TMI Blog1983 (5) TMI 148X X X X Extracts X X X X X X X X Extracts X X X X ..... Unit Trust of India Defendant 31,250 500365 to 531614 No. 1) General Insurance Corporation of India (Defendant No. 2) 1,250 537865 to 539114 Oriental Fire and General 1,250 541615 to 542864 Insurance Co. Ltd. (Defendant No. 3) United India Insurance Co. Ltd. 1,250 542865 to 544114 (Defendant No 4) National Insurance Co. Ltd. 1,250 539115 to 540364 (Defendant No. 5) New India Assurance Company 1,250 540365 to 541614 Limited (Defendant No. 6) Industrial Credit and Investment Corporation of India 6,250 531615 to 537864 (Defendant No. 7) Four different appeals have been filed by the defendants. Appeal No. 390 of 1982 is filed by original defendant No. 1, namely, The Unit Trust of India (hereinafter referred to as "UTI"). Appeal No. 391 of 1982 is by defendant No. 7, i.e ., The Industrial Credit and Investment Corporation of India (her ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t transactions of debentures with an option clause of converting part of the debentures into shares. The plaintiffs contend that the transactions were really that of taking a loan of 80 per cent as loan amount and the issue of shares for the remaining 20 per cent, of the amount. When the plaintiffs purchased shares in the open market, defendant No. 8 refused to register and transfer the shares in the name of the plaintiffs. This was done with a view to deprive or prevent the plaintiffs from acquiring voting strength. The plaintiffs further contend that side by side the financial institutions increased their voting strength on the basis of the impugned conversion of debentures and thus acquired additional voting power to the extent of 51,000 shares. This litigation pertains to 43,750 shares while there is another Suit No. 1110 of 1981 regarding 7,250 shares which is stilt pending. This later suit is about the issue of shares on the basis of the loan of Rs. 58 lakhs by ICICI. The learned single judge negatived practically all the contentions of the plaintiffs. However, the suit was decreed only on one ground. The agreement between the financial institutions and the company was that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, of Rs. 350 lakhs and the allotment of shares for the remaining 20 per cent, of the loan amount. It is contended that such allotment is bad. As against this the defendants' case is that the transaction is that of debentures with an option to convert 20 per cent, of the debentures into equity shares and that this is permissible under section 81(3) without any prior resolution of the company. It would be convenient to reproduce section 81. It reads as follows: "81. Further issue of capital. (1) Where at any time after the expiry of two years from the formation of a company or at any time after the expiry of one year from the allotment of shares in that company made for the first time after its formation, whichever is earlier, it is proposed to increase the subscribed capital of the company by allotment of further shares, then, ( a )such further shares shall be offered to the persons who, at the date of the offer, are holders of the equity shares of the company, in proportion, as nearly as circumstances admit, to the capital paid up on those shares at that date ; ( b )the offer aforesaid shall be made by notice specifying the number of shares offered and limiting a time no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ures issued or loans raised by the company ( i )to convert such debentures or loans into shares in the company, or ( ii )to subscribe for shares in the company : Provided that the terms of issue of such debentures or the terms of such loans include a term providing for such option and such term ( a )either has been approved by the Central Government before the issue of debentures or the raising of the loans, or is in conformity with the rules, if any, made by that Government in this behalf; and ( b )in the case of debentures or loans other than debentures issued to, or loans obtained from, the Government or any institution specified by the Central Government in this behalf, has also been approved by a special resolution passed by the company in general meeting before the issue of the debentures or the raising of the loans...." Sub-section (1) is not relevant for our purpose. It is clear that under sub-section (1A) the company can allot shares in favour of anybody provided there is a special resolution to that effect. In the absence of such resolution, there should be an ordinary resolution but in the latter case the Central Government must be satisfied that the propos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares were already agreed to be allotted a mere show of issue of debentures in question was made so as to avoid the provisions of section 81(1)( a ) or section 81(1A) of the Companies Act. The grievance of Mr. Nariman is that the pleading about the nature of the transaction is really a bald plea without pleading material facts on which that plea is based. The relevant plea reads as follows (page 135 of the paper-book): "The plaintiffs submit that what is covered by the exemption order is a genuine issue of debentures with a conversion clause. The plaintiffs submit that in the instant case the issue was not of debentures with a conversion clause so as to be within clause 4( iv ) of the exemption order. The issue in reality was an issue of shares by allotment and of debentures but was deliberately termed as an issue of debentures. The plaintiffs say that in the instant case the alleged option was such as to be exercisable simultaneously with the issue of debentures and was a mere cloak... within the clutches of section 81(1)( a ), 81(1A) of the Companies Act and section 3(2) and section 4(2) of the Capital Issues (Control) Act." It was submitted that the various circumstances or f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of the transaction as a whole." In the case of N. Pattay Gounder v. P.L. Bapuswami, AIR 1961 Mad. 276, the Madras High Court had to decide the nature of a document, namely, whether it was a mortgage by conditional sale or a sale with a condition of repurchase. The court held that apart from the terms appearing in the deed itself, the surrounding circumstances are also relevant. Mr. Cooper also relied upon the decision of the Supreme Court in the case of Sundaram Finance Ltd. v. State of Kerala [1966] 17 STC 489; AIR 1966 SC 1178. In that case, the question was as to whether the agreement in question was a hire purchase agreement or a loan transaction. The Supreme Court held that the nature of a transaction may be determined from the terms of the agreement considered in the light of the surrounding circumstances. Mr. Nariman, however, urged that the principles enunciated in the abovementioned decisions would not be applicable when we have to construe the transaction evidenced by formal documents such as agreements, conveyance, etc . He relied upon the decision of the Privy Council in the case of Bomanji Ardeshir Wadia v . Secretary of Slate for India in Council ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss on a particular part of the correspondence while the defendants relied more particularly on some other part of the correspondence. In this background, we think that we will have to consider all the correspondence together in order to find out the exact nature of the transaction. On 20th December, 1977, ICICI wrote a letter (Exhibit H, part II-A, p. 1410 of the paper-book) agreeing to provide the defendants a