TMI Blog1973 (3) TMI 97X X X X Extracts X X X X X X X X Extracts X X X X ..... jection to the maintainability of the appeal. According to him this appeal by respondent No. 1-company is incompetent, inasmuch as the company had submitted to the orders of the court without any objection, subject to certain reservations that were made by it while submitting to the orders of the court. Secondly, he contended that this appeal which has been preferred in the name of the company cannot be filed through the shareholders, especially, when there was no allegation that any wrong was done to the company. So far as Appeal No. 153 of 1969 is concerned, both Mr. Khambatta and Mr. Phadke appearing for the Union of India and respondent No. 1-company respectively raised a preliminary objection to the maintainability of that appeal on the ground that respondents Nos. 8 10 who had preferred the appeal were not the shareholders 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he minutes of proceedings of the adjourned extraordinary general meeting of the shareholders which was held at Calcutta on August 26, 1969, where the aforesaid letter of Messrs. Chimanlal Shah Co., attorneys, dated August 16, 1969, was placed before them and considered by them. It appears that this meeting was adjourned to enable the members to consider the whole matter fully and the said meeting was adjourned to August 27, 1969. At this meeting the members passed certain resolutions which were moved by the chairman. By the first resolution the shareholders indicated that they were of the unanimous view that all possible efforts should be made to bring to an end the proceedings under section 398 of the Companies Act which were pending before the court and that counsel on their behalf should submit before the court to consider the terms of settlement already agreed to by the members with the Government (meaning the settlement said to have been arrived at on August 20, 1969. By the second resolution the shareholders resolved that the company's counsel should 3ubmit on behalf of the members of the company that a board be constituted by the High Court to manage the affairs of the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of respondent No. 1-company that the learned judge proceeded to deliver his judgment and passed necessary orders disposing of the petition. In other words, according to Mr. Khambatta, since respondent No. 1-company had submitted to the orders of the court subject to certain reservations made in the matter of the company's appeal in regard to the employees and civil suit filed by it against respondent No. 2 and certain other employees, it was not open to respondent No. 1-company to prefer this appeal to this court. In support of his contention Mr. Khambatta relied upon two decisions one reported in Sayad Zain v. Kalabhai Lallubhai [1899] 1 Bom. LR 366; ILR 23 Bom 752 and the other in Venkateswarlu v. Narasi Reddy AIR 1961 AP 71 [FB]. In the former case ( Sayad Zain v. Kalabhai Lallubhai [1899] 1 Bom LR 366; ILR 23 Bom. 752) the parties to a suit referred the matter in dispute to the subordinate judge, before whom the suit was pending, for a settlement of the dispute between the parties. The subordinate judge passed a decree accordingly when one of the parties, viz ., the defendant, preferred an appeal, the court held that the judgment of the subordinate judge was in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder of the court would mean that the company would have no right of appeal that the company at its meeting of the board of directors decided to submit to the order of the court. He further contended that, in any event, in this case, having regard to the course of conduct adopted by the parties, particularly by all the respondents who were appearing, the court was obliged to follow a procedure which was fundamentally different from that which would have generally been followed. By submitting to the orders of the court after making certain reservations to the effect that any order that may be passed by the court should not amount to any admission in respect of any allegations in she petition on the part of the respondents and that the same should not amount to any finding against them the respondents induced the court 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 section 402 of the Companies Act on the footing that the conditions of section 398 of the Companies Act which conferred jurisdiction upon the court had arisen or had exist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wrong, it was always appealable. It is difficult to accept this submission of Mr. Sen for the simple reason that the statement made on behalf of respondent No. 1-company to the court on August 28, 1969, is abundantly clear and that statement was to the effect that in view of the resolution passed by the board of directors of the company the company submitted to the orders of the court, of course without prejudice to the company's appeal in regard to the employees and the civil suit filed by it against respondent No. 2 and several other employees. No reservation whatsoever was made as to the nature of the order which the court was invited to pass when respondent No. 1-company submitted to the orders of the court. Besides, this statement was made after being warned that such course would leave no right of appeal to the company. Moreover, 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 res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a contended that if at all any appeal was to be preferred challenging the judgment and order dated August 28, 1969, the same could have been filed by respondent No. 1-com-pany only through its directors; but having regard to the resolution passed by the board on August 28, 1969, and having regard to the statement made by counsel on behalf of the company acting through the board on that day the board has rightly not preferred any appeal but the appeal has been preferred by the shareholders in the name of the company and he urged that such an appeal was incompetent. On the other hand, Mr. Sen relied upon the following passage occurring in Gower's Principles of Modern Company Law, third edition, at page 583, where the statement of law to the following effect is to be found: "Normally, therefore, the company itself is the proper plaintiff, and the only 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e passage quoted above) with the strict doctrine of the separation of powers as between the board and the general meeting " and reference is made to pages 136 and 137 of the book where