TMI Blog2015 (2) TMI 644X X X X Extracts X X X X X X X X Extracts X X X X ..... f 2000 which automatically renders a public company created under Section 43A to become a private company. It is also the case of the respondents that the failure to amend the Articles of Association to give effect to Section 3(1)(iii)(d) ipso facto make the first respondent a public company thereby rendering Article 57 inoperable. it can be seen that by the date of amendment of Section 43A by the Act 53 of 2000, there are four classes of private companies which are declared by the said section to become public companies on the happening of an event mentioned in each of the sub-sections.It is also necessary to note that each of the abovementioned four sub-sections contained a proviso. The tenor of all the four provisos is identical. Proviso- “Provided that even after the private company has so become a public company, its articles of association may include provisions relating to the matters specified in clause (iii) of sub-section (1) of section 3 and the number of its members may be, or may at any time be reduced, below seven.” The High Court held that It is clear from the factual position that the attempt to amend the Memorandum and Articles of Association of the fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellants are precluded from raising such a question of law in the instant appeal. Appeal allowed. - CIVIL APPEAL NO. 2481 OF 2014 - - - Dated:- 28-10-2014 - J. CHELAMESWAR AND A.K. SIKRI, JJ. JUDGMENT Chelameswar, J. 1. The first respondent is a company under the Companies Act, 1956 (hereinafter referred to as the Act ). Two appellants herein who are mother (since deceased) and son respectively are minority shareholders holding or otherwise controlling 17 per cent of the equity in the first respondent company. HISTORY OF THE COMPANY 2. First respondent company is carrying on the business of selling chemical process, knowhow and of manufacturing dyes, chemicals and textile auxiliaries etc. It all started as a family firm in the year 1962 known as M/s. Gardha Chemicals Industries. The above-mentioned partnership was created by (1) the mother of the first appellant, (2) the husband of the first appellant, (3) a sister of the first appellant and the second respondent - the brother of the first appellant. The partnership deed contained a clause that none of the partners could sell his/her respective share in the firm without offering it first to the other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntaken shares and the company shall be bound, upon payment to the transfer of the fair value of such shares, to transfer the shares to the member applying; (e) The promising transferor shall be bound to execute a transfer in respect of any shares so sold and in default thereof be deemed to have executed such a transfer. The company shall thereupon cause the names of the members who have purchased the shares to be entered in the Register as the holders of such shares and thereafter the validity of the proceedings shall not be questioned by any person; (f) In case no member shall apply for any of the shares included in the transfer notice or in case any are untaken after the compliance with the foregoing provisions of this Article the intending transferor shall have the right (which right shall endure for the period of one year from the date of transfer notice) to sell and dispose of hi shares to any person and at any price and to apply for registration of the transfer of the same and the company shall be bound to give effect to the transfer of such shares accordingly. (g) For the purpose of this clause the fair value of the share shall be such sum, if any, as the auditors f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts from persons other than the members, directors or the relatives of the members or the directors of the company. According to the respondents, such a proposal for amendment was necessitated to comply with the requirements of the newly inserted sub-section (d) of Section 3(1)(iii) private company means a company which has a minimum paid-up capital of one lakh rupees or such higher paid-up capital as may be prescribed, and by its articles,-- (d) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives. which came to be inserted by Act 53 of 2000 w.e.f. 13.12.2000. The appellant opposed the amendment of the Articles of Association and the amendment could not be carried as the proposal failed to muster the requisite majority. HISTORY OF THE LITIGATION: 6. In the month of May, 2009, certain reports appeared in the media that the second respondent was proposing to sell his shares in the first respondent company which were at that time valued at approximately 1600 crores. The appellant, therefore, filed a Company Petition No. 132/397- 98/CLB/MB/2009 (hereinafter referred to as the Company Petition 132 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts, the High Court held that - an agreement between shareholders of an unlisted public company conferring a right of preemption which is embodied in its Articles is invalid and unenforceable. - SLP 8. Elaborate submissions were made on either side dealing with the various provisions of the Companies Act as amended from time to time. The learned counsel appearing on either side also submitted written briefs. 9. According to the written brief submitted by the appellant the question that arises for consideration of this Court is summarized as follows: - Whether on and after the bringing into force of the Companies (Amendment) Act, 2000, the status and character of Gharda Chemicals Ltd. (R-1) continued to be as that of a hybrid company (Section 43A company) and whether this company and its members are bound by the terms of a preemption clause contained in Article 57 of the Articles of Association? In our opinion, the REAL QUESTION is not whether after the Amendment Act 53 of 2000, the first respondent continued to be a private company or became a public company, But whether the amendment made by the Act 53 of 2000 to Sections 3 and 43A destroys the rights and obligatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by guarantee .) (b) limits the number of its members to fifty and (c) prohibits any invitation to public to subscribe for any shares or debentures for the company. 