TMI Blog1964 (2) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... trol. This petition has been an exception and the only reason I can see for its having run its full course is that there is absolutely no merit in it. I shall immediately proceed to state the facts giving rise to the petition. The facts are many and to some extent disputed and it is, therefore, necessary to set them out in some detail. The company concerned in the petition is Shri Sayaji Jubilee Cotton and Jute Mills Limited. I shall hereinafter refer to Shri Sayaji Jubilee Cotton and Jute Mills Limited as the company. The company was incorporated on 3rd September, 1907, under the provisions of the Baroda Companies Act, Samvat year 1953. The authorised capital of the company is ₹ 3,35,000 divided into 6,700 shares of ₹ 50 each. The subscribed and paid up capital of the company is ₹ 2,60,550 divided into 5,211 shares of ₹ 50 each. There are in all 587 shareholders of the company. The registered office of the company is situate at Induprasad Rawal's Bungalow, Bindu Sarovar Road, Sidhpur. The company was promoted for the purpose of running a textile mill at Sidhpur. Clause 6 of the memorandum of association of the company provided for appointment of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hladji Sevakram and Company as secretaries, treasurers and agents of the company on the terms and conditions contained in the said agreement. The remuneration set out in the said agreement, to which I shall for the sake of convenience refer as the first managing agency agreement, was a little different from that specified in clause 6 of the memorandum of association and articles 119 and 120 of the articles of association, though again that is not a matter relevant for the purpose of the present petition. The clause of the first managing agency agreement material for the purpose of the present petition was clause 7 which in its English translation provides as follows : 7. The moneys required by way of working capital for running the mill which you agents have to procure in accordance with the memorandum of association and articles 96 and 97 under heading 11 of the articles of association shall be brought on 3'our behalf only by Shah Manilal Mulchand and his heirs and successors and such moneys shall be procured by Shah Manilal Mulchand, his heirs and successors on account of the mill on interest at the rate of six per cent, per annum and for the work of procuring moneys for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rate of 12 annas per ₹ 100 on the total amount of sale proceeds of yarn and cloth and also 12 annas per ₹ 100 on the amount of purchase price of cotton in consideration of the work of lending and other wise procuring moneys on interest at the rate of six per cent, per annum as above and for sincerely purchasing cotton at the market rate for the Mills Company and for sincerely selling yarn and cloth in the market in such a way as to benefit the Mills Company. (6). You shall have to include the commission ( haksai ) on the purchase of cotton in your invoice for the cotton purchase and as you say that there is a custom to pay the amount of purchase of cotton on the next day after it is weighed, it will be credited to your account as per that custom but no interest is to be paid on the amount of commission ( haksai ) . But that amount is to be credited to your account after settling the accounts at the end of the month of December. The commission ( haksai ) to be paid in consideration of the sale of yarn and cloth will be credited to your account after settling the accounts at the end of the month of December every year. (16). The amount to be lent by you as wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f time but after some years, the condition deteriorated and towards the end of May, 1935, Messrs. Prahladji Sevakram and Company found it difficult to run the textile mill of the company. Messrs. Prahladji Sevakram and Company accordingly handed over the management of the business of the company to the board of directors on 31st May, 1935, and also tendered their resignation as secretaries, treasurers and agents of the company. The directors thereafter ran the textile mill of the company for a few months through a committee appointed for the purpose, but the textile mill of the company had soon to be closed down. Efforts were thereafter made to restart the textile mill and, as a result of the meetings of the shareholders and the creditors, a scheme was framed for reconstruction of the company and resuming the textile mill of the company. The scheme was sanctioned by the District Court, Mehsana, on 14th October, 1935. Under the scheme the creditors of the company were divided into three classes, the first class, described as A consisted of Messrs. Prahladji Sevakram and Company and Shah Manilal Mulchand and the respective partners of those firms, the second class, described as B c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mulchand to the company under this agreement. The amounts advanced by Shah Manilal Mulchand to the company under this agreement were shown separately in the balance-sheets of the company from year to year and the last balance-sheet which showed the amount was the balance-sheet as at 31st December, 1942. The entire amount advanced by Shah Manilal Mulchand to the company under this agreement was returned some time in 1943, with the result that the balance-sheet as at 31st December, 1943, did not show any loan as outstanding from the company in this account. As I have pointed out above, the textile mill of the company was restarted on 13th February, 1937, and between 1937 and 1946, the company made good profits from the working of the textile mil. The creditors belonging to classes B and C were regularly paid the instalments in respect of their dues from out of the profits of the company and they wore fully paid off by the end of 1941. Messrs. Prahladji Sevakram and Company and Shah Manilal Mulchand thereupon became entitled to receive commission from the company under their respective agreements with the company from Ist January, 1942, and a resolution to that effect was passed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dji Sevakram and Company Limited at such lump sum figure as they thought fit. The second managing agency agreement with this modification continued in force until 31st December, 1956, when a new agreement was necessitated by reason of the enactment of the Companies Act, 1956, which came into force with effect from Ist April, 1956. A new agreement was accordingly entered into between the company and Messrs. Prahladji Sevakram and Company Limited on 10th January, 1958, after obtaining the requisite sanction of the Central Government and under this new agreement the remuneration payable to Messrs. Prahladji Sevakram and Company Limited as managing agents of the company was fixed at ten per cent, of the net profits of the company in accordance with the provisions of the Companies Act, 1956, and the minimum remuneration was determined at ₹ 25,000 per year. This agreement was to be operative from Ist January, 1957. It may be pointed out at this stage that the managing agency of Messrs. Prahladji Sevakram and Company Limited thereafter came to an end on 15th August, 1960, by reason of the provisions contained in section 330 of the Companies Act, 1956. Since the Companies Act, 195 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions under the adat agreement and enabling the directors and their relations to recover their moneys which were lying locked up in the business of the company. I shall consider these rival versions a little later when I examine the arguments advanced on be half of the parties. To continue the narration further, on the textile mill of the company being closed down, the Majoor Mahajan Sangh, being a representative union of the employees of the company, preferred an application before the authority under the Payment of Wages Act for payment of retrenchment compensation and the claim preferred by them on behalf of the workmen aggregated to ₹ 7,66,074. Before I narrate the history of what happened on this application, I must point out that on Ist December, 1947, a letter was addressed by Chandrakant Bakubhai, Rameshchandra Bakubai and Sanatkumar Bakubhai, as partners of Shah Manilal Mulchand, to the company terminating the adat agreement in view of the fact that the textile mill of the company had closed down. By this letter they also requested the company to make up accounts in respect of the dealings between Shah Manilal Mulchand and the company and to do the needful in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to secure payment of the amount due and owing from the company to Shah Manilal Mulchand and in consideration Shah Manilal Mulchand agreed to