Act purports to make provisions which are of a drastic character and against the general law of the land as laid down in the Indian Companies Act, in regard to the administration and management of the affairs of one company in Indian territory. The Act itself gives no reason for the legislation but the Ordinance, which was a precursor of the Act, expressly stated why the legislation was necessary. It said that owing to mismanagement and neglect, a situation had arisen in the affairs of the company which prejudicially affected the production of an essential commodity and caused serious unemployment amongst a certain section of the community. Mr. Chari's contention in substance is that there are various textile companies in India situated in a similar manner as the Sholapur Company, against which the same charges could be brought and for the control and regulation of which all the reasons that are mentioned in the preamble to the Ordinance could be applied. Yet, it is said, the legislation has been passed with regard to this one company alone. The argument seems plausible at first sight, but on a closer examination I do not think that I can accept it as sound. It must be conceded that the Legislature has a wide discretion in determining the subject matter of its laws. It is an accepted doctrine of the American Courts and which seems to me to be well founded on principle, that the presumption is in favour of the constitutionality of an enactment and the burden is upon him who attacks it to show that there has been a transgression of constitutional principles. As was said by the Supreme Court of America in Middleton v. Texas Power and L. Co., "it must be presumed that a Legislature understands and correctly appreciates the needs of its own people, that its laws are directed to problems made manifest by experience and that its discriminations are based upon adequate grounds." This being the position, it is for the petitioner to establish facts which would prove that the selection of this particular subject by the Legislature is unreasonable and based upon arbitrary grounds. No allegations were made in the petition and no materials were placed before us to show as to whether there are other companies in India which come precisely under the same category as the Sholapur Spinning and Weaving Company and the reasons for imposing control upon the latter as mentioned in the preamble to the Ordinance are applicable to them as well. Mr. Chari argues that these are matters of common knowledge of which we should take judicial notice. I do not think that this is the correct line of approach. It is quite true that the Legislature has, in this instance, proceeded against one company only and its shareholders ; but even one corporation or a group of persons can be taken as a class by itself for the purposes of legislation, provided it exhibits some exceptional features which are not possessed by others. The courts should prima facie lean in favour of constitutionality and should support the legislation if it is possible to do so on any reasonable ground, and it is for the party who attacks the validity of the legislation to place all materials before the court which would go to show that the selection is arbitrary and unsupportable. Throwing out of vague hints that there may be other instances of similar nature is not enough for this purpose. We have not even before us any statement on oath by the petitioner that what has been alleged against this particular company may be said against other companies as well. If there was any such statement, the respondents could have placed before us the whole string of events that led up to the passing of this legislation. If we are to take judicial notice of the existence of similar other badly managed companies, we must take notice also of the facts which appear in the Parliamentary proceedings in connection with this legislation which have been referred to by my learned brother Fazl Ali, J., in his judgment and which would go to establish that the facts connected with this corporation are indeed exceptional and the discrimination that has been made can be supported on just and reasonable, grounds. I purposely refrain from alluding to these facts or basing my decision thereon as we had no opportunity of investigating them properly during the course of the hearing. As matters stand, no proper materials have been placed before us by either side and as I am unable to say that the legislature cannot be supported on any reasonable ground, I think it to be extremely risky to overthrow it on mere suspicion or vague conjectures. If it is possible to imagine or think of cases of other companies where similar or identical conditions might prevail, it is also not impossible to conceive of something "peculiar1" or "unusual" to this corporation which led the legislature to intervene in its affairs. As has been laid down by the Supreme Court of America, " the Legislature is free to recognise degrees of harm and it may confine its restrictions to those cases where the need is deemed to be the clearest." (Vide Radice v. New York). We should bear in mind that a corporation, which is engaged in production of a commodity vitally essential to the community, as 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. If its possibilities are large and it had a prosperous and useful career for a long period of time and is about to collapse not for any economic reason but through sheer perversity of the controlling authority, one cannot say that the legislature has no authority to treat it as a class by itself and make special legislation applicable to it alone in the interests of the community at large. The combination of circumstances which are present here may be of such unique character as could not be existing in any other institution. But all these, I must say, are matters which require investigation on proper materials which we have not got before us in the present case. In these circumstances I am constrained to hold that the present application must fail on the simple ground that the petitioner made no attempt to discharge the prima jacie burden that lay upon him and did not place before us the materials upon which a proper decision on the point could be arrived at. In my opinion, therefore, the attack on the legislation on the ground of the denial of equal protection of law cannot succeed.

The only other thing that requires to be considered is the argument of Mr. Chari that the law in question is invalid as it is not covered by any of the items in the legislative list. In my opinion, this argument has no substance. What the law has attempted to do is to regulate the affairs of this company by laying down certain special rules for its management and administration. It is fully covered by item No. 43 of the Union List which speaks inter alia of “incorporation, regulation and winding up of trading corporations."

The result is that the application fails and is dismissed with costs.

Das, J.—As I have arrived at a conclusion different from that reached by the majority of this Court, I consider it proper, out of my respect for the opinion of my learned colleagues, to state the reasons for my conclusions in some detail.

