TMI Blog1973 (3) TMI 152X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing orders in accordance therewith. 2. The facts leading to the filing of the Company Petition No. 114 of 1967 by the Union of India (the petitioners) against Bennett Coleman Co. Ltd. (respondent No. 1) and others under s. 398 read with s. 401 of the Companies Act, 1956 may be stated: The Bennett Coleman Co. Ltd. (hereinafter referred to as the Company ) with its registered office in Bombay was incorporated on November 29, 1913, under the provisions of the Indian Companies Act, 1882. The Company has been principally engaged in the business of publishing the Times of India group of newspapers, Journals, Magazines and other publications. According to the petitioners (the Union of India), prior to 1955 one Ramkrishna Dalmia was the Chairman of the Company. He and his group were controlling the share-holding of the Company and in the year 1955 the controlling interest in the share-holding of the Company passed on to Shanti Prasad Jain (the son-in-law of Ramkrishna Dalmia and original respondent No. 2) and his group and he became the Chairman of the Company. According to the petitioners further, in or about July 1957 respondent No. 2 issued instructions to one J.C Jain, the th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... withheld from the Inspector and prevented the disclosure of all important and relevant documents necessary for the proper investigation and the Inspector also noticed that the officers and the employees of the Company had been intimidated and coerced into giving evidence favourable to the management and to destroy and tamper with the relevant documents and evidence. It may also be stated that between September and November 1963 some representations made by the senior officers of the Company were received by late Mr. Jawaharlal Nehru, the then Prime Minister of India, complaining about serious irregularities and illegalities that had been and were being committed in the management and conduct of the Company and in particular complaining about the instructions that had been issued by Shanti Prasad Jain (respondent No. 2) and P.K Roy (the then General Manager and original respondent No. 5) directing destruction as far as possible of all important records of the Company containing details of the transactions then being investigated by the Inspector and further directing that untruthful, misleading or evasory answers be given to the Inspector so that the investigation might be obstruct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fairs of the Company and the determination of their fitness to hold the positions which they held in the Company and also to continue and maintain the illegal, mala fide and wrongful control, power and influence of the said S.P Jain and A.P Jain and the exercise of functions by the said P.K Roy in the Company; similarly, on or about September 25, 1964 the new Board of Directors appointed one Shri P.R Krishnamoorthy as Deputy Secretary of the Company, one Shri Nemchand Jain as Deputy Chief Accounts Officer and Shri R.P Agarwal as an Internal Auditor of the Company, all of whom were appointed by having their services on loan from other Sahu Jain concerns controlled by Shri S.P Jain and, according to the petitioners, by these appointments the wrongful control and management of the Company by the previous Directors (particularly S.P Jain and A.P Jain) was intended to be continued and confirmed. 3. In the circumstances aforesaid the Union of India seriously apprehended that the apparent change in the control and management of the Company, both by alteration in the Board of Directors and addition of the said Krishnamoorthy, Jain and Agarwal to the staff of the Company, was likely to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tition that the Union of India was either a member of the Company or its creditor but the Petition had been filed by virtue of s. 401 of the Companies Act. 4. During the pendency of the above Petition, either before the Companies Tribunal or after its transfer to this Court upon abolition of the former, several other proceedings came to be instituted or commenced to which it will be convenient to refer to at this stage. By its letter dated January 21, 1967 the Company gave an intimation to the Company Law Board under s. 635b of the companies act of its intention to dispense with the service of five of their employees, namely P.K Roy General Manager, P.L Shah Secretary and Chief Accountant, K.C Raman Production Manager, Parameshwaran Assistant Manager and T.P George Store Superintendent on the ground that they had either been the principals, a betters or accomplices of the persons, who constituted the Board of Directors at the time of the alleged mismanagement. The Company Law Board by its reply dated February 13, 1967 placed on record its objection to the action proposed to be taken against these employees by the Company. Against such objection raised by the Company Law Board th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recorded; 652 pages by the Companies Tribunal and about 706 pages by the learned Judge and even after recording such lengthy evidence only the first witness was still in the box when the final judgment and order was delivered by Mr. Justice Nain on August 28, 1969 in the following circumstances: While the first witness Mr. George was still in the witness box and hearing and final disposal of the petition was likely to take quite a few months, on August 14, 1969 respondent No. 2 stated to the learned Judge that if the money claim could not be entertained in this petition filed under s. 398 of the Companies Act and if the Court's order would not amount to any admission on his part or any finding against him in respect of any of the allegations contained in the petition, he would not object to an order being passed by the Hon'ble Court for reconstitution of the Board for the future management of the Company's affairs on the footing that the order would sufficiently protect him and make it clear that there was no admission on his part in respect of any of the allegations in the petition and that there would also be no finding against him and that no prejudice would be cause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for a short adjournment of the matter till August 21, 1969. On the respondents so stating to the Court, counsel on behalf of the petitioners also stated that the petitioners would have no objection to the Court passing such orders as it thought fit without going into the allegations contained in the petition and arriving at a finding on the issues framed by the Companies Tribunal. He also stated that he would submit to the orders of the Court subject to protection being given to the concerned employees of the Company. In other words, all the parties to the proceedings, who were appearing before the Court except respondent No. 1 Company who took time to obtain necessary instructions, made it clear to the Court that subject to the reservations that were made by each one of them as indicated above, the Court should dispose of the petition by passing such orders as it thought fit on the assumption that the allegations made by the petitioners against the respondents, that at the material time the affairs of the Company were being conducted in a manner prejudicial to public interest and to the interest of the Company and that a material change in the Board of Directors had taken place a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be full, protection to the employees. However, at the instance of respondent No. 2 leave was granted to him to take out Judge's Summons for recording the compromise or settlement which according to him had been arrived at on