TMI Blog1980 (4) TMI 236X X X X Extracts X X X X X X X X Extracts X X X X ..... titioner No. 1-company started manufacturing business. Petitioner No. 2 thereafter in the year 1967 joined petitioner No. 1-company and became its managing director for the first time. He was appointed for a period of five years. Again he was appointed in the year 1972 as the managing director for a period of five years and he continued to serve petitioner No. 1 in that capacity up to 1977. Thereafter, petitioner No. 1-company decided to re-appoint petitioner No. 2 again for a period of five years and for that purpose the terms and conditions were settled and an application was submitted to the Govt. of India for the purpose of obtaining sanction and that petition was submitted on August 16, 1977. Thereafter on January 28, 1978, the Govt. of India sanctioned and gave approval for a period of two years and the terms and conditions which were set out by the company were revised. Under these circumstances the petitioners ultimately filed this special civil application. It may be stated here that the terms and conditions which were agreed showed that the appointment was to be made for a period of five years. The salary which was fixed was Rs. 5,000 per month with annual increment up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ichever is less". In regard to medical benefits also a change was made which was as under: "Reimbursement of expenses actually incurred for self, wife and dependent children, the total cost of which to the company shall not exceed one month's salary in any year". Here, year was taken as a unit. Now, therefore, the company petitioner No. 1 and petitioner No. 2 both felt aggrieved and thereafter they continued correspondence with the Govt. of India. We will refer to that correspondence whenever it becomes necessary to do so. Ultimately on November 19, 1979, this petition came to be filed. It was submitted in the petition that sections 269 and 637 AA of the Companies Act, 1956, impose unreasonable restrictions on the rights of the shareholders of petitioner No. 1 and the rights of petitioner No. 2 to carry on business on terms offered and accepted and results in hostile and discriminative treatment qua management personnel and public limited companies and their subsidiaries and are violative of the petitioners' rights under articals 14 and 19(1)( g ) of the Constitution of India. The other points which are argued by the learned advocate, Shri J.C. Bhatt appearing on behalf o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8, two terms were modified. The terms modified were regarding medical benefits for self and family and Rs. 10,000 were fixed for a period of two years of service in regard to reimbursement of expenses actually incurred towards medical expenses for self, wife and dependent children. Again regarding residential accommodation, the words occurring in clause 1( c )( vii ) which were "15% of the salary" were replaced by words "25% of the salary minus 10% of the salary". The two terms were modified because of the correspondence and the meeting which took place. Again on March 6, 1979, the advocate met on behalf of the petitioners the officer of the Govt. of India and requested him to pass a speaking order. The speaking order was not passed. Ultimately on October 1, 1979, when petitioner No. 1 approached the Govt. of India by a letter it was mentioned in that letter that a fresh application was being submitted without prejudice to the contention that the earlier orders of approval were illlegal in so far as they sought to modify the terms mutually agreed upon between the managing director on the one hand and the company on the other hand and were discriminatory in nature. It may here be m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ho, by virtue of an agreement with the company or of a resolution passed by the company in general meeting or by its Board of directors or by virtue of its memorandum or articles of association, is entrusted with substantial powers of management which would not otherwise be exercisable by him, and includes a director occupying the position of a managing director, by whatever name called". The proviso is not important for the purpose of this judgment and, therefore, it is not referred. Reference thereafter is required to be made to section 198(1) which runs as under: "198. (1) The total managerial remuneration payable by a public company or a private company which is a subsidiary of a public company, to its directors and its.........manager in respect of any financial year shall not exceed eleven per cent of the net profits of that company for that financial year computed in the manner laid down in sections 349, 350 and 351, except that the remuneration of the directors shall not be deducted from the gross profits". It is also necessary to set out section 269(1) which runs as under : "269 Appointment or re-appointment of managing or whole time director to require Governme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he other, provided that except with the approval of the Central Government such remuneration shall not exceed five per cent, of the net profits for one such director, and if there is more than one such director, ten per cent, for all of them together. Section 310 reads as under : "310. Provision for increase in remuneration to require Government sanction. In the case of