rupee term loan of Rs. 58 lakhs to meet a part of the cost of the Nylon Tyre Cord Project on certain terms and conditions. The NRC was informed by ICICI that they (ICICI) would have an option of converting a part of the loan into equity shares of NRC on terms to be decided later on. On 8th February, 1978, there was a bridging loan agreement (Exhibit L, part II-A, p. 1432 of the paper-book) as a part of the this transaction under which ICICI advanced Rs. 40 lakhs out of the loan amount of Rs. 58 lakhs. On 8th March, 1978, ICICI sent a letter (Exhibit M-1, part II-A, pages 1437, 1438 of the paper-book along with a draft of the final loan agreement for the entire amount of Rs. 58 lakhs which was to be executed by the company. This draft also includes the term that ICICI would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the ratio of Rs. 180 per share, that is, with a premium of Rs. 80 per share. The SEM approved this proposal. Thus, the SEM also supports the defendants' case of conversion of a part of the debentures into equity shares. On 17th May, 1978, NRC wrote a letter (Exhibit Z-49 (1), part II-B, page 2564 of the paper-book) to UTI intimating that the consortium of banks was also providing additional term loan of Rs. 1 crore to meet the company's capital requirements and that there would be a charge of this loan on the company's assets. The UTI by its letter dated 19th May, 1978 (Exhibit Z-49 (2), part II-B, page 2566 of the paper-book) wrote to NRC that the finances through banks would be costly and that it was necessary for NRC to conserve its resources for getting out of the mess created by the previous management and also for diversification programme. The UTI informed NRC that they (UTI) were ready to advance an additional loan of Rs. 1 crore on the strength of debentures to be issued by the company. In that letter the UTI also informed NRC that there would be an option for conversion into equity shares of 20 per cent, of the face value of the said debentures. This again indicates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., allotment of shares directly and not of debentures with the exercise of the option for converting debentures into shares. The UTI wrote a letter (Exhibit Z, part II-A, page 1588 of the paper-book) dated 1st June, 1978, to NRC informing NRC that UTI was agreeable to render financial assistance of Rs. 300 lakhs as a part of the expenses of the modernisation programme. The letter states that the said assistance would be in the form of subscription to debentures. The understanding amongst the financial institutions is that whenever such assistance is sanctioned, the other financial institutions also participate in that assistance and hence UTI informed NRC that the assistance of UTI of Rs. 300 lakhs would be reduced to the extent the other financial institutions would indicate their willingness to participate. The assistance was agreed to be given on certain terms and conditions. Mr. Cooper relied upon condition No. 7 and hence we intend to reproduce it verbatim. It reads as follows: "Condition No. 7. The company should agree to vest in Unit trust of India and other financial institutions the option to acquire in lieu of conversion equity shares of Rs. 60 lakhs inclusive of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntemplated by section 81(3) of the Companies Act. No doubt, the letters dated 1st June, 1978, 6th June, 1978, and 8th June, 1978, can convey such a meaning. However, these letters will have to be construed and understood along with the various surrounding factors. As already observed, the letter dated 17th January, 1978, completely supports the defendants. By that letter UTI has offered a financial assistance of Rs. 50 lakhs. This letter gives the various terms and conditions of the said offer. It is not necessary to reproduce all the various terms. Suffice it so say that the tenor of the letter is to render financial assistance on the basis of the private debentures. Condition No. 4 says that the commitment under the letter shall be deemed to have been fully discharged on the UTI making an application for the debentures of Rs. 50 lakhs. There are some terms dealing with the rate of interest and the mode of redemption of the debentures. This was to be decided later. Condition No. 8 reads as follows: " Condition No.8: The company should agree to vest in the Unit Trust of India the option of converting a portion of debentures into equity capital on terms and conditions to be dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore completing it and any alterations or changes suggested or indicated by UTI are required to be incorporated therein. Condition No. 24 provides that the company should obtain the necessary consent, approval, etc ., from the Government authorities for the issue of requisite debentures. The letter is wound up by saying that the offer will not be binding unless the debenture trust is executed by the company in such form as may be required by UTI. UTI asked NRC to confirm the terms and conditions mentioned in the letter for subscription by UTI to the debentures are acceptable. It is thus clear that except condition No. 7, all the rest of the conditions and other parts of the letter are consistent with the defendants' version that what was really contemplated was the convertible debentures and not direct allotment of shares. The offer was to have debentures of Rs. 300 lakhs and this connotes that initially the entire loan was of Rs. 300 lakhs debentures. Similarly, it was specifically provided that the debenture trust has got to be approved by UTI before it was executed by the company. Mr. Cooper is right when he contends that condition No. 7 read by itself may support the plaintiffs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y shares at the rate of Rs. 160 per share. GIC and its subsidiaries had also agreed to participate in the transaction of Rs. 50 lakhs. Hence GIC wrote a letter dated 19th June, 1978 (Exhibit Z-14, part II-A, page 1707, of the paper-book). In this letter, there is a reference to the debenture without any mention of asking shares immediately. On 16th October, 1978, GIC wrote another letter (Exhibt Z-19A, Part II, page 1889 of the paper-book) stating therein that the participation of Rs. 50 lakhs would be divided into five portions of Rs. 10 lakhs each to be contributed by GIC, NIC, NIA, OFGI and UI. In this letter there is a mention that there would be an option to acquire in lieu of conversion equity shares of Rs. 10 lakhs (from out of the participation amount of Rs. 50 lakhs) at the rate of Rs. 160 per share. The letter is wound up with an observation that the said offer would be subject to the condition that the debenture trust deed would be finalised in the manner as may be approved by GIC and its subsidiaries. There are also letters from NIA, NIC, OFGI and UI to the NRC agreeing to participate to the extent of Rs. 10 lakhs. All these subsidiaries except NIA have stated that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the finalisation of the transaction. On 17th June, 1978, the government has passed an order (vide Exh. 27, part II, p. 1616) under section 108D of the Companies Act. We would later consider the circumstances under which this order was passed, as some grievance has been made by Mr. Cooper, but, for the present, suffice it to say, that the net result of the freezing order was that the plaintiffs were prevented from exercising their right to vote on the basis of the shares held by them and also on the basis of the proxies which