14. Section 27(3) of the Act stipulates: In the case of a private company having a share capital, the articles shall contain provisions relating to the matters specified in sub-clauses (a), (b) and (c) of clause (iii) of subsection (1) of section 3; and in the case of any other private company, the articles shall contain provisions relating to the matters specified in the said sub-clauses (b) and (c). This sub-section makes it clear that to be a private company either with or without share capital the Articles of Association of such company must necessarily provide for the matters specified in Section 3(1)(iii) of the Act. In the case of a private company limited by share capital all the three requirements specified in clauses (a), (b) and (c) of clause (iii) of sub-section (1) are to be provided. In the case of a private company other than a company having share capital only matters specified in clauses (b) and (c) of the above sub-section are to be stipulated. 15. Part-II of the Act deals with incorporati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... COMPANIES (they are referred to by the learned counsel for the appellant as HYBRID Companies ) though Section 43A does not use that expression. In our opinion, Section 43A only creates a new class of PUBLIC companies -answering the description contained therein though they have and can retain all the attributes of a PRIVATE COMPANY as defined under Section 3(i)(iii). These companies are hereinafter referred to as HYBRID Companies for the sake of convenience. 21. Obviously, the question of private companies without share capital becoming public companies does not arise. Bodies corporate cannot hold non-existent shares in such private companies. Sub-Section (1) has two provisos. An examination of the contents of the first proviso is relevant and necessary for the purpose of this case. We shall deal with the same separately. 22. Sub-section (2) mandates that within three months from the date on which a private company becomes a public company by virtue of Section 43A(1), the company shall inform the Registrar that it has become a public company. It also mandates that the Registrar shall make necessary consequential alterations of the records. 23. The language and implicati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specified in clause (iii) of sub-section (1) of section 3 and the number of its members may be, or may at any time be reduced, below seven. 28. The amount of ₹ 1 crore mentioned originally in the sub-section (1) is substituted by the Act 31 of 1988 with the words such amount as may be provided . 29. Sub-section (1B) declares that any private company holding not less than 25 per cent of the paid up share capital of a public company shall become a public company. Both the sub-sections contain a proviso each, which are ipsissima verba. The implications of such provisos along with the implication of the proviso to sub-Section (1) shall be examined later. (1B) Where not less than twenty-five per cent of the paid-up share capital of a public company, having share capital, is held by a private company, the private company shall,- (a) on and from the date on which the aforesaid percentage is first held by it after the commencement of the Companies (Amendment) Act, 1974, or (b) where the aforesaid percentage has been first so held before the commencement of the Companies (Amendment) Act, 1974 on and from the expiry of the period of three months from the date of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company shall, on and from the date on which such acceptance or renewal as the case may be, is first made after such commencement, become a public company and thereupon all the provisions of this section shall apply thereto: Provided that even after the private company has so become a public company, its articles of association may include provisions relating to the matters specified in clause (iii) of sub-section (1) of section 3 and the number of its members may be, or may at any time be, reduced below seven. 32. Thus, it can be seen that by the date of amendment of Section 43A by the Act 53 of 2000 under Section 43A, there are four classes of private companies which are declared by the said section to become public companies on the happening of an event mentioned in each of the sub-sections. 33. It is also necessary to note that each of the abovementioned four sub-sections contained a proviso. The tenor of all the four provisos is identical. Provided that even after the private company has so become a public company, its articles of association may include provisions relating to the matters specified in clause (iii) of sub-section (1) of section 3 and the number of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us provisions of the Companies Act. At the same time, a public company has certain advantages under law. Therefore, it is for the company and its members to decide whether the restrictions and limitations contained in the Articles of Association referable to matters specified in Section 3(1)(iii) should still continue even after the company lost the exemptions and privileges attached to a private company. 38. Section 43 of the Companies Act recognizes the existence of such privileges and exemptions by declaring that a private company which defaults in complying with any one of the stipulations made in its Articles of Association relating to the matters specified under Section 3(1)(iii), such Company shall cease to be entitled to the privileges and exemptions conferred on private companies by or under this Act and this Act shall apply to the Company as if it were not a private company. 