give time to the company up to 28th March, 1959. The plant and machinery which constituted the rest of the movable properties of the company were also pledged by the company in favour of these parties including Shah Manilal Mulchand to secure payment of the amounts respectively due and payable by the company to them and in their turn they agreed to give time to the company to repay the said amounts up to 28th March, 1959. The company also created an equitable mortgage of its immovable properties in favour of the same parties to secure repayment of the amounts respectively due and payable to them by the company. Two memoranda of pledges were executed by the company in respect of the aforesaid pledges created by the company in favour of these parties and Shah Manilal Mulchand and a memorandum of equitable mortgage was executed by the company in respect of the aforesaid equitable mortgage made by the company in favour of Shah Manilal Mulchand. All these documents were executed on 29th March, 1958. Considerable reliance has been placed on behalf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey decided to close down the textile mill and to sell the block of the textile mill to Bharat Kala Bhandar Limited for the price of ₹ 11,40,000, on 9th September, 1961. Before I proceed with the narration of the history of the facts I may state here that after the textile mill was closed down on 25th April, 1957, the sale of the properties of the company was advertised in the issue of the Times of India on 17th, 20th and 22nd June, 1957, since the directors felt that it would not be possible to run the textile mill with the hope of making any profit and that it would be in the interests of the company to sell off its properties at a reasonable price. Pursuant to these advertisements only one offer was received by the company and that was from Messrs. Indian Textile Traders. By their letter dated 23rd July, 1957, Messrs. Indian Textile Traders made an offer for purchase of the machinery of the company for ₹ 6,07,500. The directors, however, found the offer to be too low and they accordingly did not pursue the same further. A number of persons interested in the purchase of the properties of the company came to see the properties but none of them gave a concrete offer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Limited and to finalise the same as also to obtain the consent of the secured creditors to such sale. The second resolution authorized Hiralal Nagindas Desai and Haridas Prabhudas Parikh to execute the deed of sale in respect of the entire block of the company after the sale was finalised. It appears that Induprasad Prahladji Rawal and Rameshchandra Bakubhai thereafter carried on negotiations with Bharat Kala Bhandar Limited and ultimately as a result of the negotiations an offer in writing was made by S. M. Junjunwala, advocate on behalf of Bharat Kala Bhandar Limited, to Messrs. Kanga and Company, solicitors on behalf of the company, by a letter dated 12th July, 1961. It is not necessary at this stage to set out the terms and conditions of the offer for I shall have occasion to consider the same in greater detail when I consider the question whether any of the material terms and conditions of the offer were omitted to be set out in the explanatory statement issued under section 173 of the Companies Act, 1956, while con vening the extraordinary general meeting of the company for the purpose of obtaining the consent of the company under section 293 of the Companies Act, 1956. All t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f those shareholders, namely, Dahyalal Chhotalal and Jiabalal Prabhudas thereupon sent an express telegram to Induprasad Prahladji Rawal at 2-50 p.m. on the same day complaining against his having refused to accept the proxies which were tendered at his residence at 1-25 p.m. The extraordinary general meeting of the company was thereafter held on 5th September, 1961. At this meeting an objection was raised on behalf of some of the shareholders that the resolution giving consent to the sale of the block of the company to Bharat Kala Bhandar Limited could be passed only as a special resolution and not as an ordinary resolution and that the resolution could not, therefore, be carried unless there was 3/4th majority of votes in favour of the resolution. The objection was not well founded and was, therefore, negatived by the chairman. Certain other objections were also taken by these shareholders who did not want the resolution to be passed and a statement was handed in by them to the chairman containing those objections. Those objections were in the opinion of the chairman frivolous and were, therefore, rejected by him. Of these objections, the only one relevant for the purpose of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bharat Kala Bhandar Limited for the purchase of the block of the company. Since the negotiations for the purchase of the block to the company were going on from about July, 1961, Durgaprasad Birla had sent Sankerlal Ramlal Sharma, who was a clerk in Bharat Commerce and Industries Limited, Nagda, to Sidhpur in or about July, 1961, for the purpose of keeping a watch on the machinery of the company, so that none of the machinery of the company might be. removed or damaged during the pendency of the negotiations. Shankerlal Ramlal Sharma was staying in a bungalow situate in the mill premises at Sidhpur and he was keeping a watch on the machinery with the help of two jamadars taken by him. It was this Sankerlal Ramlal Sharma who received the letter date 5th September, 1961, on behalf of Bharat Kala Bhandar Limited when it was tendered by the postman. After receiving the letter he forwarded it to Bharat Commerce and Industries Limited, Nagda. Considerable controversy centered round this incident since one of the contentions raised in the course of the arguments before me was that by this letter, dated 5th September, 1961, which also contained a copy of the statement of objections and whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndar Limited in Bombay. It may be pointed out here that the secured creditors of the company, namely, Induprasad Prahladji Rawal, Chandrakant Bakubhai and their relations and Shah Manual Mulchand in whose favour securities were created on 29th March, 1958, as mentioned above, gave their consent to the sale of the block to Bharat Kala Bhandar Limited and they accordingly joined as confirming parties in the deed of sale. The result was that on 9th September, 1961, the property in the movable properties of the company passed in favour of Bharat Kala Bhandar Limited and so far as the immovable properties were concerned, the deed of sale transferred the property in the immovable properties to Bharat Kala Bhandar Limited and the entire price of ₹ 11,40,000 was paid off by Bharat Kala Bhandar Limited to the company. The transaction was thus carried out in its entirety on 9th September, 1961, and the only thing which thereafter remained was registration of the deed of sale. On receiving the amount of the purchase price from Bharat Kala Bhandar Limited, the company paid off the amounts due and owing by it to its secured creditors. It may be pointed out that apart from these secured cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imed in the suit was a declaration that the resolution passed at the said meeting was illegal, inoperative and null and void and was not binding on the company or its shareholders and an injunction restraining the company and its directors from acting upon the said resolution. No relief was claimed against Bharat Kala Bhandar Limited. Immediately after filing the suit, an application for interim injunction was made on behalf of these two shareholders and on the application an ad interim injunction was granted restraining the company from acting upon the resolution dated 5th September, 1961. No ad interim injunction was issued against the Sub-Registrar of Assurances. The Sub-Registrar of Assurances at Bombay, however, refused to register the deed of sale since a copy of the ad interim order issued by the court of the Civil Judge, Junior Division, Sidhpur, was served upon him. Bharat Kala Bhandar Limited thereupon preferred a Special Civil Application No. 742 of 1962 in the High Court of Bombay under articles 226 and 227 of the Constitution on 7th May, 1962, for a writ of mandamus requiring the Sub-Registrar of Assurances to register the deed of sale. At the hearing of the Special Ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s should be appointed to manage the affairs of the company in future. In addition to these two reliefs which as I said above were the main reliefs prayed for in the petition, it was also claimed in the petition that the directors of the company or any one or more of them should be ordered