August 20, 1969 and the hearing of the said Summons was fixed on August 28, 1969. Respondent No. 2 took out the requisite Judge's summons (being Company Application No. 77 of 1969) supported by his affidavit dated August 23, 1969 for recording the aforesaid alleged compromise with the Government and the same was duly served upon all the concerned parties and it came up for hearing and for recording evidence before the Court on August 28, 1969. On that day at about 11 A.M counsel for respondent No. 2 stated to the Court that there was a final agreement concluded with the Government and that the matter be adjourned for ten days in order to enable him to place the compromise before the Court. But counsel for the petitioners denied that there was any agreement as alleged and stated that an affidavit to that effect was on its way but he also stated that there were certain counter proposals which were under consideration of the Government and in the circ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etitioners in these appeals before us disputed that any such statement was made by him to the Court on this occasion or that he applied for an adjournment as alleged. But according to him, after counsel for respondent No. 1 Company stated to the Court that the Company was submitting to the orders of the Court subject to reservations indicated above, the learned Judge proceeded to deliver his judgment. 7. In view of the aforesaid statements that were made by all the parties before him (by the petitioners and respondents Nos. 2, 4, 5, 6, 8, 9 and 10 on August 14, 1969 and by respondent No. 1 Company on August 28, 1969 at about 2.45 P.M) the learned Judge felt that no useful purpose would be served by prolonging the enquiry any further and in the circumstances the best thing would be to pass such orders as he thought fit on the assumption that the allegations made by the petitioners against the respondents in the petition were correct and that the conditions prescribed under s. 398 of the Companies Act giving him jurisdiction to pass appropriate order under s. 402 had arisen and existed. He also felt that passing appropriate orders on such assumption would cause no prejudice to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffective majority to the directors appointed by the Court and the Government over the shareholders' directors; (3) He felt that in order to give effect to his aforesaid orders, certain Articles viz. Articles 87, 93(f), 93(g), 95 and 101 of the Articles of Association of the Company required certain modifications and Articles 92, 93(c), 94, 96, 97 and 104 required abrogation as specified in the Schedule annexed to his Order and he, therefore, directed carrying out the necessary modification and abrogation in the Articles. He further ordered that the Articles of Association of the Company shall stand modified in the manner indicated in the Schedule and that the Company shall not have the power to alter the Articles as modified by his order without the leave of the Court and any such alteration made without the leave of the Court shall to that extent be null and void. He, however, preserved the Court's power to further amend or rescind any of the Articles including the modifications made by his order as and when occasion may arise after due notice to the Central Government and other persons concerned; (4) In view of the fact that serious allegations of malversation, misfeasanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that no affidavit by way of reply was filed by the Union of India or any of the other parties to the said summons but the said application was resisted by the Union of India on several grounds. The learned Judge refused to record the alleged settlement or compromise and dismissed the Judge's summons by his Order dated September 6, 1969. 9. Feeling aggrieved by the judgment and order dated August 28, 1969 all the original respondents, except respondents Nos. 7 and 9, have preferred appeals to this Court. Appeal No. 154 of 1969 preferred by respondent No. 1 Company at the instance of the share-holders and Appeal No. 153 of 1969 preferred by respondents Nos. 8 and 10 in their capacity as directors of the Company are mainly directed against the order directing reconstitution of the Board of Directors for the Company in the manner done for a period of seven years. Appeal Nos. 149/69, 155/69, 151/69 and 147/69 have been preferred by original respondents Nos. 2, 3, 4 and 6 principally challenging the order of injunction barring them from becoming directors of the Company at any time in future. Appeal No. 150/69 has been preferred by respondent No. 5, principally against the orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ering of the judgment and order on the part of the learned Judge on August 28, 1969 we have already indicated several events that took place from August 21, 1969 onwards. As regards the settlement or compromise of the matter we may mention that initially respondent No. 2 for the first time suggested to the Court on August 21, 1969 that the settlement had been reached with the Central Government on August 20, 1969 in regard to orders to be passed for the future management of the Company and he applied for adjournment to make the necessary application to have that compromise recorded. The learned Judge granted him an adjournment to make the necessary application and respondent No. 2 did take out the Judge's summons for recording that compromise which was said to have been arrived at on August 20, 1969. But at the hearing of the said summons on August 28, 1969 since counsel for the Union of India had emphatically denied that there was any such settlement, respondent No. 2 did not press his application in accordance with the undertaking which he had given to the Court on an earlier occasion. That summons was, therefore, dismissed by the learned Judge on that day at about 11 A.M Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Company represented by its shareholders and the share-holders of the Company on the other was entirely different from the one which he had put forward on August 28, 1969 and that this compromise or settlement had been arrived at between the parties mentioned above late in the evening of August 27, 1969 and in regard to all that transpired in that meeting which took place in the evening of August 27, 1969 respondent No. 2 had addressed a letter on August 28, 1969 to the Government of India, Department of Company Affairs, Delhi in which he set out the broad terms of the settlement that had been arrived at between the parties. It appears that at that meeting the earlier proposal for settlement submitted by respondent No. 2 on May 26, 1969 was discussed and certain fresh amendments were suggested as a result of which broad outlines came to be agreed upon between the parties. As could be seen from the letter dated August 28, 1969 which was addressed by respondent No. 2 it was agreed that the Board of Directors should consist of nine persons, five persons (whose names were agreed between the parties) to be nominated by the Government and four persons (whose names were agreed between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hed that there was a concluded settlement or compromise arrived at between the parties and in view of the said settlement that had been arrived at between the parties the present proceedings under s. 398 read with s. 401 of the Companies Act were to be terminated. It was this compromise or settlement that was sought to be got recorded by respondent No. 2 by the Judge's summons dated September 1, 1969. As stated earlier, no affidavit in reply was filed either on behalf of the Union of India or on behalf of any other parties to the summons but the application was resisted by the Union of India on several grounds. The learned Judge after hearing the submissions that were put forward on behalf of the parties appearing before him was of the view that there was no compromise or settlement arrived at between the parties either in fact or in law as suggested by respondent No. 2 and he therefore dismissed the application with costs. In his judgment which he delivered on September 6, 1969 he recorded as many as five reasons why he felt that the application was liable to be dismissed. In the first place, he held that in fact the two letters on which reliance was placed by respondent No. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e recorded by the Court. He secondly contended that if the subsequent conduct of the share-holders was seen, it would appear clear that even the share-holders did not appear to have accepted this position that there was any such settlement arrived at between the Union of India on the one hand and the Company on the other. He, therefore, urged that this Court in appeal should not record the so-called compromise or settlement that has been put forward by respondent No. 2. 11. In support of his appeal Mr. J.O Bhatt counsel for respondent No. 2 challenged the various grounds on which the learned Judge had rejected the application for recording the compromise. He also contended that the two additional grounds on which Mr. Khambatta tried to resist the recording of the compromise should not be allowed to be raised in this appeal, inasmuch as, his client would be at a disadvantage to meet those points for want of sufficient material having been brought on record. He pointed out that though the first additional ground urged by Mr. Khambatta was a legal submission, since it was not raised in the trial Court proper material in the form of relevant legal authority and the relevant notifica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alf he pointed out that on August 28, 1969 the application for adjournment for the purpose of enabling his client to take out a summons for recording the compromise had been wrongly rejected by the learned Judge and in any case the application to record the compromise had been made by his client before the judgment had been signed by the learned Judge and in these circumstances the learned Judge was under an obligation or duty bound to record the compromise if in point of fact it was so arrived at between the parties concerned. As regards the compromise being not in the public interest, Mr. Bhatt contended that the grounds on which the learned Judge felt that the compromise was not in public interest were not valid and that in any case proper weight ought to have been given to the fact that a party like the Union of India who was also supposed to safeguard the public interest while arriving at any compromise had with open eyes entered into the same with the Company represented by its share-holders and no material was brought on record to show as to whether and if so what aspects of the matter having a bearing on the public interest were omitted by the Union of India from considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ween the parties. In substance, the agreement was that the Board of Directors should consist of nine persons, the five persons (whose names were agreed between the parties) were to be nominated by the Government and the four persons (whose names were agreed between the parties) were to be nominated by the share-holders and that Shri Ashok Kumar Jain was to be the Chairman of the Board of Directors and according to respondent No. 2 further, this Board was to hold office till the annual general meeting of the share-holders was held in 1972 for passing of accounts for the year 1971 and any casual vacancies on the Board arising between the date of the orders of the Court and the Annual General Meeting in 1972 were to be filled in by mutual agreement. Since strong reliance was placed by Mr. Bhatt on the reply dated September 3, 1969 it would be desirable to set out the relevant portion of that letter, written by Shri R. Prasad to respondent No. 2. After acknowledging the receipt of respondent No. 2's letter dated August 28, 1969 which was said to have been received by him on September 1, 1969, Shri R. Prasad proceeded to state as follows: (2) I am directed to state that while th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had been arrived at between the parties on all important aspects of the matter and in fact Shri Prasad had recorded that whatever had been stated by respondent No. 2 in his letter dated August 28, 1969 had been stated correctly of the outlines of the agreement that had been arrived at between the parties. He pointed out that so far as three past directors, namely Shanti Prasad Jain, Gian Chand Jain and Alok Prakash Jain were concerned, they had already given an undertaking in the application filed under s. 388b and s. 388c of the companies act that they were not seeking any directorship of the Company or intermeddling with the affairs of the Company till those proceedings were disposed of. In other words, these past directors were out of picture so far as future management of the Company was concerned during the pendency of the petition filed under ss. 388b and 388c of the companies act and on the question as to how the Board should be reconstituted, the agreement clearly indicated that there should be five directors on behalf of the Central Government and four directors on behalf of the share-holders and that even as to the period of the reconstituted Board that it should be roug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tt in support of his contentions for the reasons which we shall presently indicate. 17. In the first place, even in his letter dated September 3, 1969 Shri Prasad has clearly observed that while the earlier proposals for a possible settlement of the matter were under consideration, at a meeting held late in the evening of August 27, 1969, the following specific points were discussed and he has further gone on to add that out of three points detailed there the agreement was reached on points (i) and (ii). This observation makes the position quite clear that there were several aspects which were required to be considered while entertaining the earlier proposals for a possible settlement of the matter and out of several aspects agreement had been reached on aspects detailed in items (i) and (ii) in para. 2 of that letter. It is clearly implied that the other aspects or the other points on which agreement had not been reached had remained still to be discussed and negotiations with regard to those aspects were required to be carried on further between the parties. In other words, it is clear that except the two aspects of the matter, viz. that the newly reconstituted Board of Dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w directors who were already working on the Board as representing the shareholders and what should happen to them has also not been made clear in the compromise or settlement. Anomalous position arising in this context could be illustrated thus: In the proposed reconstituted Board there were going to be four persons representing the share-holders and the names of these four persons had also been indicated by respondent No. 2 in his letter dated August 28, 1969, namely Ashok Kumar Jain of Calcutta, Narendra Kumar of Calcutta, Mouli Chandra Sharan of New Delhi and J.P Saxena of Bombay. As it happens these had not included two of the existing share-holders' representatives on Board viz. Dr. L.M Singhvi and Mrs. Rama Jain, the former having been nominated by the Court during the interim period and the latter having been co-opted on the Board as a new director after three past directors had resigned. The names of these two had not figured in the list of four directors whose names have been mentioned in the letter dated August 28, 1969 as being the persons who were to be the share-holders' representatives on the Board. Now what should happen to these two persons whether they will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company. In such a case, unless a settlement or compromise on all important aspects of the matter covering all the issues raised in the proceeding was arrived at, it would be difficult to say that a concluded and complete agreement was arrived at between the parties by reason of what is contained in the two letters dated August 28, 1969 and September 3, 1969. In our view, therefore, the learned Judge was right in coming to the conclusion that in fact there was no concluded and complete agreement between the parties covering all the aspects and issues which arose in the proceedings before him which could be recorded as desired by respondent No. 2. 