a public company, or a private company which is a subsidiary of a public company, any provision relating to the remuneration of any director including a managing or whole time director, or any amendment thereof, which purports to increase or has the effect of increasing, whether directly or indirectly, the amount thereof, whether that provision' be contained in the company's memorandum or articles, or in an agreement entered into by it, or in any resolution passed by the company in general meeting or by its Board of Directors, shall not have any effect unless approved by the Central Government; and the amendment shall become void, if and in so far as it is disapproved by that Government. Provided that the approval of the Central Government shall not be required where any such provision or any amendment there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e regard to ( a )the financial position of the company ( b )the remuneration or commission drawn by the individual con cerned in any other capacity, including his capacity as a sole selling agent; ( c )the remuneration or commission drawn by him from any other company; ( d )professional qualifications and experience of the individual concerned; ( e )public policy relating to the removal of disparities in income." Having set out the relevant provisions which are required to be con sidered for the purpose of deciding the submissions made on either side the first question which is required to be considered is whether the guidelines issued by the Govt. of India are illegal or not. The guidelines were issued on November 11, 1969. They are set out at annex. "G" on p. 50. It prescribes a ceiling of Rs. 90,000 per annum and it also prescribes a ceiling in regard to commission on net profit which is fixed up to 1 per cent, of the net profits subject to a maximum ceiling of 50% of the approved salary, i.e ., an absolute ceiling of Rs. 45,000 per annum. It also provides that if a company proposes to pay remuneration in the form of commission on net profits alone, this shall be su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is, therefore, clear that the Govt. of India has not formulated any statutory public policy. Therefore, when the petition of petitioner No. 1 for reappointment of petitioner No. 2 as managing director came before the Govt. of India, the Govt. of India was bound to decide that application in accordance with the provisions contained in the Companies Act which we have set out above. Reference may be made to Upper Doab Sugar Mills Ltd. v. Company Law Board [1971] 41 Comp. Cas. 643 (Delhi). It was held that the condition imposed by the Company Law Board fixing the ceiling on managerial remuneration far below the legislative ceiling fixed by sections 98 and 309 was, illegal as it was contrary to those sections. It was also held on the facts, that the company had been given adequate opportunity of being heard before the Board refused to enhance the remuneration of the managing directors above the ceiling of Rs. 50,000 fixed by statute for the year in which the company had incurred a loss, and that the Board gave sufficient reasons for the refusal. After this judgment in the year 1971, the Govt. of India by Act No. XLI of 1974 added section 637AA in the Companies Act. This judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s after the coming into force of the Act, the remuneration to be paid to such a managing director shall not, after the coming into force of the Act, exceed 5 per cent, of the net profits for one such director, and if there be more than one such director, 10 per cent, for all of them together." It was also held as under (p. 180) : "Section 637A of the Act makes it clear , inter alia , that where the Central Government is required or authorised by any provision of the Act to accord approval in relation to any matter, then, in the absence of anything to the contrary contained in such or any other provision of the Act, the Central Government may accord such approval subject to such conditions, limitations or restrictions as it may think fit to impose. In view of the provisions of sections 269 and 637A of the Act, we find no infirmity in the condition imposed by the appellant-Board. The provisions of both sections 269 and 637A expressly deal with the question which arises directly in this case." Now, therefore, the Govt. of India after having added section 637AA in the Companies Act was also required to follow that section which was added in the year 1974. It may be made clear tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... director. Whereas sections 198, 267, 637A and 637AA require the Central Govt. to take into account individual or special factors touching a company, the impugned guidelines lay down generalisations which are sought to be made applicable to all such companies. An administrative generalisation militates against the due consideration of individual or special factors touching a company which the statute requires to be done. Such an administrative generalisation will, therefore, be ultra vires the statutory provision. Guidelines issued in 1969 are indisputably administrative instructions of a general character because, as stated on the floor of Parliament, no statutory public policy, contemplated by section 637AA( e ) had yet been formulated by the Central Govt. Administrative guidelines issued in 1969 firstly circumscribe or squeeze