to pay or contribute such sum or sums to the assets of the company as and by way of compensation in respect of mismanagement and malpractices committed by them in relation to the affairs of the company as the court might think fit, though I may point out that this relief was not seriously pressed on behalf of the petitioners. On the petition being admitted, a notice was issued to the Central Government under section 400 of the Companies Act, 1956. The Central Government has, however, not filed any affidavit in response to the notice. At the date when the petition was filed, no one was made a party respondent to the petition and that was presumably done having regard to the form prescribed for such petitions by the Companies Court Rules, 1959. But when the petition came up for hearing it was felt that it would be desirable to add the company, its directors and Bharat. Kala Bhandar Limited as par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplied for leave to amend the petition by adding paragraph 9A after paragraph 9. By the proposed paragraph 9A the petitioners sought to contend that the resolution dated 8th December, 1957. passed by the board of directors cancelling the adat agreement between the company and Shah Manilal Mulchand was illegal, invalid and not binding on the company for three reasons, namely, (1) of the three directors present at the meeting, Chandrakant Bakubhai being a partner of Shah Manilal Mulchand was interested in the resolution but he had not disclosed the nature of his concern or interest as required by section 299 of the Companies Act, 1956 ; (2) Chandrakant Bakubhai was interested in the cancellation of the adat agreement and yet he took part in the discussion on the resolution ; and (3) the presence of Chandrakant Bakubhai could not be counted for the purpose of forming a quorum at the time of any such discussion and there was accordingly no quorum and besides the resolution was also oppressive to the petitioners and other shareholders of the company and prejudicial to the interests of the company. The application for leave to amend the petition was opposed on behalf of the responden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her there was justification or not, the petition did proceed on the basis that the adat agreement was subsisting at the date of the petition. When it was pointed out in the affidavit in reply that the adat agreement was cancelled by the resolution of the board of directors dated 8th December, 1957, the pettioners immediately in their affidavit in rejoinder came forward in the contention that the said resolution was illegal, invalid and not binding on the company. Of course the petitioners should have, as soon as the true position was brought to their notice by the affidavit in reply, taken immediate steps to put the petition in order by applying for the necessary amendment, but the petitioners did not do so and it was only after the petition had gone on before me for some time that the application was made for leave to amend the petition. That, however, cannot be a sufficient ground for refusing leave to amend the petition. If the factual position is that the adat agreement was not subsisting between the company and Shah Manilal Mulchand at the date of the petition but was cancelled by the resolution dated 8th December, 1957, the petitioners must be given an opportunity to am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, made an order allowing the proposed amendment and pursuant to the order made by me, the proposed amendment was carried out by the petitioners on 29th March, 1963, by introducing paragraph 9A after paragraph 9 in the petition. An affidavit in reply to paragraph 9A of the petition was made on 3rd April, 1963 by Chandrakant Bakubhaion behalf of the company and the directors. This however, was not the end of the applications for leave to amend the petition. Yet another application for leave to amend the petition was made on behalf of the petitioners on 18th April, 1963. Extensive amendments were sought in the petition on this occasion. After paragraph 21 a new paragraph 21A was sought to be added. By this paragraph the petitioners wanted to aver facts showing that the letter dated 5th September, 1901, addressed by Dahyalal Chhotalal Patwa to Bharat Kala Bhandar Limited was received by Shankerlal Ramlal Sharma on behalf of Bharat Kila Bhandar Limited on 8th September, 1961, and that Shankerlal Ramlal Sharma was an agent of Bharat Kala Bhandar Limited authorized to receive the letter on behalf of Bharat Kala Bhandar Limited. Since the averments in this paragraph did not seek to int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... introduction of paragraph 23A after paragraph 33 of the petition. These amendments were also rejected by me since they did not add anything to the petition beyond merely setting out the evidence, which evidence was already on record in the shape of the affidavits and documents filed by the parties. The petitioners also sought to add prayers ( f )( i ) and ( f )( ii ) after prayer ( f ) in the petition. These prayers were consequential upon the averments made in the petition and merely amplified the relief which was already sought in prayer ( a ) of the petition. I, therefore, allowed the introduction of these prayers by way of amendment. In reply to these amendments permitted by me, two affidavits in reply were filed on behalf of Bharat Kala Bhandar Limited, one made by Pratapvardhan Deva, the constituted attorney of Bharat Kala Bhandar Limited and the order made by Shankerlal Ramlal Sharma. On these affidavits an application was made on behalf of the petitioners for an order that Pratapvardhan Deva and Shankerlal Ramlal Sharma should be produced for cross-examination by the petitioners and I, accordingly, made an order directing the attendance of Pratapvardhan Deva and Shankerla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be exercised in the present case, since Bharat Kala Bhandar Limited was, on the facts and circumstances of the case, protected by the doctrine of indoor management. The validity of these preliminary objections turned on the true interpretation to be put on the provisions of sections 397 and 398 of the Companies Act, 1956. I shall, therefore, immediately proceed to examine the scope and ambit of these sections. Sections 397 and 398 are part of a fasciculus of sections commencing from section 397 and ending with section 407 and this fasciculus of sections occurs in section A dealing with powers of court under Chapter VI headed Prevention of oppression and mismanagement . Under section 397 any members of a company who complain that the affairs of the company are being conducted in a manner oppressive to any member or members including any one or more of themselves, may petition the court which, if satisfied that the company's affairs are being conducted in a manner oppressive to any member or members and that the facts justify the making of a winding-up order on the ground that it is just and equitable to do so but that this would unfairly pre judice such member or members ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cure and remedy according to the true intent of the makers of the Act, pro bono publico. Now Mr. S. B. Vakil is certainly right in his submission that sections 397 and 398 being designed to suppress an acknowledged mischief, they should receive liberal interpretation and the court should give such construction as will advance the remedy, but even applying this principle of interpretation, it is not possible to accept the construction contended for on behalf of the petitioners. The reasons are as follows : Prior to the enactment of the Companies Act, 1956, the statute relating to companies was the Indian Companies Act, 1913. There was in the Indian Companies Act, 1913, section 153C which corresponded to sections 397 and 398 of the Companies Act, 1956. This section was introduced in the Indian Companies Act, 1913, by Act 111 of 1951 following the enactment of section 210 in the English Companies Act, 1948. The genesis of the provisions contained in sections 397 and 398 of the Companies Act, 1956, is therefore, to be found in section 210 of the English Companies Act, 1948. Now the position which obtained prior to the enactment of section 210 of the English Companies Act, 1948, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n end to such oppression or mismanagement, apply for relief under the section and the court could make such order as it thought necessary with a view to putting an end to such oppression or mismanagement and preventing its recurrence. When the. Companies Act, 1956, was enacted, what was originally section 153C was split up into sections 397 and 398 and the scope of the remedy was expand ed by removing in cases covered by section 398 the