19. The other aspect of the matter is whether assuming that a concluded agreement could be said to have been arrived at between the parties on the strength of the two letters on which reliance was placed by respondent No. 2, the Court was bound to record the case, for, it is clear that unless the settlement put forward by respondent No. 2 could be regarded by the learned trial Judge as being in public interest which was one aspect which he was bound to consider the settlement or compromise could never have been recorded by him. On this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital of the Company was closely held by respondent No. 2 and his group including companies in which he had a controlling interest. According to Mr. Bhatt, there was no material on record warranting the insinuation contained in the first part of the observations of the learned Judge and secondly it was erroneous to suppose that because the reconstituted Board as per compromise would give a precarious majority of one it would be dangerous for the proper management and conduct of the affairs of the Company, for, according to Mr. Bhatt, even if decisions had been taken by such Board in the absence of one or two nominated directors of the Government, such decisions could always be changed later on which the full Board could meet and, therefore, the danger apprehended by the learned Judge was unwarranted. He, therefore, urged that the settlement should not have been regarded as being not in public interest and in fact the same ought to have been recorded. 20. In the first place, we would like to observe that there would be a clear distinction between the compromise that is sought to be made in the proceeding under ss. 397 and 398 of the Companies Act and the compromise effected in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by the Madras High Court in 1958 when the amendments pertaining to consideration of public interest were not incorporated in s. 397 and s. 398 of the Companies Act. We may mention that it was by act 53 of 1963 that the words pertaining to consideration of public interest were inserted in ss. 379 and 398 of the Companies Act. This would show that even when s. 397 and s. 398 as they stood originally, the Court had to consider the question as to whether the compromise was in the interest of Company or not and such compromise could not be treated as an ordinary compromise which is effected by private parties in private litigation but the Company's interests were paramount. After the amendments that were made by act 53 of 1963 the Court has not merely to consider the interests of the Company but also whether the suggested compromise is in the public interest or not. It is, therefore, clear that it is not as if any compromise or settlement that may be put forward in the proceedings under ss. 397 and 398 that the Court must record the same if it is shown to the Court that such a compromise was in fact arrived at but the Court has to consider not merely the interests of the Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent where the reconstituted Board was to function for a period of three years according to the settlement was not in public interest. If the main idea behind reconstituting the Board for the future management of the Company was that the past mismanagement should be completely stopped and in future there should be no scope for further mismanagement, it was clear that in a Company where the share-holding was closely held by respondent No. 2 and his group of companies, it was desirable that the share-holders' representatives on the Board should never get any control over the affairs of the Company or a decisive voice in the Company affairs and if they were to have a precarious majority of one it was bound to lead to a difficult situation or dangerous situation and the likelihood of the share-holders' directors getting a voice in the management of the Company in a decisive manner could not be overlooked. It was suggested by Mr. Bhatt that this danger apprehended by the learned Judge would really be no danger at all in the future management of the affairs of the Company which was director-managed Company and the decision of the Board taken at a meeting where a couple of Governme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... share-holders' directors. The directors appointed by the Court would also have majority over the Government directors and the share-holders' directors taken together. The settlement or compromise put forward by respondent No. 2 envisaged five directors who were to be nominated by the Government and four directors were to be nominated by the share-holders and even this composition could be regarded as not being in public interest when dealing with a Company which is engaged in the business of publishing The Times of India group of newspapers, magazines and other journals and periodicals where even the voice of the Government nominated directors may not be regarded as desirable and some independent directors nominated by the Court who would not be under the influence of the then ruling party would be more desirable. In this context it would not be out of place to refer to certain views that were expressed by the share-holders of the Company at a meeting held on August 27, 1969 in the context of the questions to who could be the personnel of the reconstituted Board. The view was expressed thus: The members are of the unanimous opinion that it will not be in the interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... likely to get protracted for quite some time, the period of three years during which the Board was to operate under the settlement proposed by respondent No. 2 will have to be regarded as unreasonable and not being in public interest. The learned Judge by his judgment and order dated August 28, 1969 had, therefore, prescribed a period of seven years during which the reconstituted Board as done by him was to operate a period which in our view was rightly regarded as reasonable by him having regard to the pendency of the criminal proceedings and Taxation proceedings. 