On January 9, 1950, the Governor-General of India, acting under Section 42 of the Government of India Act, 1935, promulgated an Ordinance, being Ordinance No. II of 1950, concerning the Sholapur Spinning and Weaving Co. Ltd., (hereafter referred to as the said company). The preambles and the provisions of the Ordinace have been referred to in the judgment just delivered by Mukherjea, J., and need not be recapitulated by me in detail. Suffice it to say that the net result of the Ordinance was that the managing agents of the said company were dismissed, the directors holding office at the time automatically vacated their office, the Government was authorised to nominate directors, the rights of the shareholders of this company were curtailed in that it was made unlawful for them to nominate or appoint any director, no resolution passed by them could be 'given effect to without the sanction of the Government and no proceeding for winding up could be taken by them without such sanction, and power was given to the Government to further modify the provisions of the Indian Companies Act in its application to the 'said company.

On the very day that the Ordinance was promulgated the Central Government acting under Section 15 delegated all its powers to the Government of Bombay. On January 10, 1950, the Government of Bombay appointed respondents Nos. 3 to 7 as the new directors. On March 2, 1950, respondent No. 5 having resigned, respondent No. 8 was appointed a director in his place on the same day respondent No. 9 was also appointed as a director. In the meantime the new Constitution had come into force on January 26, 1950. On February 7, 1950, the new directors passed a resolution sanctioning a call for Rs. 50 on the preference shares. Thereupon a suit, being Suit No. 438 of 1950, was filed in the High Court of Bombay by one Dwarkadas Shrinivas against the new directors challenging the validity of the Ordinance and the right of the new directors to make the call. Bhagwati, J., who tried the suit held that the Ordinance was valid and dismissed the suit. An appeal (Appeal No. 48 of 1950) was taken from that decision which was dismissed by a Division Bench (Chagla, C.J, and Gajendragadkar, J.) on August 29, 1950. In the meantime, on April 7, 1950, the Ordinance was replaced by Act No. XXVIII of 1950. The Act substantially reproduced the provisions of the Ordinance except that the preambles to the Ordinance were omitted. On May 29, 1950, the present petition was filed by one Chiranjilal Chaudhari.

The petitioner claims to be a shareholder of the said company holding 80 preference shares and 3 ordinary shares. The preference shares, according to him, stand in the name of the Bank of Baroda to whom they are said to have been pledged. As those preference shares are not registered in the name of the petitioner he cannot assert any right as holder of those shares. According to the respondents, the petitioner appears on the register as holder of only one fully paid up ordinary share. For the purposes of this application, then, the petitioner's interest in the said company must be taken as limited to only one fully paid up ordinary share. The respondents are the Union of India, the State of Bombay and the new directors besides the company itself. The respondent No. 5 having resigned, he is no longer a director and has been wrongly impleaded as respondent. The reliefs prayed for are that the Ordinance and the Act are ultra vires and void, that the Central Government and the State Government and the directors be restrained from exercising any powers under the Ordinance or the Act, that a writ of mandamus be issued restraining the new directors from exercising any powers under the Ordinance or the Act or from in any manner interfering with the management of affairs of the company under colour of or in purported exercise of any powers under the said Ordinance or Act.

The validity of the Ordinance and the Act has been challenged before us on the following grounds:—(i) that it was not within the legislative competence (a) of the Governor-General to promulgate the Ordinance, or (b) of the Parliament to enact the Act, and (ii) that the Ordinance and the Act infringe the fundamental rights of the shareholders as well as those of the said company and are, therefore, void and inoperative under article 13.

Re. (i)—The present application has been made by the petitioner under article 32 of the Constitution. Sub-section (1) of that article guarantees the right to move this Court by appropriate proceedings for the enforcement of the rights conferred by Part III of the Constitution. Sub-section (2) empowers this Court to issue directions or orders or writs, including certain specified writs, whichever may be appropriate, for the enforcement of any of the rights conferred by that Part, It is clear, therefore, that article 32 can only be invoked for the purpose of the enforcement of the fundamental rights. Article 32 does not permit an application merely for the purpose of agitating the competence of the appropriate legislature in passing any particular enactment unless the enactment also infringes any of the fundamental rights. In this case the claim is that the fundamental rights have been infringed and, therefore, the question of legislative competence may also be incidentally raised on this application. It does not appear to me, however, that there is any substance in this point for, in my opinion, entry 33 of List I of the Seventh Schedule to the Government of India Act, 1935, and the corresponding entry 43 of the Union List set out in the Seventh Schedule to the Constitution clearly support these pieces of legislation as far as the question of legislative competency is concerned. Sections 83A and 83B of the Indian Campanies Act can only be supported as valid on the ground that they regulate the management of companies and are, therefore, within the said entry. Likewise, the provisions of the Ordinance and the Act relating to the appointment of directors by the Government and the curtailment of the shareholders' rights as regards the election of directors, passing of resolutions, giving directions with respect to the management of the company and to present a winding up petition are matters touching the management of the company and, as such, within the legislative competence of the appropriate legislative authority. In my judgment, the Ordinance and the Act cannot be held to be invalid on the ground of legislative incompetency of the authority promulgating or passing the same.

Re. (ii)—The fundamental rights said to have been infringed are the right to acquire, hold and dispose of property guaranteed to every citizen by article 19(1)(f) and the right to property secured by article 31. In Gopalan's case I pointed out that the rights conferred by article 19(1)(a) to (e) and (g) would be available to the citizen until he was, under article 21, deprived of his life or personal liberty according to procedure established by law and that the right to property guaranteed by artic