requirement that the aggrieved shareholders must make out a case for winding up under the just and equitable clause before they can apply for relief under that section. The object and purpose of the remedy, however, remained the same, namely, to cure the mischief of oppression or mismanagement on the part of controlling shareholders by bringing to an end such oppression or mismanagement so that it does not continue in future. The remedy was intended to put an end to a continuing state of affairs and not to afford compensation to the aggrieved shareholders in respect of acts already done which were no longer continuing wrongs. It is in the light of this background that the principle of interpretation relied on by Mr. S. B. Vakil must be applied and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch is oppressive to any shareholder or shareholders or prejudicial to the interests of the company and it is this course of oppressive or prejudicial conduct which would form the subject-matter of the complaint in the application. Now the purpose for which an order can be made under sections 397 and 398 being to bring to an end the matters complained of and the matters complained of in an application under these sections being a course of conduct on the part of controlling shareholders in the management of the affairs of the company which is oppressive to any shareholder or shareholders or prejudicial to the interests of the company, it is clear that an order can be made under these sections only for .the purpose of bringing to an end such course of oppressive or prejudicial conduct, that is, for the purpose of putting an end to oppression or mismanagement on the part of controlling shareholders so that there may not be in future such oppression or mismanagement. The language of sections 397 and 398 leaves no doubt as to the true intendment of the legislature and it is trans parent that the remedy provided by these sections is of a preventive nature so as to bring to an end oppress ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quired to put an end to such state of affairs. The necessity of interference under these sections may arise in an infinite variety of circumstances and the legislature has, therefore, left the discretion of the court unfettered in the matter of making an appropriate order. Such power can, however, be exercised by the court only for the purpose of bringing to an end oppressive or prejudicial conduct in the management of the affairs of the company. This, in my opinion, is the true import of sections 397 and 398 and it is amply supported by the heading under which the sections occur. It is now well settled that headings of this kind can be referred to for the purpose of construction of the sections ranged under the headings. In Inglis v. Robertson [1898] AC. 616 , Lord Herschell, called upon to construe section 3 of the Factors Act, 1889, relied upon the fact that the section appeared in a group of sections headed Dispositions by Mercantile Agents and after referring to the headings of different parts of the Act, observed : These headings are not, in my opinion, mere marginal notes, but the sections in the group to which they belong must be read in connection with them and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olders who are aggrieved by such conduct would be entitled to ask the court to set aside such transaction. Now such transaction may not come within any of the three recognized exceptions to the rule in Foss v. Harbottle [1843] 2 Here 461 and yet the aggrieved share holders would be entitled to challenge such transaction by taking proceedings in their own right under sections 397 and 398. The result would be that on this construction the exceptions to the rule in Foss v. Harbottle [1843] 2 Here 461 would be enlarged beyond the three well recognized exceptions and whenever any transaction is entered into by a company with a third party which is part of oppressive or prejudicial conduct on the part of those in management of the affairs of the company, it would be liable to be challenged at the instance of the aggrieved shareholders. Now could the legislature have intended to bring about such a result which would have the effect of almost abrogating the rule in Foss v. Harbottle [1843] 2 Here 461 in so far as transactions with third parties are concerned ? Could the legislature have intended to strike a death-blow to the rule in Foss v. Harbottle [1843] 461 Here 461 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wer to that question. If sections 397 and 398 are intended to confer a new cause of action on individual shareholders to set aside transactions entered into by the company with third parties, on what grounds are those transactions liable to be impeached ? No clue to the answer to this question is furnished by the sections save and except that the transactions would be liable to be set aside if they are part of a continuous and continuing course of oppressive or prejudicial conduct on the part of controlling shareholders. But this would mean that individual shareholders would have a right to ask the court to set aside any transaction entered into by the company with a third party on the mere ground that such transaction, though otherwise perfectly legal and valid and hence, incapable of being avoided by the company, was oppressive to the complaining shareholders or prejudicial to the interests of the company. Such a view would make it impossible for any outsiders to deal with the company and far from advancing the interests of the company would be clearly detrimental to the interests of the company, for it would scare away persons dealing with the company. How would an outsider deal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement between a company and a third party which is subsisting at the date of the order and provides that such agreement may be terminated, set aside or modified by the order. Such an agreement would have a continuing effect and if it is entered into as part of a course of oppressive or prejudicial conduct or has brought about a course of oppressive or prejudicial conduct, the court certainly can, for the purpose of bringing to an end such oppressive or prejudicial conduct, terminate, set aside or modify such agreement. Clause ( e ) of section 402 deals with a situation such as this and does not profess to strike at any past and concluded transactions between a company and third parties which are no longer continuing wrongs. The question, therefore, remains to be considered only in so far as clause ( f ) of section 402 is concerned. Clause ( f ) of section 402 undoubtedly deals with past and concluded transactions between a company and third parties which are no longer continuing wrongs. But, I am afraid, it is not possible to say that this clause is illustrative of a general category of orders which can be made by the court under section 397 or 398, setting aside or interferin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f section 402 merely describes the character of the transaction which can be set aside by the court and the description which is given is that such transaction must be a transaction amounting to fraudulent prefer ence effected within three months before the date of the application. It docs not say that a transaction amounting to fraudulent preference may be set aside only if it is effected within three months before the date of the application, nor does it contain any words indicating that only transactions amounting to fraudulent preference effected within the said period of three months may be set aside and no others. The provision in clause ( f ) of section 402 is clearly not a provision which in any way derogates from the general power of the court under sections 397 and 398. As a matter of fact and that is the second difficulty, which Mr. S. B. Vakil has to meet, the provision in clause ( f ) of section 402 is a provision which is enacted without prejudice to the generality of the power conferred on the court under section 397 or 398 and it cannot, therefore, be construed as derogating from the power of the court under sections 397 and 398 or limiting that power to transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assistance to his argument. Reference may also be made in this connection to section 406 which makes sections 539 to 544 in the form set forth in Schedule XI applicable in relation to an application under section 397 or 398. Section 406 read with section 543 as set forth in Schedule XI enables the court in an application under section 397 or 39S to bring to book delinquent directors managing agents, secretaries and treasurers, managers and other officers of the company and to enforce the company's claim against them if they have misapplied or retained or become liable or accountable for any