23. Having regard to the aforesaid discussion of all the aspects which have a bearing on the question of public interest, we are clearly of the view that the settlement or compromise which was put forward by respondent No. 2 as contained in the two letters, one dated August 28, 1969 and the other dated September 3, 1969, cannot be regarded as being in public interest and if that were so, the learned Judge was right in refusing to record the said compromise or settlement, assuming one in fact had been concluded or established by the two letters. The learned Judge has categorically, observed in his impugned order to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal on the ground that respondents Nos. 8 and 10 who had preferred the appeal were not the share-holders but only the directors against whom no order had been made by the learned Judge and who in fact had been continued on the reconstituted Board as Directors of the Company for a period of seven years and they had submitted to the orders of the Court subject to certain reservations that were made by them. Before dealing with these appeals on merits therefore, it would be convenient to deal with the preliminary objections that were raised by Mr. Khambatta and Mr. Phadke to the maintainability of these appeals. 27. In amplification of the preliminary points that were raised by them, in Appeal No. 154 of 1969 Mr. Khambatta pointed out to us the relevant contents of the letter dated August 16, 1969 addressed by Chimanlal Shah Co., attorneys, who were acting as attorneys for the Company in the proceedings, to the Chairman of respondent No. 1 Company and he relied upon the statement that was made by counsel who appeared for respondent No. 1 Company on August 28, 1969 before the learned Judge. According to him, the proceedings in the main petition were getting protracted and the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that counsel on their behalf should submit before the Court to consider the terms of settlement already agreed by the members with the Government (meaning the settlement said to have been arrived at on August 20, 1969). By the second resolution the share-holders resolved that the Company's counsel should submit on behalf of the members of the Company that a Board be constituted by the High Court to manage the affairs of the Company consisting of three representatives of the shareholders excepting those against whom there were allegations of mismanagement in the petition and four independent directors, the Chairman being one of the representatives of the share-holders and with no nominee of the Government on the Board. It was also decided at this meeting that it should be submitted before the Court that the term of the reconstituted Board should be as short as possible and the same should not be for more than two years and in any case not more than three years, considering the fact that the Company had been under the management other than that of the share-holders for well over five years. Mr. Khambatta further pointed out that these resolutions which were passed by the membe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .. In the former case (Sayad Zain v. Kalabhai Lallubhai) the parties to a suit referred the matter in dispute to Subordinate Judge, before whom the suit was pending, for a settlement of the dispute between the parties. The Subordinate Judge passed a decree accordingly and when one of the parties, viz. the defendant preferred an appeal, the Court held that the judgment of the Subordinate Judge was in the nature of an arbitrator's award against which an appeal could not be entertained and that the fact that the Subordinate Judge gave his award in the form of a decree would not make it a decree from which a-regular appeal could lie. At page 368 the Court observed as follows: Here the parties agreed that they would abide (Manya karave) by the decision of the Subordinate Judge. The fact that the express provisions of Chapter XXXVIII of the Civil Procedure Code were knowingly disregarded shows that the proceedings were extra cursum curiae, and thus the judgment of the Subordinate Judge was in the nature of an arbitrator's award, against which an appeal cannot be entertained if the competency of the Appellate Court is objected to by the party holding the judgment. 28. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt to decide the matter on the assumption that the allegations contained in the petition against all the respondents were true. Thereby the respondents enabled the Court, to pass appropriate orders under S. 402 of the Companies Act on the footing that the conditions of s. 398 of the Companies Act which conferred jurisdiction upon the Court had arisen or had existed. In fact the respondents did not desire that the Court should record the entire evidence or should adjudicate and give its findings on the issues involved in the case and by their conduct the parties prevented the Court from taking on record the entire evidence that would have been otherwise led by the petitioners and further prevented the Court from recording any finding on any of the issues involved in the case. In other words, the parties, particularly respondent No. 1 Company obliged the Court to deviate from the normal procedure which would have been otherwise followed and the decision that was given was obviously extra cursum curiae. If that be so, according to Mr. Khambatta, the respondents had lost their right of appeal. In fact, we may indicate here that even on merits the precise grounds on which the main deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... having regard to the manner in which all the parties including respondent No. 1 Company had submitted to the orders of the Court and invited the Court to pass such appropriate order as it thought fit, it seems to us clear that the parties including respondent No. 1 Company induced the Court to make its decision extra cursum curiae and as such respondent No. 1 Company must be taken to have lost its right of appeal to challenge the impugned order on merits. Neither the propriety nor the validity of the order can be challenged by any party except if the illegality goes to the root of the Court's jurisdiction to make the order. In other words, if respondent No. 1 Company is in a position to satisfy us that the impugned directions or orders are without jurisdiction altogether, then, of course, the same will have to be set aside but subject to this exception the propriety and/or validity of the impugned orders cannot be allowed to be challenged in appeal at the instance of any party including respondent No. 1 Company who had submitted to the orders of the Court. The contention of Mr. Khambatta against the maintainability of the appeal on merits on the above ground will have to be uph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly proper plaintiff, in an action arising out of a dispute within the company. And the appropriate agency to start an action on the company's behalf is the board of directors, to whom this power is delegated as an incident of managing the company. However, it is well established that if the directors cannot or will not start proceedings in the company's name (and if they themselves are the defendants they obviously will not) the power to do so reverts to the general meeting. Hence, the practice has grown up of allowing anyone connected with the company to start proceedings in the company's name subject to the risk that the defendants will challenge his right to do so. In that event, the court will stay proceedings until a general meeting has been called to decide whether or not the company shall sue. If the decision is in favour of continuing, all is well. If, however, the decision is against action the proceedings will be dismissed, and the rash individual and his solicitors on the record will be liable for the costs. 33. The aforesaid passage is based upon the decisions in the case of Pender v. Lushington . 