they would secure from the shareholders. The plaintiffs filed writ petition No. MP-1904 of 1978, challenging this order. This writ petition came for hearing before the court on 28th June, 1978, and the court stayed the operation of the freezing order subject to the plaintiffs giving an undertaking to vote for the amended item No. 4. It is material to note that the original item No. 4 was with respect to the resolution under section 293 of the Companies Act, for the loan of Rs. 108 lakhs ( i.e ., loan of Rs. 58 lakhs by ICICI and debentures loan of Rs. 50 lakhs to UTI). By the amendment, the proposed resolution was to sanction not only the loan of Rs. 108 la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus by that date, all permissions, sanctions and approvals including the permission dated 7th May, 1978,. under the Urban Land (Ceiling and Regulations) Act were there and hence, on 18th May, 1979, ICICI sent a letter to the NRC (Exh. 2-29, part II-A, p. 1940) requesting the NRC to pass the necessary resolution of the board of directors in connection with the execution of the debenture trust for Rs. 350 lakhs and documents in respect of the loan of Rs. 58 lakhs. The proposed resolutions are annexures to this letter and they mention the issue of 35,000-11% debentures of Rs. 1,000 each. The draft resolution further states that each of the financial institutions would have an option to convert a part of the debenture loan into equity shares. The resolution also mentions that such conversion should be to the extent of 31,250 shares each of Rs. 100 in favour of the UTI and 6,250 shares each of Rs. 100 in favour of ICICI and 1,250 shares each of Rs. 100 in favour of GIC and its four subsidiaries. It appears that, accordingly, the board of directors passed an appropriate resolution and though the resolutions themselves are not on record, the plaint para. 72 (relevant portion appears on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct for the purpose of contending that at the time of finalising the transaction, these two letters and the statements made therein were not at all taken into consideration and the transaction was settled without these letters. There is much substance in this contention. Before going to the other clauses of the preamble, we may like to add that each of these sub-clauses of clause (6) makes mention of the debenture, the total of which (so far as the suit transaction is concerned) comes to Rs. 350 lakhs. Clause (11) of the preamble refers to the resolution passed by the company on 29th June, 1978. That resolution is reproduced verbatim and we have already observed that the said resolution is with respect to the debentures of Rs. 350 lakhs. Clause (16) says about the issue of 35,000-11% convertible debentures of Rs. 1,000 each. Clause (20) recites the resolution of the board meeting of the NRC dated 24th May, 1979, about the issue of 35,000-11% convertible debentures of Rs. 1,000 in seven series, viz. , "A" to "G" in favour of each of the financial institutions. After this preamble the recitals in the trust deed proper follow. It says that the debentures mean, the debentures issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (36)( c ) provides that the company (NRC) shall duly observe and perform all the terms, conditions, covenants and stipulations contained in the loan agreement of the financial institutions. The Vth Schedule to this debenture trust gives the form of the debentures to be executed in favour of the financial institutions. Clause (5)( i ) of that form reads as follows: "UTI as the registered holder of the series 'A' debentures of the aggregate nominal value of Rs. 2,50,00,000 (Rupees two hundred and fifty lakhs) shall to the extent of such series 'A' debentures of the nominal value of Rs. 50,00,000 (rupees fifty lakhs) at any time and from time to time between the 15th day of June, 1978, and 14th day of June, 1980, (both days inclusive), by notice in writing of not less than one month given either before or during the said period of conversion and delivered at the registered office of the company accompanied by the relative debenture certificate have the right of conversion conferred under the trust deed and shall be entitled to call for the allotment to UTI as the registered holder of 31,250 fully paid up equity shares of the company of the face value of Rs. 100 each at a premium o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debentures into equity shares. These notices are at ( Ex. Z-34 to Z-41, part II-B, pp. 2388 to 2499). The notices are similarly worded and it would be sufficient if we make a mention to the contents of one of those notices. For example, in the notice issued by UTI (Ex. Z-34), there is a reference to the correspondence dated 31st January and 1st June, 1978, and to clause (4)( a ) of the debenture trust. The notice then states that in terms thereof, the UTI is entitled to call for an allotment of 31,250 fully paid up shares and that, therefore, the UTI was giving a notice to convert with immediate effect 5000 debentures from "A" series into 31,250 fully paid up equity shares. There is a minor change in other notices so far as the number of shares that were to be demanded on such conversion. On 5th June, 1979, the NRC passed necessary resolution for the allotment of shares on such conversion and this allotment is of 43,750 shares (so far as this litigation is concerned) as detailed in para. 1 above. Section 75 of the Companies Act, 1956, requires filing of the returns with the Registrar of Companies for the allotment of such shares and the said return has been filed on 27th June, 197 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecution of the documents. However, Nareshchandra Singhal, who is working with ICICI for a number of years, has made the position clear. The witness was cross-examined in order to find out as to whether there were any instances where the documents had provided the period of conversion so as to include some period earlier to the execution of the document. The witness has stated that there were such instances. Mr. Cooper asked the witness to produce certain statements in that respect. Singhal has produced at Ex. Z-75, part II, p. 3232 onwards, such a statement. It is not necessary to go into the details thereof. Suffice it to say that at serial No. 1 in the statement there is a loan transaction of Rs. 158 lakhs which was given to Balarpur Industries Ltd., on June 15, 1981. However, the option to convert a part of the loan into equity shares was agreed to be exercised between February 1, 1979, to July 31, 1981. This means that the period of conversion had already commenced long before the loan was advanced. Similar is the case of loans to J.K. Synthetics, Rallis India Limited and Raymond Woollen Mills Ltd. The witness was also asked to produce a statement as to whether there have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw Board (hereinafter referred to as "the CLB"), approved the election and appointment of plaintiff No. 2 as a director of the NRC. The statements of accounts for the year 1979 and the directors' report were placed before the AGM held on May 25, 1980. The annual report of 1979 coupled with the balance-sheet and the statements of account, is at pages 207 to 267 of vol. 8. On p. 220 of the directors' report, there is a mention of the allotment of shares on conversion. Obviously, this conversion also included the debentures and the conversion in question. On p. 234, the share capital in the year 1978-79 is mentioned. The capital was