money or property of the company or committed any misfeasance or breach of trust in relation to the company. The court can, therefore, in cases covered by section 543 as set forth in Schedule XI award, on an application under section 397 or 398 at the instance of the aggrieved shareholders, compensation to the company and through the company to the aggrieved shareholders, in respect of past and concluded transactions which are not continuing wrongs. Just as clause ( f ) of section 402 enables the court to set at naught transactions amounting to fraudulent preference effected within three ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a were cross-examined on behalf of the petitioners on this preliminary objection. I do not think it would be right on my part to refuse to deal with this preliminary objection and to record my opinion on the same. The contention of Mr. I. M. Nanavati relating to this preliminary objection was that even if the power of the court under sections 397 and 398 extended to making an order setting aside a transfer already made by a company in favour of a third party, such power could not be exercised in the present case since Bharat Kala Bhandar Limited had no knowledge at the date when it purchased the movable and immovable properties of the company that there were any irregularities in the passing of the resolution dated 5th September, 1961, or that the affairs of the company were being conducted in a manner oppressive to the petitioners and other minority shareholders or prejudicial to the interests of the company and that the sale was a part of such conduct so as to render the sale liable to be set aside under section 397 or 398 and Bharat Kala Bhandar Limited was, therefore, protected by the doctrine of indoor management. Now it is a well settled rule of company law that an outsider d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Sub-Registrar of Assurances at Bombay, and prior to that, notice of invalidity of the resolution dated 5th September, 1961, was given by Dahyalal Chhotalal Patwa to Bharat Kala Bhandar Limited by his telegram dated 9th September, 1962, which was acknowledged by Bharat Kala Bhandar Limited by its letter dated 14th September, 1961, and that Bharat Kala Bhandar Limited had, therefore, knowledge of the invalidity of the resolution dated 5th September, 1961, before it completed the purchase of the properties of the company. The second answer which Mr. S. B. Vakil gave was that even if 9th September, 1961, be taken as the date at which it should be considered whether Bharat Kala Bhandar Limited had knowledge of the invalidity of the resolution dated 5th December, 1961, notice of invalidity of the said resolution was given by Dahyalal Chhotalal Patwa by his letter dated 5th September, 1961, which was received by Shankerlal Ramlal Sharma on 8th September, 1961, and Bharat Kala Bhandar Limited had, therefore, notice of invalidity of the said resolution on 8th September, 1961, i.e ., a day prior to 9th September, 1961. Now both these answers given by Mr. S. B. Vakil are in my opinion not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... solution: dated 5th September, 1961, should, therefore, have been received by Bharat Kala Bhandar Limited before 9th September, 1961, when the sale of the movable properties was completed and if no such notice was received by Bharat Kala Bhandar Limited until that date, Bharat Kala Bhandar Limited could not be deprived of the protection afforded by the doctrine of indoor management. The question which must, therefore, be considered is whether Bharat Kala Bhandar Limited had notice of the invalidity of the resolution dated 5th September, 1961, before 5th September, 1961. For affecting Bharat Kala Bhandar Limited with notice of the invalidity of the resolution dated 5th September, 1961, prior to 9th September, 1961,Mr. S. B. Vakil relied on the letter dated 5th September, 1961, addressed by Dahyalal Chhotalal Patwa to Bharat Kala Bhandar Limited which was received by Shankerlal Ramlal Sharma on 8th September, 1961. Mr. S. B. Vakil contended that the notice of the invalidity of the resolution dated 5th September, 1961, was given by the said letter and since Shanker lal Ramlal Sharma who received the said letter was the agent of Bharat Kala Bhandar Limited, the notice of the invalid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttending to the preliminaries in connection with the purchase of the movable and immovable properties of the company on behalf of Bharat Kala Bhandar Limited. Shri D. P. Birla sent Shankerlal Ramlal Sharma to Sidhpur in or about July, 1961, to keep a watch on the machinery of the company since the transaction of purchase was being finalised. It is true that Shankerlal Ramlal Sharma was not an employee of Bharat Kala Bhandar Limited but was serving as a clerk in Bharat Commerce and Industries Limited, Nagda, but since he was sent by Shri D. P. Birla who was acting on behalf of Bharat Kala Bhandar Limited to keep a watch on the machinery of the company, he was certainly an agent of Bharat Kala Bhandar Limited for the purpose of keeping a watch on the machinery of the company. But that was the only scope and ambit of the agency of Shankerlal Ramlal Sharma. He was not an agent of Bharat Kala Bhandar Limited for the purpose of receiving any letters on behalf of Bharat Kala. Bhandar Limited or for the matter of that for any other purpose than keeping a watch on the machinery of the company. He was cross-examined by Mr. S. B. Vakil but he emphatically stated that apart from keeping watch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 48 hours for the said letter to reach from Sidhpur to Calcutta and that would have been after 9th September, 1961, It is, there fore, clear that even if the other conditions were satisfied so as to bring into play the principle of law stated above, Bharat Kala Bhandar Limited could not be deemed to have notice of the invalidity of the resolution dated 5th September, 1961, until after 9th September, 1961. Moreover, notice of the invalidity of the resolution dated 5th September, 1961, even if it could be said to have been received by Shankerlal Ramlal Sharma on 8th September, 1961, could not be imputed to Bharat Kala Bhandar Limited since the invalidity of the said resolution was not a fact or circumstance material to the business of the agency of Shankerlal Ramlal Sharma who was employed merely as an agent to keep a watch on the machinery of the company and it could not be said to have come to his knowledge in the course of his employment as agent of Bharat Kala Bhandar Limited. For these reasons I am of the opinion that notice of the invalidity of the resolution dated 5th September, 1961, could not be said to have been received by Bharat Kala Bhandar Limited prior to 9th September ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 397 or 398 at least in so far as the company and its directors are concerned. Now it is not difficult to say when the conduct of the affairs of a company can be said to be prejudicial to the interests of the company, but the question as to when it can be said to be oppressive to any shareholder or shareholders is certainly not free from difficulty. The difficulty of defining oppression arises from the fact that it can take various forms. It is not possible to lay down any straight-jacket formula in which a particular conduct must fall in order to constitute oppression to one or more shareholders. Human ingenuity is such that there may be an infinite variety of ways in which oppression may be caused to some shareholders by the others. It is, therefore, neither possible nor expedient to define what oppression is. But a useful working rule about the meaning of oppression in this context is to be found in the following words of Lord Cooper in Elder v. Elder Watson [1952] SC. 49 where the learned law Lord from Scotland said that the essence of the matter seems to be that the conduct complained of should at the lowest involve a visible departure from the standards of fair-pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the distribution of the sale proceeds in payment of the debts of the directors and their relatives, the directors and the controlling share holders were motivated by only one object, namely, that of extricating Shah Manilal Mulchand from its obligations under the adat agreement and enabling the directors to realise the investment which they had made in the company. According to Mr. S. B. Vakil all these steps which I have outlined in the preceding paragraph were taken by the directors and the controlling shareholders with a view to taking their moneys out of the company and to relieving Shah Manilal Mulchand from its obligations under the adat agreement. I shall presently examine the facts with a view to showing the fantastic