1877 L.R 6 Ch. D. 70.. He also relied upon the passages ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... structions of the members in all matters not specifically reserved (either by the Act or the articles) to a general meeting. And, as we shall see in a later chapter, the practical difficulties in the way of effectively exercising even this measure of supervision are very great owing to the directors' control over the proxy-voting machinery. The old idea that the general meeting alone is the company's primary organ and the directors merely the company's agents or servants, at all times Subservient to the general meeting, seems no longer to be the law as it is certainly not the fact. 34. From the above discussion it will thus appear clear that the normal rule is that in an action arising out of a dispute within the Company the appropriate agency to start an action on the company's behalf is the Board of Directors, though as an exceptional measure it has been ruled that if the directors cannot and will not start proceedings in the company's name, the power to do so reverts to the general meeting. But the manner in which the general meeting can retain the ultimate control is only through its power to amend the Articles and remove the directors and to substitute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of the Board of Directors must in the first instance be got rid of by taking proper proceedings by the share-holders in that behalf and unless that step is taken it would not be open to the share-holders to prefer an appeal to this Court against the impugned judgment and order. Obviously, it would not be open to them to challenge those resolutions by way of present appeal itself which they have thought fit to file. It may be stated that even in the Memo of Appeal they have not sought to challenge those resolutions as being not binding on them or as being against the interest of respondent No. 1 Company. In this view of the matter, we feel that the requisite steps to challenge and set aside the relevant resolutions not having been taken the present appeal preferred by the Company through its share-holders would be incompetent and in our view, the appeal must be held to be incompetent on both preliminary points urged by Mr. Khambatta before us. 35. Turning to the maintainability of Appeal No. 153 of 1969 which has been preferred by original respondents Nos. 8 and 10, in our view, the objection is clearly well-founded. It is not disputed that original respondents Nos. 8 and 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t statement. In our view, therefore, neither in their capacity as directors of respondent No. 1 Company nor as eonominee parties to the original proceedings the original respondents Nos. 8 and 10 are entitled to prefer this appeal on merits to this Court. The preliminary objection against the maintainability of this appeal must, therefore, be upheld. 36. However, we do not propose to dispose of these appeals by merely upholding the preliminary objections to their maintainability. We will proceed to deal with these appeals on merits on the assumption that these appeals are competent and on that basis we will proceed to deal with the contentions that were urged on behalf of respondent No. 1 Company represented by its share-holders in Appeal No. 154 of 1969 and on behalf or original respondents Nos. 8 and 10 in Appeal No. 153 of 1969. 37. On merits, the impugned judgment and orders passed by the learned Judge on August 28, 1969 were challenged both in regard to their legality and propriety. 38. On the question of legality it was contended that the reconstituted Board for a period of seven years in the manner done by the learned Judge was violative of ss. 255 and 408 of the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... new Article 95 in the manner done which was contrary to s. 255 of the Companies Act and that ss. 398 and 402 under which the petition has been disposed of do not confer any authority on the Court to frame such an Article contrary to s. 255 of the Companies Act. Mr. Sen contended that though under cls. (a) and (g) of s. 402 any order passed by the Court in a proceeding instituted under s. 398 could provide for the regulation of the conduct of the Company's affairs in future and could also provide for any other matter for which in the opinion of the Court it is just and equitable that provision should be made, the section did not confer any authority or power upon the Court to frame an Article which would be contrary to s. 255. In other words, according to him, any order making provision for the regulation of the conduct of the Company's affairs in future and making provision for any other matter which in the opinion of the Court it would be just and equitable to make, the Court's orders and any provision made thereunder must be in consonance with the other provisions of the Act. The Board as reconstituted by the learned Judge was also challenged on the ground that it con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may provide for the appointment of not less than two-thirds of the total number of the directors of a public company, according to the principle of proportional representation, whether by the single transferable vote or by a system of cumulative voting or otherwise, the appointments being made once in every three years and interim casual vacancies being filled in accordance with the provisions, mutatis mutandis, of s. 262. He pointed out that neither s. 398 nor S. 402 of the Companies Act under which the impugned orders were passed contained any such non-obstante clause and according to him, the absence of non-obstante clause in these sections clearly shows that the Court could not by any order passed thereunder make a provision or modify any Article or insert a new Article which would be contrary to s. 255 of the Act. Thirdly, he strongly relied upon s. 404 of the Companies Act which deals with the effect of alteration of memorandum or articles of a company by Court's order under s. 397 or 398. Under sub-cl. (1) of s. 404 it has been provided that where an order under s. 397 or 398 makes any alteration in the memorandum or articles of a company, then, notwithstanding any other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sections confer upon the Court jurisdiction and powers of the widest amplitude to pass appropriate orders which the circumstances of the case may require, it would be difficult to accept Mr. Sen's submissions that the impugned orders and directions are liable to be set aside on the basis that the reconstituted Board or modified Article 95 was not in consonance with s. 255 of the Act. To correctly appreciate the ambit of the Court's jurisdiction and the amplitude of the Court's powers under ss. 397, 398 read with S. 402 of the Companies Act, 1956, it will be necessary to consider the entire scheme of the Act pertaining to corporate management of companies. At the outset, it may be stated that all these concerned provisions occur in Part VI of the Act which deals with the Management and Administration of Companies. It may further be pointed out that in this part there are eight chapters. Chapter I contains general provisions with regard to corporate management and administration of the companies such as registered office, registers of members and debenture holders, annual returns, meetings and proceedings, accounts, audit, investigation etc. chapter II, which includes s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Part VI of the Act will also indicate that the powers of the Court under s. 397 or 398 read with s. 402 cannot be read as being subject to the other provisions contained in sections dealing with usual corporate management of a company in normal circumstances. As stated earlier, Chapter VI deals with the prevention of oppression and mismanagement and the provisions therein have been divided under two heads under head A powers have been conferred upon the Court to deal with cases of oppression and mismanagement in a company falling under s. 397 and s. 398 of the Act while under head B similar powers have been