increased in 1979 by 51,000 shares. There is also a reference to the premium on shares received in that year. Plain tiff No. 1 was present in the said meeting while the directors' report and the balance-sheet have been prepared by the board of directors, in which plaintiff No. 2 was one of them. It would thus be clear that all the correspondance and the documents except a part of the letter dated June 1, 1978, and the two letters dated June 6, 1978, and June 8, 1978, consistently speak of the transaction being that of convertible debentures and not of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed into equity capital. Under clause 8, it was decided that separate guidelines would be issued for the exercise or waiver of the option clause and that pending such guidelines, the financial institutions may take a decision in consultation with the Industrial Development Bank. It is these guidelines that were available when IIM was held on 31st May, 1978. There are further guidelines dated 17th November, 1978, dealing with the extent of option and as to how the option is to be exercised. They state that in the case of existing companies not doing very well, the period for exercising the option should be fixed after the scheme for which the financial assistance is to be extended is completed and the company is in a position to pay a reasonable dividend. The grievance of Mr. Cooper is that these guidelines of November 17, 1978, have not been properly followed as the financial institutions were allowed to exercise the option within two years, i.e ., even before the modernisation programme was completed. It is this modernisation programme for which a major part of the financial assistance of Rs. 350 lakhs was sanctioned. It is very material to note that the said guidelines appear to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k is understandable and there is nothing sinister in it. It was then urged that the matter was processed in an undue haste. On May 29, 1978, the NRC wrote to the UTI about the need of an additional assistance of Rs. 408 lakhs for the modernisation programme. A tentative note about this programme was attached to this letter and the letter states that the figures were tentative. Witness, Atmaramani, who is the Joint General Manager (Investment) of the UTI immediately prepared the note about this request of the NRC and the said note was placed before IIM held on May 31, 1979. A great deal of cross-examination of Mr. Atmaramani deals with this aspect. Certain suggestions were made that the letter dated May 29, 1978. was not in fact received on that day from the NRC but it was received later on. The inward register of the UTI shows that the letter was inwarded on 4th June, 1978, which was a Sunday. But it appears that there were also other entries in the register of that day. A comment was also made that this inward entry is not in the usual inward registers of letters but is in the inward register of documents. It is, however, material to note that this letter dated May 29, 1978, from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue No. 20 was to be decided by the court. This issue reads as follows: "Whether the granting of loan on terms which included a conversion clause and the issue of debentures with such clause was mala fide and/or fraudulent as alleged in para 73( e ) of the plaint?" This issue was given up at the time of argument before the learned single judge. In that para. 73( e ), it was specifically pleaded (see. p. 1517 of the paper-book) that the power to issue debentures under section 81(3) of the Act was exercised not for the purpose of issuing debentures or raising loans but in reality was an abuse for collateral purpose, viz ., for issuing and giving the voting powers to the financial institutions. It was also alleged that the power of the directors to issue debentures and to grant loans is a fiduciary power and it was abused. Of course, there is a statement in that very para, that the immediate need, if any, would have been well met by inviting the existing shareholders to subscribe to the capital. Thus in this para. No. 73( e ), the plaintiffs have alleged that the NRC was not at all in need of money so as to enter into a transaction of loan and debentures and that the suit tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime in April, 1977, and by that time he was holding about 2,736 shares. Thereafter, the plaintiffs acquired some more shares and they applied for registration of the transferred shares in their name. It appears that the NRC did not take an immediate action in that respect. Both the plaintiffs, therefore, filed Civil Suit No. 6691 of 1977 against the NRC and its directors for an order of the transfer of the shares in their favour. A similar Suit No. 6692 of 1977 was filed by the plaintiff No. 2 and Gurudayal Berlia with respect to certain other shares. These two suits covered 27,183 shares and 2,450 shares respectively. The copies of the plaints are at Ex. D-1, part II-A, pp. 1267 to 1321. The allegations in both the suits are that the NRC had wrongly refused to register the transfer of shares in their favour. These suits were filed on 1 st September, 1977. Both the plaintiffs then filed Company Petition No. 607 of 1977 in respect of 27,183 shares (which were covered by Suit No. 6691/77). The petition was under section 155 of the Companies Act, with a request that the register of the shareholders should be rectified by including the names of the plaintiffs as the shareholders of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence Act. Mr. Cooper relied upon another method that was considered by the Supreme Court. The following is the discussion in para. 11(at p. 864, AIR 1957): "It may also be proved by internal evidence afforded by the contents of the document. This last mode of proof by the contents may be of considerable value where the disputed document purports to be a link in a chain of correspondence, some links in which are proved to the satisfaction of the court. In such a situation the person who is the recipient of the document, be it either a letter or a telegram, would be in a reasonably good position both with reference to his prior knowledge of the writing or the signature of the alleged sender, limited though it may be, as also his knowledge of the subject-matter of the chain of correspondence to speak to its authorship." It is true that a link in a chain of correspondence would be relevant while considering the authorship but the Supreme Court has observed that in case of such links, the recipient of the document is able to speak about the authorship with the help of that link. In the present case, the plaintiffs have not led any evidence of the recipient of the letters. Similarly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered in the AGM held on 23rd September, 1977, and a remainder was sent to CLB in connection with the above-mentioned application for appointing inspectors. There was a sort of dissatisfaction amongst the shareholders over the blanket ban on the transfers of shares and the company has stated in the letter that in the meeting it was suggested that the transfer of the shares not linked with Berlias and Kapadias should be accepted. Hence, on 28th September, 1977, the board of directors of the NRC decided to transfer a lot of 50 shares each provided that the lot did not belong either to Kapadias or to Berlias. The matter was further reviewed as the company continued to receive representations and a decision was taken that a transfer without any limit