nature of this allegation, but before I do so, I must point out one basic and important fact, namely, that the directors and their relatives were not only creditors of the company but they were also holding a large block of shares in the company and if the allegations made on behalf of the petitioners are well-founded, it would mean that the directors and the controlling shareholders acted in a manner prejudicial to their own interests, for it is axiom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the credit of the profit and loss account as a result of the profits made by the company during the previous years was wiped out and the carried forward loss at or about the time when the mill of the company was closed down was in the neighbourhood of ₹ 4,76,849. Of course this was the carried forward loss as on 31st December, 1957, but the mill did not work from and after 23rd April, 1957, and the figure of ₹ 4,76,849 may, therefore, be taken as roughly representing the carried forward loss at or about the time of the closure of the mill. The management of the company, therefore, naturally felt that it would not be advisable to continue to run the mill, for such running would mean incurring of further losses and this in its turn would further affect the financial position of the company. The management, there fore, closed down the mill on 23rd April, 1957. The notice dated 23rd April, 1957, put up by the manager of the company clearly stated that the financial position of the company was not sound and the mill was running in losses and there was no sign of improvement of the financial position in the near future and the mill was, therefore, being closed. The report of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nless a large scale rehabilitation programme was undertaken and the mill was worked only as a spinning unit after installing either new machinery in the spinning, winding and warping departments or second-hand machinery in the blow-room and ring-frame departments and new machinery in the other departments. This piece of evidence completely negatives the case of the petitioners that it was not necessary to close down the mill and that the mill could be continued to be worked at a profit but that it was deliberately closed down by the directors and the controlling shareholders for an ulterior object. Then again there is one other circumstance which also militates strongly against this case of the petitioners. Immediately after closing down the mill the company inserted an advertisement in three issues of the Times of India on 17th, 20th and 22nd June, 1957, inviting offers for sale of the movable and immovable properties of the company and though a number of persons came to see the said properties, no one made concrete offer of even ₹ 7, 00,000 to ₹ 8,00,000 for the same. It was only in September, 1958, that the company could secure an offer of ₹ 9,75,000 from Meh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the mill would mean killing the hen which was laying golden eggs. If the mill continued working, Shah Manilal Mulchand would go on getting adat under the adat agreement and it may be pointed out that the adat was definitely on the higher side. As pointed out by the committee appointed by the Government of Gujarat in its report, the commission of the selling agents, i.e ., Shah Manilal Mulchand, was on the higher side than the normal practice. The continued working of the mill was therefore very much in the interests of Shah Manilal Mulchand. Of course Shah Manilal Mulchand would have had to advance moneys for working capital but that would be against security of cloth and yarn and if the mill could run at a profit, there was no reason why Shah Manilal Mulchand should not advance moneys to the company as provided in the adat agreement and earn adat which was definitely on the higher side. It would be against the interest of Shah Manilal Mulchand to close down the mill unless it was really impossible to run it at a profit. It is, therefore, not possible to appreciate the contention of the petitioners that the mill was closed down in order to extricate Shah Manilal Mulch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the adat agreement and enabling the directors and their relatives to take out their moneys from the company. But this allegation was patently unsustainable. The resolution accepting the termination of the adat agreement was passed by the board of directors on 8th December, 1957, in response to a letter dated Ist December, 1957, which was addressed by Shah Manilal Mulchand to the company. By this letter, Shah Manilal Mulchand pointed out that inasmuch as the company had stopped running the mill, Shah Manilal Mulchand wanted to terminate the adat agreement and Shah Manilal Mulchand accordingly gave notice to the company terminating the adat agreement. This letter was placed before the meeting of the board of directors held on 8th December, 1957. Now the position which obtained at that date was that the mill of the company had stopped working since 23rd April, 1957. Efforts were being made by the company to sell the mill and advertisements had actually appeared in three issues of the Times of India on 17th, 20th and 22nd June, 1957. There was a large claim of over ₹ 7,00,000 which was made by the workmen for retrenchment compensation. It was in this background that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ased and no cloth or yarn to be sold and in that event no adat would be payable to Shah Manilal Mulchand. There would in that event be failure of consideration so far as the obligation of Shah Manilal Mulchand to advance moneys to the company is concerned and that obligation would cease to exist. It is, therefore, clear that the continuance of the working of the mill was the basis of the adat agreement and as soon as the company closed down the mill, Shah Manilal Mulchand was entitled to tell the company that the adat agreement was at an end. When, therefore. Shah Manilal Mulchand by its letter dated Ist December, 1957, intimated to the company that the adat agreement was being terminated, the company had no choice but to accept the termination of the adat agreement. Moreover, it must also be remember ed that under the adat agreement adat was to be paid by the company to Shah Manilal Mulchand at the end of every year but the company admittedly failed to pay the amount of such adat to Shah Manilal Mulchand and that was also an additional reason why the company could not insist on the continuance of the adat agreement when Shah Manilal Mulchand by its letter dated I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulchand from its obligations under the adat agreement If Shah Manilal Mulchand wanted to get out of its obligations under the adat agreement, it was not necessary for the directors and the controlling shareholders to close down the mill, incur a heavy liability for payment of retrenchment compensation, lose the accruing profits, dislocate the business of the company and then accept the termination of the adat agreement. The directors and the controlling shareholders could have easily achieved this purpose by not passing a special resolution granting the consent of the company to the continuance of Shah Manilal Mulchand as selling agent under section 314 of the Companies Act, 1956. Since section 31 provided that except with the previous consent of the company accorded by a special resolution, no director of a company or a relative of such director, shall hold any office or place of profit carrying a total monthly remuneration of five hundred rupees or more, except certain offices or places of profit with which I am not concerned in the present case, and since the partners of Shah Manilal Mulchand were Chandrakant Bakubhai and his brothers, Ramesh Bakubhai and Sanatkumar Bukubh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Shah Manilal Mulchand to put an end to the adat agreement. It may be that such an action on the part of Shah Manilal Mulchand would amount to a breach of the adat agreement. But there would hardly be any damage to the company. It is indeed strange that rather than let Shah Manilal Mulchand adopt such a course, the directors and the controlling share holders should have acted in the manner in which they did, injuring not only their own interest as creditors but also their interests as share holders. There are two or three other circumstances which I may also recall at this stage. These circumstances completely negative the case put forward on behalf of the petitioners and show that in acting as they did, the directors and the controlling shareholders were not actuated by any ulterior object. The past conduct of the directors and the controlling shareholders speaks eloquently of their desire to protect and safeguard the interests of