given to the Central Government to deal with cases of oppression and mismanagement in a company but it will be clear that some limitations have been placed on Government's powers while there are no limitations or restrictions on Court's powers to pass orders that may be required for bringing to an end the oppression or mismanagement complained of and to prevent further oppression or mismanagement in future or to see that the affairs of the company are not being conducted in a manner prejudicial to public interest. In other words, whenever the Legislature wanted to do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cate what type of orders the Court could pass and cls. (a) to (g) are clearly illustrative and not exhaustive of the type of such orders. Clauses (a) and (g) indicate the widest amplitude of the Court's power; under cl. (a) the Court's order may provide for the regulation of the conduct of the company's affairs in future and under cl. (g) the Court's order may provide for any other matter for which in the opinion of the Court it is just and equitable that provision should be made. An examination of the aforesaid sections clearly brings out two aspects, first the very wide nature of the power conferred on the Court and secondly the object that is sought to be achieved by the exercise of such power with the result that the only limitation that could be impliedly read on the exercise of the power would be that nexus must exist between the order that may be passed thereunder and the object sought to be achieved by these sections and beyond this limitation which arises by necessary implication it is difficult to read any other restriction or limitation on the exercise of the Court's power. We are, therefore, unable to accept Mr. Sen's contention that the Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplant the entire corporate management or rather corporate mismanagement by resorting to non-corporate management which may take the form of appointing an administrator or a special officer or a committee of advisers etc. who could be in charge of the affairs of the company. If the Court were to have no such power the very object of the section would be defeated. We must observe in fairness to Mr. Sen that it was not disputed by him that powers of the Court under s. 398 read with S. 402 of the Companies Act were wide enough to enable the Court to appoint an administrator or a special officer or a committee of advisers for the future management of the company and thereby supplant completely the corporate management through Board of Directors and it was conceded that it should be so for the simple reason that if as a result of corporate management that has been allowed to run for a certain period oppression or mismanagement has resulted, the Court should have power to substitute the entire corporate management by some form of non-corporate management and while doing so the Court cannot obviously have any regard or be subject to the other provisions dealing with the corporate form of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of the Act but would be subject to such provisions. In the first place, like a deeming provision which is sometimes made with a view to make explicit what is obvious a non-obstante clause is also used at times ex abundant cautela to make explicit what is obvious and therefore the absence of that clause would not necessarily lead to an inference suggested by Mr. Sen. Secondly, normally such non-obstante clause becomes necessary when the enacted provision or enacted clause is necessarily going to conflict with the other provisions of the Act and if there would be no such conflict, then there would be no necessity to use a non-obstante clause and we shall indicate presently that there is no necessary conflict between the provisions of s. 397 and s. 398 read with s. 402 and the provisions of s. 255 of the Act and, therefore, the non-obstante clause must not have been used while enacting the relevant sections. By the very nature the provisions contained in ss. 397 and 398 read with s. 402 have been enacted to meet emergent situations and extraordinary circumstances while s. 255 contains provisions which would operate when the normal corporate management of a company is being r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich would reduce the legislation to futility and should rather accept the bolder construction based on the view that Parliament would legislate only for the purpose of bringing about an effective result. 43. The above passage is based on the judgment of Viscount Simon L.C in the case of Nokes v. Doncaster Amalgamated Collieries, Ld. . [1940] A.C 1014., and, in our view, the rule could be applied to the instant case. Having regard to the admitted position that there is neither a non-obstante clause contained in any of these relevant sections nor is there anything to indicate that the Court's powers under these sections are to be exercised subject to any of the other provisions of the Act, there is a choice available to the Court and having regard to the manifest purpose of the legislation, it will be difficult to accept the contention of Mr. Sen that the narrower construction of these sections leading to curtailment of powers conferred upon the Court should be adopted simply because the provisions do not contain any non-obstante clause; instead we are inclined to adopt a broader construction, inasmuch as, such construction would have the effect of achieving the desired resu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of s. 255 and provisions of s. 397 or 398 read with s. 402 would respectively operate are entirely different and mutually exclusive and as such there will be no repugnancy between any article that may be re-framed or inserted by the Court while passing orders under s. 398 read with s. 402 and other provisions of the Act including s. 255 which deal with normal corporate management of a Company. The contention that the re-framing or insertion of a new article like Article 95 as done in this case will be hit by s. 9(b) cannot be accepted. 45. The only other aspect which was pressed by Mr. Sen was the one emerging from sub-s. (2) of s. 404. Sub-section (2) of s. 404 provides that the alterations made by the Court's order in the memorandum or articles of company shall, in all respects, have the same effect as if they had been duly made by the company in accordance with the provisions of the Act. Great emphasis was laid by Mr. Sen upon the expression shall, in all respects, have the same effect occurring in sub-s. (2) and according to Mr. Sen, this expression clearly suggested that the altered article should not be repugnant to any of the provisions of the Act for ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on it thereunder whereas in the instant case powers have been exercised by the Court under s. 398 read with s. 402 of the Act and as such it is difficult to accept the contention that the exercise of such power is contrary to the provisions of s. 408 of the Act. In point of fact all that had happened was that the learned Judge invited suggestions from counsel appearing for the Union of India to suggest names of three persons as nominees of the Central Government whom he wanted to appoint on the reconstituted Board and after the names were mentioned to him he appointed those persons as Government nominees on the reconstituted Board. The decision to reconstitute the Board with three directors being the representatives of the share-holders, three directors being the representatives of the Central Government and five directors being appointed by the Court was taken by the learned Judge himself and after taking this decision he invited suggestions as to who should be the representatives of the respective parties and it is this manner that the learned Judge came to appoint the three nominees of the Central Government on the reconstituted Board of respondent No. 1 Company. The contention, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um mentioned in s. 22 did not entitle the Tribunal to disregard those provisions. The Tribunal having thus acted illegally in directing the grant of sick and casual leave more than the maximum fixed by s. 22 the said direction was set aside by the Court. Obviously the Industrial Tribunal could not give directions which were contrary to the express provision of s. 22 of the Delhi Shops and Establishments Act. In our view, these decisions would not be applicable to the facts of this case where the question is what is the amplitude of the powers of the Court on a true interpretation of ss. 397, 398 and 402 of the Companies Act when the Court is called upon to meet emergent situations or extraordinary circumstances in the management of the affairs of a company where the normal corporate management has failed. 