of 50 shares should be effected except the dealings of Kapadias and Berlias were concerned. The letter further refers to the order dated 9th November, 1977, appointing an inspector as prayed for by the company. The letter also states that the advocates of the NRC were of the view that it would not be possible to sustain the refusal of transfer in favour of Berlias and it was for this reason that the company agreed to transfer shares in fav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 702 of 1978. Company Petition No. 702 of 1978 was decided on 7th December, 1979, in favour of Berlias and Ex. Z-43-A, part II-B, p. 2447, is a copy of the judgment. All these documents do show that the NRC refused to accept the transfer of certain shares in favour of Berlias and that in some cases, agreed to effect the transfer when proceedings were filed in court while in other matters, the court granted relief to Berlias by delivering judgment in their favour. Mr. Cooper is right when he contends that the NRC was avoiding the transfer of shares in favour of Berlias. However, the settlement of 1977 had given an option to NRC to consider new transfer applications on their merits. There is nothing on record to show the reasons for which the NRC had rejected the transfer application. But the absence of such reasons would not necessarily mean that the NRC wanted to act maliciously against Berlias particulary when the company had certain apprehensions as discussed above. The result therefore, is that though the NRC had refused to transfer certain shares in favour of Berlias still that fact would not be a circumstance to suggest that the NRC in conjunction with the financial instit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Secretary, Department of Company Affairs. (4)Shri V.K. Shunglu, Director of Banking Division, Department of Economic Affairs. (5)Shri J.P. Mukharjee, Director (Investment), Department of Economic Affairs. (6)Shri S.P. Ganguly, Director, Department of Company Affairs; and (7)Shri V.P. Uppal, Under Secretary, Department of Company Affairs. The said minutes make a mention about the number of shares that have been purchased by Berlias and also state that Berlias have obtained 1,74,127 proxies for utilising them at the time of the meeting of the NRC and that as against that, the financial institutions had collected 1,08,000 proxies. The meeting came to the conclusion that it would be prejudicial to the interest of the company if Berlias would gain the controlling interest of NRC and that if they are able to have their nominees on the board of directors, they would be able to utilise all the information of the company for their own purpose and interest. The meeting, therefore, resolved that directions be issued under section 108D of the Companies Act, not to transfer any share exceeding a block of 50 shares lodged by any individual. It was also resolved that the department of C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or on the basis of the proxies collected by them. We have already mentioned as to how Berlias filed Writ Petition No. 994 of 1978, and how certain conditional orders of injunction were passed under which Berlias undertook to vote the amended resolution to cover the additional loan amount of Rs. 300 lakhs. Mr. Cooper laid much stress on the letter dated June 6, 1978, written by the two financial institutions viz. , the UTI and GIC and urged that the freezing order was the direct result of the move taken by these two instititutions. It is true that immediately after this letter a formal freezing order dated June 17, 1978, was issued. However, it has to be borne in mind that the Government of India, i.e ., its Department of Company Affairs and the Department of Economic Affairs, had already taken a decision on June 26, 1978, that necessary action under section 108 should be taken. In the present litigation, we are not concerned much with the correctness or otherwise of that order but we have to see as to whether that order is on account of any joint efforts of the NRC and the financial institutions. The request of the NRC for such an order was already rejected in February, 1978. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erted into equity shares. (4)With respect to these earmarked debentures, the financial institutions should give a conversion notice in writing of not less than one month. (5)After the conversion of these debentures, the financial institutions should surrender the debentures to NRC. In the present case, only letters of allotment have been issued to the financial institutions and the debentures proper have not been issued. Thus, there were no debentures so issued and consequently no entry in the register of debentures. Mr. Cooper also contended that as the debentures were not issued, the financial institutions were not able to earmark or separately appropriate certain and. particular debentures up to 20 per cent, for conversion. The notice given by each of the financial institutions does not comply with the requirement that it should be one month's notice. It was, therefore, urged that on account of the above deficiencies, the allotment of shares is totally bad. In our opinion, all the above-mentioned requirements did not constitute a condition precedent for exercising the option. All these provisions are meant to avoid any difficulty or problem as to who are the debenture hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... version. But it is material to note that the financial institutions by their notice have exercised their option up to the maximum limits, viz. , 20% of the total debentures. In that background, prior earmarking or appropriation of particular debentures for conversion was not at all necessary or mandatory. The parties contemplated that there should be one month's notice for conversion. The notice given by the financial institutions is not such a type of notice. However, the case of the defendants is that the notice has been waived. Giving of one month's notice is after all a contractual provision and the company would have a right to waive it. Mr. Cooper contended that at the time of converting the debentures into shares it was necessary for the financial institutions to surrender the debentures and he argued that in the absence of the debentures there was no possibility of their surrender. Mr. Nariman submitted that all this was for the benefit of the parties and the parties would be entitled to waive them. A provision for surrender of the debentures was for the purpose of identifying which of the debentures have been converted. If there is no such dispute about the identification ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entures while borrowing loans. Clause 79 is relevant for our purpose; it reads as follows: "Any debentures, debenture stock or other securities may be issued at a discount, premium or otherwise and may be issued with any special privileges and conditions as to redemption, surrender, drawing and attending (but not voting) at general meetings, appointment of directors and otherwise." Thus the debentures can contain certain privileges. Mr. Nariman contended that the word 'otherwise' would show that the powers of the board of directors are large enough to include an option to convert a part of the debentures into equity shares. Mr. Cooper urged that the said word should be used in a restricted meaning so as to cover the privileges or conditions about redemption, surrender, etc . We do not think that such a restricted meaning to the word "otherwise" should be