the company. In 1935 at a time when the company was in serious difficul ties and the working of the company had almost come to an end, it was the managing agents and Shah Manilal Mulchand who came to the rescue of the company and not only agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions 299 and 300 of the Companies Act, 1956, and moreover there was no quorum at the meeting of the board of directors which passed the said resolution. Now as I have already pointed out above, the question whether a particular action of the directors was within the limits of the law or was in contravention of any provision of law is not a proper subject-matter of inquiry in a petition under section 397 or 398 of the Companies Act, 1956. If an action of the directors is illegal or invalid, the company or the shareholders may take appropriate action in a court of law challenging the validity of such action, but a petition under section 397 or 398 is not an appropriate remedy for the purpose. The only question with which the court is concerned in a petition under section 397 or 398 is whether the action of the directors- whether within the law or outside the law-is oppressive to the minority shareholders or is prejudicial to the interests of the company. Having regard to this, it is obvious that once I have come to the conclusion that the resolution dated 8th December, 1957, was not oppressive to the minority shareholders or prejudicial to the interests of the company, all further in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and under section 287 of the Companies Act, 1956, one-third of the total strength, namely, two, could form a quorum. There were three directors present at the meeting of 8th December, 1957. Of them of course one was Chandrakant Bakubhai, and since he was a partner of Shah Manilal Mulhand and was, therefore, interested in the resolution, his presence could not be counted for a quorum. The other two directors were, however, not in any way interested to pass the resolution. Mr. S. B. Vakil then contended that there was contravention of section 299 since Chandrakant Bakubhai had not disclosed the nature of his concern or interest in the termination of the adat agreement at the meeting of the board of directors held on 8th December, 1957, and that the resolution was, therefore, illegal and invalid. Now there are more answers than one to this contention. In the first place, the letter dated It December, 1957, addressed by Chandrakant Bakubhai, Ramesh Bakubhai and Sanatkumar Bakubhai as partners of Shah Manilal Mulchand to the company was placed before the board of directors and the board of directors had, therefore, notice that Chandrakant Bakubhai was a partner of Shah Manilal Mulcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m and Company Limited. On this part of the case the argument of Mr. S. B. Vakil was that though the mill was closed down on 25th April, 1957, and advertisements were given for sale of the movable and immovable properties of the company, the directors and controlling shareholders got the company to enter into the agreement dated 10th January, 1958, with Messrs. Prahladji Sevakram and Company Limited so that notwithstanding the closure of the business and the bad financial position of the company, Messrs. Prahladji Sevakram and Company Limited could extract annual sums of ₹ 25,000 from the company. But this argument was patently misconceived. It completely overlooked the circum stances in which the agreement dated 10th January, 1958, was made between the company and Messrs, Prahladji Sevakram and Company Limited. The Companies Act, 1956, came into force from Ist April, 1956, and as a result of the provisions contained in that Act, the managing agency agreement which subsisted between the company and Messrs. Prahladjt Sevakram and Company Limited required to be modified in order to bring it in line with those provisions. The company, therefore, took steps to bring the managing a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce to the directors and their relatives over the other creditors, such transaction may be liable to be avoided at the instance of the other creditors, if any, but surely it cannot be said to be a transaction oppressive to the shareholders in their capacity as shareholders. By this transaction no right of theirs as shareholders was infringed nor was their interest in the assets of the company in any way prejudiced. It was not disputed that the company did owe to Shah Manilal Mulchand and the other creditors the amounts for which the memorandum of equitable mortgage and the memoranda of pledge were executed, but the only grievance was that securities were given for those amounts. Now if for an admitted debt due and owing by a company, the company gives security to the creditor, though it may not be necessary, the action cannot be said to be oppressive to the minority shareholders in their capacity as shareholders. But on the facts I do not think that the giving of securities was an entirely gratuitous act on the part of the company. The resolutions of the board of directors dated 29th March, 1958, show that demands for the amounts respectively due and payable to them were made by Sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion to the minority shareholders or to prejudice the interests of the company and no reliance can be placed on the execution of the said equitable mortgage and pledges for the purpose of supporting the allegations in the petition. As in the case of the resolution dated 8th December, 1957, so also in the case of the equitable mortgage and pledges executed by the company in favour of Shah Manilal Mulchand and the other creditors on 29th March, 1958, Mr. S. B. Vakil, on behalf of the petitioners, raised a contention of invalidity. There were two grounds on which this contention was founded. The first ground was that the consent of the company in general meeting was not obtained under section 293 of the Companies Act, 1956, before the execution of the said equitable mortgage and pledges. The short answer to this contention is that section 293 did not apply since what was being done by the execution of the said equitable mortgage and pledges was not disposition of the whole or substantially the whole of the undertaking of the company within the meaning of that section. The second ground urged by Mr. S. B. Vakil was that the directors did not disclose their interest in the transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the movable and immovable properties of the company was not less than ₹ 20,00,000, but that the said movable and immovable properties had been arbitrarily and capriciously sold for the price of only ₹ 11,40,000. Though this allegation was made in the petition, no evidence was produced in sup port of this allegation. The only piece of evidence on which Mr. S. B. Vakil relied was an affidavit dated 14th September, 1959, made by Induprasad Prahladji Raval in the winding up petition filed against the company in the High Court of Bombay. It is undoubtedly true that in that affidavit it was stated by Induprasad Prahladji Raval that the total value of the machinery of the company was ₹ 12,02,180, but this statement made on 14th September, 1959, merely gave the opinion of Induprasad Prahladji Raval as regards the value of the machinery. This statement was obviously not based on any valuation made by the company. Induprasad Prahladji Raval in his affidavit filed in reply to the present petition pointed out the circumstances in which this statement came to be made by him and he stated that the valuation given in this statement was based on an offer given by one machinery ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to sell the movable and immovable properties of the company. Three advertisements were given in the issues of the Times of India dated 17th, 20th and 22nd June, 1957. But the only offer received was that from Messrs. India Textile Traders which was only for a sum of ₹ 6,07,500 for the machinery of the company. This offer was, however, considered to be a low offer and the directors did not, therefore, accept the same. Thereafter, no offer worth the name was received until about September, 1958, when an offer of ₹ 9,75,000 for the movable and immovable properties was received from Mehsana Jilla Sahakari Audyogik Sangha Limited. This transaction, however, did not go through since the company could not settle the claim of the workmen for retrenchment compensation. The company thereafter continued to make efforts to sell the movable and immovable properties of the company and it was only on 12th July, 1961, that a firm offer to purchase the movable and immovable properties of the company for ₹ 11,40,000 was received from Bharat Kala Bhandar Limited. These facts clearly show that the maximum offer received