49. In the context of the above question Mr. Phadke invited our attention to three decisions having a bearing on the Court's powers under s. 402 of the Act, namely R.E.S Corpn. Ltd. v. Nageshwara Rao . [1956] A.I.R S.C 213., Shanti Prasad v. Kalinga Tubes Ltd. . [1965] A.I.R S.C 1535. and Richardson Cruddas Ltd. v. Saridas Mundhra . [1959] A.I.R Cal. 695.. In the first tw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... true construction of s. 398 read with s. 402, we are clearly of the view that no limitation of the type suggested by Mr. Sen on the Court's power could be placed and the same are not subject to s. 255 or the other provisions of the Act dealing with normal corporate management. The Court had ample powers to reconstitute the Board in the manner done and to re-frame Article 95 in the manner done and neither the reconstituted Board nor the re-framed Article 95 are violative of s. 255 or 408 of the Act. The orders passed and directions given by the learned Judge cannot be said to be either illegal or without jurisdiction. The contention with regard to legality of the impugned orders and directions, therefore, must fail. 52. During the course of his argument Mr. Sen submitted that the Court could have achieved its objective by reconstituting the Board of Company No. 1 in accordance with s. 255 rather than by contravening the same and in that behalf he pointed out that ⅓rd of the total number of directors who are immune from retirement by rotation could have been appointed by the Court and out of the remaining ⅔rds who are liable to retire by rotation half the number dr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company that the reconstituted Board should consist of nine persons, the five persons of whom could be nominated by Government and the four persons could be elected by the share-holders. His contention was that the reconstituted Board in effect resulted in drastic curtailment of the share-holders' right to have a corporate management in accordance with s. 255 of the Companies Act, that is to say, a drastic curtailment of their right to have the company managed by the elected directors. He also urged that such drastic curtailment of the share-holders' right is to last for a period of seven years and such drastic curtailment was not warranted. He also complained that all this was done without Bearing the share-holders and therefore the impugned order should be set aside. Similar contentions were urged by Mr. Thakkar on behalf of original respondents Nos. 8 and 9 in their appeal. So far as the propriety of the impugned orders is concerned, it must be borne in mind that after all the section under which the Court acted confers discretion upon the Court to pass such orders as it thinks fit and it was in exercise of judicial discretion conferred upon the Court that the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the facts that criminal proceedings were pending against respondent No. 2 and his co-accused and also taxation proceedings under the Income-tax Act and other Taxation Laws were pending and if the learned Judge felt that these proceedings will take quite some time before the management could be handed over back to the share-holders' directors and that in the meanwhile evidence of employees of the Company should be ensured, then even the period of seven years cannot be regarded as any unreasonable period. In our view, therefore, on merits the propriety of the order is not capable of being challenged or interfered with by this Court in appeal. So far as original respondents Nos. 8 and 10 (being the appellants in Appeal No. 153 of 1969) are concerned, the position is still very clear. As eo nominee parties to the original proceedings no adverse order has been passed against them, on the contrary they have been retained on the reconstituted Board and as such they can have no grievance. So far as the share-holders' right to manage the company in accordance with s. 255 is concerned, we have already indicated that they had submitted to the orders of Court as regards future mana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appellant before us), contended that the injunction issued against his client that he should not become a director of the Company at any time in future was unwarranted by the facts and circumstances of the case. Mr. Bhatt pointed out that respondent No. 2 had given an undertaking in the proceedings instituted by the Union of India under s. 388B to the effect that during the pendency of those proceedings he will not stand for election as director of the Company. He further pointed out that since the proceedings under s. 388B which commenced on September 17, 1964 are still pending and it will take some time before these are finally disposed of, the undertaking given by respondent No. 2 will remain in operation till the said proceedings come to an end and in view of this undertaking it was not necessary that respondent No. 2 should have been debarred from becoming a director of respondent No. 1 Company for all times in future. Mr. Bhatt also invited our attention to the provisions of ss. 388B and 203 of the Companies Act. He pointed out that under sub-s. (3) of s. 388B after accepting the decision of the High Court under Chapter IV-A the Central Government while passing orders under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... true it cannot be said that the learned Judge was wrong in taking the view that he should be debarred from becoming a director of respondent No. 1 Company at any time in future. So far as the provisions of s. 388B and s. 203 are concerned, it seems to us that those provisions deal with different situations arising under different circumstances and in the instant case, the Court was concerned with the proceedings under s. 398 read with s. 402 and in those proceedings it was up to the learned Judge to decide for what period this respondent should be debarred from becoming a director and from interfering or indermeddling with the affairs and conduct of respondent No. 1 Company and the discretion having been exercised judicially on proper materials, it will not be possible for us to interfere with that order passed by the learned Judge. 60. Mr. Bhatt next contended that some of the observations made by the learned Judge in his judgment amount to suggesting that respondent No. 2 had admitted some of the allegations made against him and some observations amount to some sort of findings having been recorded on some issues against respondent No. 2. 61. We do not agree with this cont ..... X X X X Extracts X X X X X X X X Extracts X X X X
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