given. If the debentures are within the powers of the board of directors, the term of option being a part of such debentures would also be within that very power. It will not, therefore, be possible for Mr. Cooper to contend that the option clause is bad in the absence of the resolution of the general body. The net result of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... want quashing of the abovementioned part of section 81(3) without actually praying that the notifications issued under the impugned part of section 81(3) should be quashed. The notification has been issued by the Central Govt. and the Central Govt. would be interested to defend the validity of the notification by contending that no part of section 81(3) is unconstitutional. In that suit, the Union of India is not made a party. Mr. Cooper contends that the Union of India is not at all a necessary party. According to him, once the concerned part of section 81(3) is struck down, the notification issued by the Central Govt. would not survive. However, it would not be permissible to decide the validity or otherwise of any provision of section 81(3) without making the Union of India a defendant when the very purpose of raising such a contention is to set at naught the notification issued by the Union of India. Mr. Cooper relied upon the provisions of O. 27A of the CPC which lays down that the notice to the Attorney General should be issued whenever in any suit it appears to the court that any question as is referred to in article 132(1) of the Constitution is involved. He submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mr. Cooper replied that this would not be a correct statement inasmuch as in the same para, (on p. 129 of the paper-book), there is an averment which reads as follows: "Defendants Nos. 1 to 7 thus acquired for themselves voting power to the extent of 51,000 votes to enable them to control the passing of the resolutions to be moved on 28-6-1979. 43,750 shares were allotted to respondents Nos. 1 to 7 as per statement hereto annexed and marked Ex. 'S' in respect of the privately placed debentures......." Mr. Nariman, however, urged that initially the date in the above reproduced portion of the plaint was June 29, 1978, and that it was corrected on July 6, 1982. This can be seen from the order of the court at record No. 36 (vide p. 961 of the paper-book). According to him, this correction was made after the evidence was recorded and hence the defendants were at a disadvantage. According to Mr. Cooper correction was not a surprise to the defendants. He submitted that even at the time when he opened the case before the trial court (that is, before leading the evidence), he had stated that the words and figures "29th June, 1978", were a mistake and that they should read as 28th June, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence as to how the demand for additional loan of Rs. 300 lakhs was processed in 1978. He has also deposed as to how the matter was finalised in 1979. In the cross-examination, specific suggestions have been made to Atmaramani about the hurry and its purpose when processing the matter in 1978. We would like to reproduce that part of the evidence which reads as follows: (Vide pp. 910 and 911 of the paper-book). "Q: I put it to you that the only urgency was the desire of the financial institutions and defendant No. 1 to see that they acquired more shares and increase their voting strength before the ensuing AGM of the 8th defendant to be held June, 1978? A: It is not correct...... Q: I put it to you that the urgency to obtain shares ceased when the freezing order under section 108 was obtained? A: It is not correct." No specific case has been put to this witness in the cross-examination that there was particular hurry in 1978 and that the notice was waived in order to complete the transaction, maliciously and in a hurried manner. Similarly, no questions were put to Atmaramani in cross-examination that the financial institutions were in need of getting additional voting stren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttended the meeting of 28th June, 1979. It will not, therefore, be correct to say that Atmaramani has not deposed anything about the transaction including the giving of notice of exercising the option. In view of this position, we will not be able to accept the contention of Mr. Cooper that there was no necessity of cross-examining Atmaramani by putting the plaintiffs' case about the alleged hurry or alleged mala fides in waiving the notice. All the above factors will be relevant while considering the contention that Mr. Cooper urged, that an adverse inference should be drawn because none of the directors have entered the witness box. Similarly, they would have relevance while appreciating the plaintiffs' cases about the mala fides in waiving the notice. Mr. Cooper wanted to rely upon a number of previous antecedent events for the purpose of contending that the waiver of notice was mala-fide . For example, he drew our attention to the fact that the company had refused to transfer the shares of Berlias in 1977 and 1978 and that Berlias were required to go to the court for getting reliefs. The other factor on which he wants to rely is the freezing order dated 17th June, 1978 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This decision has been upheld by the Supreme Court in the case of Nanalal Zaver v. Bombay Life Assurance Co. Ltd. [1950] 20 Comp. Cas. 179 . The Supreme Court has also considered this aspect in another case of Needle Industries ( India ) Ltd. v. Needle Industries Neway ( India ) Holding Ltd. [1981] 51 Comp. Cas. 743 (SC). It is held therein that what is considered objectionable is the use of such powers merely for an extraneous purpose like maintenance or acquisition of control over the affairs of the company. In Howard Smith Ltd. v. Ampol Petroleum Ltd. [1974] AC 821; [1974] All ER 1126 (PC), the facts were quite eloquent. Howard Smith Ltd. intended to purchase the shares of another company known as Millers. Such intention was expressed on 15th June. Two other companies were having majority of shares in Millers and they had issued a statement dated 27th June, that they would act jointly for rejecting any offer from Howard Smith Ltd. The directors of the company were, however, in favour of Howard Smith Ltd. Hence, in order to favour the attempt of Howard Smith Ltd. to take over the Millers Company, the directors on 6th July issued a large number of shares in favou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rences arose between the executors of G.G. Symons and another director, namely, G.R. Symons. However, the majority of the directors wanted to act against the executors and trustees of G.G. Symons. They wanted to deprive the executors and the trustees of G. G. Symons of power given to them under the articles of association. The directors, therefore, issued 11 shares to 5 shareholders and then called an extraordinary general meeting wherein a resolution was passed doing away with the rights of the executors and trustees of G. G. Symons to appoint the directors. This was challenged and the court held as follows: " On the evidence I am quite clear that these shares were not issued bona fide for the general advantage of the company, but that they were issued with the immediate object of controlling the holders of the greater number of shares in the company, and of obtaining the necessary statutory majority for passing a special resolution while, at the same time, not conferring upon the minority the