the following passage occurs under the caption "The directors as primary organs of the company". "The result of this discussion appears to be that the directors have ceased to be mere agents of the company. Both they and the members in general meeting are primary organs of the company between whom the company's powers are divided. The general meeting retains ultimate control, but only through its powers to amend the articles (so as to take away, for the future, certain powers from the directors) and to remove the directors and to substitute others more to its taste. Until it takes one or other of these steps the directors can, if they are so advised, disregard the wishes and instructions 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- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assed by all the directors who were present including the directors who represented the shareholders on the board. This happened prior to the disposal of the petition by judgment and order by the learned judge in court and after the judgment and orders were passed by the learned judge the board of directors, as pointed out by Mr. Sen, passed a resolution refusing to prefer an appeal notwithstanding the shareholders' desire being communicated to it at its meeting held on October 16, 1969. In this situation we feel that unless the resolution passed by the board of directors on August 28, 1969, as also the resolution passed by the board of directors on October 16, 1969, were set aside by proper steps being taken in that behalf, it would not be open to the company to prefer an appeal through its shareholders. The resolutions of the board of directors must in the first instance be got rid of by taking proper proceedings by the shareholders in that behalf and unless that step is taken it would not be open to the shareholders 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al but they further stated that they were willing to submit to the orders of the court for the reconstitution of the board of directors of respondent No. 1-company. He urged that by making such statement to the court they should not be taken to have waived their right of appeal and they could point out to the appellate court that the impugned judgment and orders were improper or wrong in law. In our view, as we have already indicated in the earlier part of our judgment, unless the impugned orders are shown to be utterly without jurisdiction and beyond the powers of the court, it would not be open to these original respondents to prefer an appeal on merits of the impugned order in view of the statement that was made on their behalf to the court, subject to whatever reservations that were made while making that statement. In our view, therefore, neither in their capacity as directors of respondent No. 1-company nor as eo nomine 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. However, we do not propose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right to have full corporate management over its affairs and dealings for such long period of seven years, that is to say, the shareholders' right to have the affairs and dealings of the company managed through elected directors to the extent of 2/3rds of the total number has been drastically curtailed. It was further pointed out that in order to give effect to his order the learned judge had amended the original article 95 of the articles of association of respondent No. 1-company and according to the modified article 95 it has been provided that at each ordinary general meeting the directors elected by the shareholders shall retire from office and there is no provision made for retirement by rotation in regard to the remaining directors. It was contended that the court was not entitled to frame a new article 95 in the manner done which was contrary to section 255 of the Companies Act and that sections 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 section 255 of the Companies Act. Mr. Sen contended that though under clauses ( a ) and ( g ) of section 402 any order passed by the court in a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act and this indicated that the court would have no power or authority to frame such an article which would be inconsistent with the provisions of the Act. Secondly, he pointed out that whenever it was intended that any provision of the Act should be overridden by anything contained in the memorandum or articles of a company appropriate language had been used in several sections of the Act and in that behalf he invited our attention to the provisions like sections 181, 197A and 265 of the Act, all of which sections commence with a non-obstante clause. He particularly relied upon section 265 under which an option has been given to the company to adopt the principle of proportional representation for the appointment of directors and the relevant provision is to this effect that, notwithstanding anything contained in the Act, the articles of a company 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 a single transferable vote or by a system of cumulative voting or otherwise, the appointments being made once in every three years and interim casua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ention. He thus urged that, since the orders and directions reconstituting the board in the aforesaid manner were violative of the provisions of section 255 and section 408 of the Act, the same were illegal and deserved to be set aside. In our view, the submissions made by Mr. Sen on the point of legality or otherwise of the impugned orders will have to be appreciated in the context of the principal question as to what are the powers of the court when it is acting in proceedings instituted under sections 397 and 398 read with section 402 of the Companies Act. The questions whether a board of directors of the type indicated in the impugned order could be reconstituted by the court or not and whether the court had power to frame an article inconsistent with the provisions of section 255 of the Act or not must in the ultimate analysis depend upon the true ambit of the powers of the court under section 397 or 398 read with section 402, for, if these 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hapter VI deals with emergent situations or extraordinary circumstances where the normal corporate management has failed and has run into oppression or mismanagement and steps are required to be taken to prevent oppression and/or mismanagement in the conduct of the affairs of a company. It is in view of this scheme which is very apparent on a fair