by the company after the mill was closed down on 25th April, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uation, the directors and controlling shareholders not only prejudiced their interests as shareholders but also injured their interests as creditors, for a part of their claims remained unpaid by the company. It is impossible to accept the contention of the petitioners that the directors and controlling shareholders were so unmindful of their own interests that they sold the movable and immovable properties of the company at a price which was not even sufficient to meet their claims as creditors, unless, of course, the price actually realised was the maximum possible price which could be fetched for the same. The contention that the sale was at an under valuation must, therefore, be rejected. The second ground on which Mr. S. B. Vakil relied was that the sale of the movable and immovable properties of the company was not at all necessary. The argument was that the movable and immovable properties need not have been sold at all and this again was put on two counts. Firstly, it was con tended that the mill could have been run at a profit for the benefit of the share holders and, secondly, that nothing would be received by the shareholders from the sale and on these two counts it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the sale should not have been effected at all. As a matter of fact if the sale had not been effected, the creditors could have got their moneys by obtaining decrees against the company and selling the assets of the company in execution of such decrees which would have been more ruinous to the shareholders. The attack on the merits of the transaction of sale must, therefore, fail and it must be held that the sale of the movable and immovable properties of the company in favour of Bharat Kala Bhandar Limited was neither oppressive to the minority shareholders nor prejudicial to the interests of the minority shareholders nor prejudicial to the interests of the company. Turning now to the attack against the validity of the sale, the main grounds on which the sale was challenged was that it was effected with out obtaining the consent of the company in general meeting as required by section 293 of the Companies Act, 1956. Now a resolution giving the consent of the company was certainly passed at the extraordinary general meeting of the company held on 5th September, 1961, but the validity of this resolution was challenged on the ground that the meeting of the company at which t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribed can have no effect or validity ; if it is directory, penalty may be incurred for non-compliance, but the act or thing done is regarded as good. As observed by Maxwell on the Interpretation of Statutes, tenth edition, page 376 : It has been said that no rule can be laid down for determining whether the command is to be considered as a mere direction or instruction involving no invalidating consequence in its disregard, or as imperative, with an implied nullification for disobedience, beyond the fundamental one that it depends on the scope and object of the enactment. It may, perhaps, be found generally correct to say that nullification is the natural and usual consequence of disobedience, but the question is in the main governed by considerations of convenience and justice, and, when that result would involve general inconvenience or injustice to innocent persons, or advantage to those guilty of the neglect, without promoting the real aim and object of the enactment, such an intention is not to be attributed to the legislature. The whole scope and purpose of the statute under consideration must be regarded. Lord Campbell in Liverpool Borough Bank v. Turner [1860] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble for inspection to the shareholders and the time and place where the said agreement could be inspected was not specified in the explanatory statement. This contention was based on sub-section (3) of section 173. But that sub-section applies only where the item of business consists of according of approval to any document by the meeting. In the present case the item of business before the meeting of the company held on 5th September, 1961, was not according of approval by the meeting to the agreement of sale between the company and Bharat Kala Bhandar Limited. The item of business was whether the undertaking of the company should be sold to Bharat Kala Bhandar Limited for the price of ₹ 11,40,000 on certain terms and conditions. Whether there was already an agreement between the company and Bharat Kala Bhandar Limited was immaterial. It was equally immaterial whether the agreement was oral or in writing. AH that the meeting was concerned with was whether to accord consent to the sale of the undertaking by the company to Bharat Kala Bhandar Limited. The agreement of sale between the company and Bharat Kala Bhandar Limited was not required to be placed for approval of the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovided that the title should be marketable, free from all claims, charges and incumbrances. This was the provision for making out market able title which is implicit in all agreements of sale. Even apart from the express provision in the agreement of sale, this would be implied as a matter of law and it could not, therefore, be said to be a material fact concerning the proposed sale which should have been set out in the explanatory statement. As a matter of fact it would not affect the judgment of the share holders one way or the other. Clause 4 provided a period of two months from the date of acceptance of the offer for completion of the transaction. Now in a sale of immovable property time is not of the essence of the contract and even if a period of two months was provided for completion of the transaction the transaction could be completed at any time even after the expiration of the period of two months, provided it was completed within the time fixed by either party making such time as the essence of the contract. Of course the sale was a composite sale of both movable and immovable properties, but it was essentially a mercantile transaction for sale of the entire block of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich was financially unsound and the working of the mill was not started within the period prescribed by clause 9 of the agreement of sale, additional compensation or damages as may be determined by Mr. Tricumdas as sole arbitrator would be payable by such party, but if such party was financially unsound, the company might not be able to recover the amount of compensation or damages from such party. The condition entitling Bharat Kala Bhandar Limited to transfer the benefit of the agreement of sale to any nominee or nominees was, therefore, a material condition which should have been disclosed in the explanatory statement. Now this contention was strenuously pressed by Mr. S. B. Vakil, but I am afraid there is no substance in it and it must be rejected. In the first place the resolution which was submitted to the general meeting of the company held on 5th September, 1961, was for consent of the general meeting to the sale of the movable and immovable properties of the company to Bharat Kala Bhandar Limited for the price of ₹ 11,40,000 and so far as that resolution was concerned, it was entirely immaterial to state in the explanatory statement that under the agreement of sale B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sclosed in the explanatory statement on pain of contravention of sub-section (2) of section 173. Mr. S. B. Vakil lastly contended that in any event there was contravention of section 173 inasmuch as it was not stated in the explanatory statement that the sale proceeds were going to be utilised for payment of the secured creditors and that after payment to the secured creditors nothing would remain with the company for distribution to the shareholders. This fact was, in the submission of Mr. S. B. Vakil, a material fact required to be disclosed so that the shareholders would be able to decide that though nothing was going to remain with the company after payment to the secured creditors, they should yet vote for the transaction of sale. This contention is also in my opinion not well-founded. It is clear from the balance-sheets of the company for the years 1958, 1959 and 1960, which were passed by the annual general meetings of the company held respectively on 25th December, 1959, 24th September, 1960, and 28th June, 1961, that there were secured creditors of the company in the aggregate amount of over ₹ 12,00,000 which exceeded the amount of the sale proceeds. The share hol ..... X X X X Extracts X X X X X X X X Extracts X X X X
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