power to demand a poll." The above-mentioned underlined portion would show that the allotment of shares was cancelled as on the evidence as was available, the immediate object was to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od. The contention of the plaintiffs is that the notice was waived with a view to grant additional voting strength to the financial institutions. It is, however, material to note that such a voting strength would have been acquired by the financial institutions even by giving one month's notice. The only thing in that case would have been that the financial institutions would have obtained that strength not earlier than the end of June, 1979. What has happened by the waiver of the notice is that the financial institutions obtained the additional voting strength by 5th June, 1979. The question is as to whether this grant of additional voting strength in an accelerated manner by waiving notice is mala fide. This would be primarily a question of fact. What has happened in 1977 and 1978 would not be decisive though it may be remotely relevant. We will have to find out as to whether there was any immediate or urgent apprehension in the mind of the company and the financial institutions that the financial institutions should require this additional voting strength in the meeting of 28th June, 1979. Was there anything to suggest that the company or the financial institutions ever though ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors to amend the draft by deleting the clause of one month's notice. This is very important as on deletion of the clause (at the time of finalisation of the draft, there would not have been any question of waiving the notice and that too with a mala fide intention. The debenture trust deed was executed on 31st May, and the financial institutions have given notice of option on that very day. This shows that the financial institutions were keen on exercising the option as soon as possible. Plaintiffs' allegation is that the financial institutions have pre-determined to exercise the option on 31st May, 1979 (that is, the date on which the debenture trust deed was executed). Mr. Nariman is right when he contends that in this background, it will be very difficult to hold that the parties to the transaction, namely, the company and the financial institutions, initially purposefully created a hurdle by providing one month's notice and thereafter they got over that hurdle by maliciously waiving the notice. There would not have been any question of malice in waiving the notice if such a notice clause was not at all provided for As discussed above, the provision for such one month's notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the debentures would continue to be of Rs. 350 lakhs. Mr. Nariman, therefore, urged that in this background, the trustee, namely, the Bank of Baroda, is a necessary party. In our opinion, the debenture trustee has no concern with the dispute as to whether particular debentures have been properly converted into shares or not. The trustee is entitled to take certain steps if NRC fails to repay the debenture debt and the interest thereon. The trustee is not at all concerned as to who are the debenture holders. It is a matter solely between the company and the particular debenture holder. The relief that certain debentures have been illegally or improperly converted into equity shares can be appropriately granted in the absence of the trustee as a party to this litigation. The question as to whether a particular party is necessary or not depends upon the facts of each case, namely, pleadings and the reliefs claimed. This court in the case of Vyankatesh Dhonddev Deshpande v. Sou. Kusum Dattatraya Kulkarni, AIR 1976 Bom. 190, held as follows (at p 205): "It is, however, well established that where the plaintiffs can obtain complete and effective reliefs from the court in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding about this illegality. This submission will have to be rejected outright inasmuch as an act which is illegal from its inception, cannot become legal by applying the principle of estoppel, laches and acquiescence. The second submission of Mr. Nariman is that at least the alleged mala fide waiver of notice would not survive as the plaintiff's contention in that respect would be barred by estoppel, laches and acquiescence. The allotment of shares on account of mala fide waiver would be a voidable transaction and hence it would be necessary to consider as to whether the plaintiffs' contention would be barred as alleged by the defendants. The annual general meeting was held on 28th June, 1979. In this meeting, plaintiff No. 1 was present. The statement of the chairman in that meeting is at Ex.11, Pt. II, p. 3503, (relevant p. 3507). In paras. 9 and 10, the Chairman has stated as follows: vide at pp. 3511 and 3512 of the paper-book. "9. FINANCE: Your company is coming ahead with the programme of modernisation to which I had made detailed reference in my last year's statement as also in the directors' report. In this context I am happy to report that the documentation concern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2, on pp. 938 and 939 of the paper-book. The learned single judge upheld the objection by observing that the plaintiffs have in para. 63 of the plaint, used the words ' crave leave to refer and rely upon '. However, the list of the documents on p. 178 clearly states that the plaintiffs wanted to rely upon this document. Another objection of Mr. Cooper was that there was no evidence that the minutes sought to be tendered were really the minutes dated March 27, 1980. The learned single judge put a query to Mr. Cooper as to whether the minutes sought to be tendered were the minutes to which a reference has been made in the plaint, and Mr. Cooper did not answer that question. This can be seen from the court's order dated 28th June, 1982, at p. 940 of the paper-book. In our opinion, the rejection of the minutes of the meeting dated March 27, 1980, was not proper, particularly when the plaintiffs themselves want to rely upon them. As contended by Mr. Nariman, it would be necessary to admit those minutes in evidence. Formal exhibiting of the document will have to be done by the office in terms of this order. The copies of the minutes are at p. 4598 onwards. Those minutes show that the pla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount to fraud, and in my view that is an abbreviated statement of a very true proposition... What, then, are the elements or requisites necessary to constitute fraud of that description? In the first place, the plaintiff must have made a mistake as to his legal rights. Secondly, the plaintiff must have expended some money or must have done some act (not necessarily upon the defendant's land) on the faith of his mistaken belief. Thirdly, the defendant, the possessor of the legal right, must know of the existence of his own right which is inconsistent with the right claimed by the plaintiff. If he does not know of it he is in the same position as the plaintiff and the doctrine of acquiescence is founded upon conduct with a knowledge of your legal rights. Fourthly, the defendant, the possessor of the legal right, must know of the plaintiff's mistaken belief of his rights. If he does not, there is nothing which calls upon him to assert his own rights. Lastly, the defendant, the possessor of the legal right, must have encouraged the plaintiff in his expenditure of money or in the other acts which he has done, either directly