the area which the statutory provisions delineate for the exercise of discretion and the statutory circumference for the exercise of such discretion is unduly narrowed down. This is one vice which vitiates the guidelines. Second vice is discernible from the fact that generalised administrative instructions cut across, militate against and cannot fit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panies Act. This court cannot examine the terms proposed in the light of the relevant sections as the objective facts which are necessary to be examined are not before us. It would be for the Govt. of India to examine the terms proposed in the light of the objective facts with reference to the provisions of law. Nothing beyond is contemplated. That leads us to the examination of the third submission which is very important. The question which is required to be considered is whether the functions exercised by the Govt. of India are administrative or whether they are of a quasi-judicial nature. The learned advocate, Miss Shah, tried to point out that the functions which are exercised are administrative and it was tried to be urged that the guidelines only laid down the administrative policy. We cannot accept this argument. In the case, Rampur Distillery and Chemical Co. Ltd. v. Company Law Board, reported in [1970] 40 Comp. Cas. 916; AIR 1970 SC 1789, it was decided in regard to section 326 of the Companies Act that the Central Govt. has to Act judicially and its satisfaction has to be objective. Section 326 is in regard to the power of the Central Govt. to approve the appointm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g that the conditions did not exist, or that no reasonable body of persons properly versed in law could have reached the decision that they did." It was clearly observed that the power was a quasi-judicial power and not an administrative power. Now, if one looks to section 269(3), practically the same aspects are required to be considered and the aspects are, ( i ) whether it is in the interests of the company to have a managing or whole-time director; ( ii ) whether the proposed managing or whole-time director of the company is, in its opinion, fit and proper to be appointed as such and that the appointment of such person as managing or whole-time director is not against the public interest; and ( iii ) whether the terms and conditions of appointment of the proposed managing or whole-time director of the company are fair and reasonable. Now, therefore, if any officer of the Central Govt. has to perform a duty having regard to sections 269, 637A and 637AA, it is clear that he has to take into account the objective facts and has to determine those facts in a quasi-judicial manner. Here we may state that it is not necessary to consider the argument of the learned advocate, Shri Bha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guidelines were to come into force, the period was limited. To state this in an affidavit is one thing. No such thing is stated when the terms of re-appointment were revised. In fact the advocate for the petitioner No. 2 approached the officer to pass a speaking order and he refused to do so. It is well settled that when any person, in a quasi-judicial matter, passes an order without stating the reasoning by which he had come to that particular finding, the order itself is arbitrary on the face of it. The person against whom the order is passed is entitled to know as of right as to under what circumstances and for what reasons his prayer was being rejected. As soon as one tells him that his prayer is rejected and that he is not bound to give reasons, the order passed is an order which is arbitrary and is required to be set aside. That order can never be sustained in a State where the citizens are governed by law. Even a citizen who approaches any authority who has a power to act judicially and he acts in a quasi-judicial manner where he is bound to take objective facts' into consideration, the person against whom the order is passed is entitled to know that only the relevant facto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1944 (1 of 1944). It was held that the power was a quasi-judicial power. It was observed as under (p. 50) : "There is hardly any doubt that the power exercised by the appellate authority, i.e ., the Collector, under section 35 is also a quasi-judicial power. He is designated as an appellate authority; before him there was a lis between the appellant which had paid the duty and the Revenue; and his order is subject to revision by the Central Government. Therefore, it is obvious that the power exercised by him is a quasi-judicial power." Another case to which we may refer is Siemens Engineering and Manufacturing Co. of India Ltd. v. Union of India, reported in AIR 1976 SC 1785. In that case it was observed (per headnote) : "It is now settled law that where an authority makes an order in exercise of a quasi-judicial function, it must record its reasons in support of the order it makes. Every quasi-judicial order must be supported by reasons. The rule requiring reasons to be given in support of an order is, like the principle of audi alteram partem, a basic principle of natural justice which must inform every quasi-judicial process and this rule must be observed in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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