reading of the arrangement of chapters and the sections contained in each chapter which are all grouped under Part VI of the Act that the question will have to be answered as to whether the powers of the court under Chapter VI (which includes sections 397, 398 and 402) should be read as subject to the provisions contained in the other chapters which deal with normal corporate management of a company and, in our view, in the context of this scheme having regard to the object that is sought to be achieved by sections 397 and 398 read with section 402, the powers of the court thereunder cannot be so read. Further, an analysis of the sections contained in Chapter VI of Part VI of the Act will also indicate that the powers of the court under section 397 or 398 read with section 402 cannot be read as being subject to the other provisions contai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itable that the company should be wound up "with a view to bringing to an end the matters complained of". Similarly, under section 398 read with section 402 power has been conferred upon the court "to make such orders as it thinks fit" if it comes to the conclusion that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company or that a material change has taken place in the management or control of the company by reason of which it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company, "with a view to bringing to an end or preventing the matters complained of or apprehended". Both the wide nature of the power conferred on the court and the object or objects sought to be achieved by the exercise of such power are clearly indicated in sections 397 and 398. Without prejudice to the generality of the powers conferred on the court under these sections, section 402 proceeds to indicate what type of orders the court could pass and clauses ( a ) to ( g ) are clearly illustrative and not exhau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a manner prejudicial to public interest. Similarly, sub-section (2) of section 398 clearly provides that where the court is of the opinion that the affairs of the company are being conducted in a manner suggested in sub-section (1), then, the court may, with a view to bringing to an end or preventing the matters complained of or apprehended, make such order as it thinks fit. In other words, sections 397 and 398 are intended to avoid winding up of the company if possible and keep it going while at the same time relieving the minority shareholders from acts of oppression and mismanagement or preventing its affairs being conducted in a manner prejudicial to public interest and if that be the objective the court must have power to interfere with the normal corporate management of the company. If under section 398 read with section 402 the court is required by its order to provide for the regulation of the conduct of the company's affairs in future because of oppression or mismanagement that has occurred during the course of normal corporate management, the court must have the power to supplant the entire corporate management, or rather corporate mismanagement by resorting to non-cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f could in any manner be curbed. In our view, therefore, the position is clear that while acting under section 398 read with section 402 of the Companies Act the court has ample jurisdiction and very wide powers to pass such orders and give such directions as it thinks fit to achieve the object and there would be no limitation or restriction on such power that the same should be exercised subject to the other provisions of the Act dealing with normal corporate management or that such orders and directions should be in consonance with such provisions of the Act. Considerable emphasis was laid by Mr. Sea on the fact that there was absence of a non-obstante clause in any of the relevant sections, viz ., sections 397, 398 and 402. His contention was that whenever the legislature intended that any of the provisions of the Act should be overridden and the legislature has clearly expressed its intention by using appropriate language, namely, by user of a non-obstante clause and since there was no non-obstante clause in section 39? or section 398 read with section 402 of the Act, the court's powers thereunder could not override the other provisions of the Act but would be subject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act dealing with corporate management including section 255 and, therefore, a non-obstante clause was used at the commencement of section 408. We are, therefore, inclined to take the view that the absence of a non-obstante clause in sections 397, 398 and 402 does not lead to the inference suggested by Mr. Sen. Moreover, as we have already indicated, there is neither a non-obstante clause contained in any of these sections nor is there language to indicate that the court's powers under these sections are to be exercised subject to any of the other provisions of the Act. In such a situation the ambit of the court's powers must be determined by the scheme of Part VI in which all the concerned sections appear, the language employed in these relevant sections and the objects sought to be achieved by them and in this context it would be useful to refer to the rule of construction enunciated in Maxwell on the Interpretation of Statutes, 12th edition, page 45, to which our attention was invited by Mr. Phadke. The relevant rule of construction has been stated thus : "If the choice is between two interpretations, the narrower of which would fail to achieve the manifest purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e memorandum, articles, etc., is declared to be void to the extent to which it is repugnant to the provisions of this Act. In our view, essentially it is a question of true and proper construction of the court's powers under section 397 or 398 read with section 402 and having regard to the scheme of Part VI which includes all the sections dealing with management and administration of companies, the language employed in the relevant sections 397, 398 and 402 and the object that is sought to be achieved by these sections ii once it is held that on a true construction the court has the widest possible jurisdiction and ample powers to pass such orders as it thinks fit to bring about the desired result in the management of the affairs of a company and that the exercise of such powers is not subject to the other provisions of the Act, there would be no question of the court not being able to reframe or insert a new article