or by abstaining from asserting his legal right. Where all t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to refer to some other decisions ; for example, in the case of Abdul Karim Babu Khan v. Sirpur Paper Mills Ltd. [1969] 39 Comp. Cas. 33 (AP), the question was about the correctness or otherwise of forfeiture of the shares. The following observation (in Firestone Tyre and Rubber Co's case), will show as to how the matter was considered (at p. 415 of 41 Comp Cas): "In the present case the shareholders were never-made aware that the solicitor-director had an interest or concern in the contract of appointment of the private company for a further term or that, but for his vote, the resolution would not have been passed at the board meeting or that his vote was void. The company acting through its board of directors did not at any time place these facts before the shareholders. It is true that in the circulars which were issued by both sides the plaintiffs had mentioned that the solicitor-director was an interested director, but in the circulars issued by Ruia, Kirloskar and the solicitor-director the contrary position was taken up or in any event suggested. Thus, the shareholders had no clear indication whether the solicitor-director had any interest or concern as alleged by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19 IA 203 (PC), specifically states that it is not necessary to have all the conditions mentioned in Willmott v. Barber [1880] 15 Ch 96 (Ch D). The matter has been recently considered in the case of Taylors Fashions Ltd. v. Liverpool Victoria Trustees Co. Ltd. and Old and Campbell Ltd. v. Liverpool Victoria Friendly Society [1981] 1 All ER 897; [1981] 2 WLR 576 (Ch D). It is a detailed and exhaustive judgment. We would like to reproduce the material headnote. It reads as follows: "The doctrine of estoppel by acquiescence was not restricted to cases where the represent or was aware both of what his strict rights were and that the representee was acting in the belief that those rights would not be enforced against him. Instead the court was required to ascertain whether in the particular circumstances it would be unconscionable for a party to be permitted to deny that which knowingly or unknowingly he had allowed or encouraged, another to assume to his detriment...... In those circumstances (which were available in the case), it would be inequitable and unconscionable for the defendants to frustrate the second plaintiff's expectations which the defendants had themselve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Eleclrolux Ltd. v. Electrix Ltd. [1954] 71 RPC 23 (CA) at p. 33 that that was not, indeed, his view. Furthermore, the more recent cases indicate, in my judgment, that the application of Ramsden v. Dyson [1866] LR 1 HL 129, principle whether you call it proprietary estoppel, estoppel by acquiescence or estoppel by encouragement is really immaterial requires a very much broader approach which is directed to ascertaining whether, in particular individual circumstances, it would be unconscionable for a party to be permitted to deny that which, knowingly or unknowingly, he has allowed or encouraged another to assume to his detriment rather than to inquiring whether the circumstances can be fitted within the confines of some preconceived formula serving as a universal yardstick for every form of unconcionable behaviour. So regarded, knowledge of the true position by the party alleged to be estopped becomes merely one of the relevant factors it may even be a determining factor in certain cases in the overall inquiry. This approach, so, it seems to me, appears very clearly from the authorities to which I am about to refer." Atpage 917 of [1981] 1 All ER and at page 594 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies, and indeed some of the categories proposed are not easy to defend...... It is not, therefore, surprising to discover a tendency in the more recent authorities to reject any rigid classification of equitable estoppel into exclusive and defined categories. The authorities on the subject have recently been reviewed by Oliver J. in his judgment in two related actions, Taylors Fashions Ltd. v. Liverpool Victoria Trustees Co. Ltd. and Old Campbell Ltd. v. Liverpool Victoria Friendly Society [1981] 1 All ER 897; [1981] 2 WLR 576 (Ch D), and on the basis of his analysis of the cases, which I gratefully adopt, he rejected an argument founded upon rigid categorisation." It would, therefore, be necessary to consider the facts of the case on the basis of the above position of law. We have already observed that plaintiff No. 2 as a director of the company was a party to the resolution showing or indicating that the disputed shares have been allotted to the financial institutions in a regular manner. The directors' report as also the balance-sheet prepared by the board of directors is consistent with this position. Plaintiff No. 1 was present at the time of the AGM on May 15, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of debentures with an option to convert 20% thereof into equity shares. Thus, it would be unconscionable to allow the plaintiffs any relief on the basis of the alleged mala fides . We would, therefore, hold that the plaintiffs suit would be barred by equitable principles of acquiescence and ratification. Rectification of share register is contemplated by section 155 of the Companies Act. There cannot be any serious dispute, though Mr. Cooper does not accept this position, that rectification is a discretionary relief. This aspect is considered in the case of Bellerby v. Rowland Mar-wood's Steamship Co. Ltd. [1901] 2 Ch 265 (Ch D). In that case, the directors surrendered certain shares of theirs to the company. On account of that surrender the liability for the uncalled shares came to an end. Surrender was made so as to relieve the company of the losses. After some time the company's business became prosperous. The directors filed an application for rectification of the share register for reintroducing their names in the register. It was alleged that the transaction of surrender of shares was bad. The court found that the transaction was bad, however, rectification was ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the rectification should have been made with effect from the date on which the shares ought to have been transferred. The transferee, therefore, took the matter in appeal. By applying the principle 'Nune pro-time', the appeal was allowed. The court held that it should make an order that the registration should be treated as rectified from the time it ought to have been so rectified. Mr. Nariman urged that this case would show that at any rate the rectification of the register should have been ordered by directing that the entry dated 5th June, 1979, be deleted but at the same time there should be an entry in the share register dated June 30, 1979 ( i.e ., the day, a month after the notice), showing that the disputed shares have been transferred to the concerned financial institutions. Mr. Cooper urged that the present proceedings are not an application under section 155 of the Act as the plaintiffs have filed a substantive suit for the rectification of the register and consequential declaration. On principle, we do not find that there can be any difference simply because the plaintiffs have filed the suit. Before filing of the suit, the plaintiffs had made an application ..... X X X X Extracts X X X X X X X X Extracts X X X X
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