which would be in conflict with some provisions of the Act. We are inclined to take the view that sections 397, 398 and 402 by their very nature and contents indicate that they are intended to operate as express provision to the contrary and would be covered by the phr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company and by each member and that it contained covenants on its and his part to observe all the provisions thereof. Besides, we have already rejected the contention that reframing or insertion of a new article by the court acting under section 398 read with section 402 will be hit by section 9(2) of the Act. Having regard to the above discussion, we are clearly of the view that the court had jurisdiction to reconstitute the board in the manner done in this case and such board is not violative of section 255 of the Companies Act and we are also of the further view that the learned judge had ample powers to alter the original article 95 of respondent No. 1-company in the manner done by him while acting under section 398 read with section 402 of the Act. Turning to the contention that the reconstituted board in the manner done by the learned judge was violative of section 408 of the Companies Act, it is obvious that the contention is ill-conceived. In our view, section 408, the contravention of which is complained of, is not applicable to the facts of the case, because in the instant case it is not the Central Government that has nominated its nominees as directors of responden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red by the reference were governed by the provisions as regards leave in the Delhi Shops and Establishments Act and the Industrial Tribunal had fixed the period of sick leave at 15 days and had permitted accumulation, which was contrary to the express provision of section 22 of the said Act and the court took the view that it was clear that as regards those workman to whom the Delhi Shops and Establishments Act, 1954, applied, the Tribunal had acted illegally in fixing the period of sick leave at 15 days and permitting accumulation and on that ground the court set aside that direction in the award and instead directed that the company should allow to the workman to whom the Delhi Shops and Establishments Act applied, sickness or casual leave of a total of 12 days with full pay and allowances and that such leave shall not be accumulated. In the other case, the clerical staff in a certain establishment used to get 12 days sick leave and 12 days casual leave while the subordinate staff was getting only 12 days sick and casual leave in a year and in that situation the Tribunal accepted the workmen's contention that the discrimination was unjustified and directed that the workmen should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 402 of the Companies Act are wide. In fact, the court may make any order for the regulation of the conduct of the company's affairs upon such terms and conditions as may, in the opinion of the court, be just and equitable in all the circumstances of the case. Constitution of an advisory board by orders of court in a proper case of company management is, therefore, in my view within the competence of the court under section 402 of the Companies Act, 1956". Further, at page 550, the learned judge has observed as follows: "Since the appointment of the special officer attempts are being made by him to put the company's administration on a sound basis. The corporation now makes the application to have a board of advisers to assist the special officer of this court in regulating and managing the company's affairs and its business. The pattern of the court's power of managing under section 402 has to be worked out. The section is an innovation in company administration by the court". We are in agreement with Justice Mukharji's view that section 402 is an innovation in company administration by the court and the pattern of the court's powers of managing thereunder has to be worked ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aning the directors who do not retire by rotation, have also to be appointed by the company in general meeting, subject, of course, to any regulations in the articles of the company in that behalf and as such if these were to be nominated by the court it would amount to interference with shareholders' right to have corporate management through directors appointed by them; secondly, even under sub-section (1) not less than 2/3rds of the total number of directors who are liable to retire by rotation, have also to be appointed by the company in general meeting, and if half of such 2/3rds directors were to be appointed subject to approval of the court, it would amount to placing restriction on the corporate right of the shareholders conferred upon them and as such a contravention of section 255 of the Act. It is thus clear that if the learned judge thought that giving a preponderating and effective majority to directors other than the directors representing the shareholders was necessary in the facts and circumstances of the case, the same could not be done without encroaching upon the corporate right of the shareholders to manage the company's affairs and, as stated above, this is wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the past directors and the family members of Shanti Prasad Jain. It is true that the learned judge has proceeded on the assumption that these allegations were to be regarded as not true because that was the attitude adopted by all the respondents at the time when the final orders were passed by him. But if regard be had to the serious allegations made it will be difficult to hold that the learned judge was wrong if he felt that none of the members of the Jain family who were connected with the prior mismanagement or who in the opinion of the learned judge were likely to influence the future management of the company should be associated, with the management of the company in future. The board as reconstituted by him will have to be regarded as the proper board in the circumstances of the case. It is not as if the shareholders' voice has been completely eliminated from future management and the learned judge has while reconstituting the board appointed three persons who would be the representatives of the shareholders on the board of directors and their voice would be heard in the future management of the company, but all that the learned judge was interested in seeing was t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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