43. Consequences of default in complying with conditions constituting a company a private company - Where the articles of a company include the provisions which, under clause (iii) of subsection (1) of section 3, are required to be included in the articles of a company in order to constitute i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contention in the instant appeal and reads as follows:- (11) Nothing contained in this section, except sub-section (2A), shall apply on and after the commencement of the Companies (Amendment) Act, 2000. The implication of the same requires a detailed examination at a later stage of this judgment. DECISION OF THE HIGH COURT: 44. The High Court noted the history of Sections 3(1)(iii) and 43A of the Act and recorded a finding that in view of the insertion of sub-section (2A) in Section 43A by the Companies Amendment Act (Act 53 of 2000)- the concept of deemed public company under section 43A and introduced by the Companies (Amendment) Act has now been abolished based on the recommendation of the working group of Companies Act, 1956. 45. The High Court also recorded a finding that the first respondent company is a public company 117. Therefore, in my view, once the first respondent is a public company as evidenced by the certificate referred to above, with effect from 17th August 1988, then, the amendment made in 2000 would be applicable and section 43A ceases to apply to it. That the words On and After , are used makes no difference as far as present cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inue to be freely transferable as they are shares of a public company. The broad distinction as noticed above, between the term Private and Public company, is enough to turn down this alternate argument. 47. The High Court also rejected the other submission of oppression and mismanagement pleaded by the appellants as the basis of the plea of oppression and mismanagement is the existence of legally valid preemption clause. The High Court held- 127. Once all these arguments and contentions are dealt with, then, other part of submissions of Mr. Samdani on oppression of minority also fail. They are raised on the basis that the preemptive right is defeated by respondent Nos.2 to 5 by their several acts of omission and commission. Once the preemptive right itself is not in existence by virtue of the statutory provisions in the field, then, there is no act of oppression. As held above, the plea of mis-management has been given up and has not been pursued. 48. The reasons which led to the above extracted conclusions of the High Court are as follows: A) Section 43A prior to its amendment by Amendment Act 53 of 2000 only provided for various situations in which a private c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of Association of the first respondent was unsuccessful. The said resolution proposed in the meeting held on 5th May 2001 was not carried but in fact defeated. Once it was defeated, then, the first respondent which had become a public company on 17th August 1988 continued with that status. It would be of relevance to note that the resolution was moved in the meeting held on 5th May 2001. That resolution was defeated on that day. However, the Companies Amendment Act 2000 had come into effect already and to be precise from 13th December 2000. On 13th December 2000, GCL was not a deemed public company but a public company. Once it was a public company, then, the argument of the appellants that it continued to retain its fundamental and basic character as a private company cannot be accepted. The status is conferred by law. The status was sought to be changed or amended by moving an amendment to insert an additional clause (d) was defeated, then, there is no scope to alter the status of the respondent No.1 company by either terming it as a deemed public company or a public company retaining the fundamental and basic character of a private company. Both these concepts are unknown to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tained a specific clarificatory proviso which preserved the essential character and status of a private company. Therefore, to construe Section 43A subsequent to 13.12.2000 to destroy the essential character and status of the companies covered by Section 43A would be illogical. (vi) A Company is a legal vehicle for more than one person/collection of persons to come together and form an enterprise. The basic terms on which such persons would join together would be contained in the Memorandum Articles of Association of such a company, creating rights and obligations including the conditions subject to which shares are to be held. When a person becomes a member of a company he agrees to be bound by the covenants in the Articles of Association (Section 36) Effect of memorandum and articles.-(1) Subject to the provisions of this Act, the memorandum and articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed by the company and by each member, and contained covenants on its and his part to observe all the provisions of the memorandum and of the articles. (2) All money payable by any member to the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s paid-up capital to one lakh rupees. (5) Where a private company fails to enhance its paid up capital in the manner specified in sub-section (3) .., such company shall be deemed to be a defunct company within the meaning of section 560 and its name shall be struck off from the register by the Registrar. thereby pre-existing private companies were required to increase their paid up capital within a period of two years to meet with the minimum threshold of Rupees One Lakh now introduced by the Amendment Act of 2000, no provision was contained for pre-existing private companies to amend their Articles of Association to introduce the new sub-clause (d) in its Articles. Thus, the existing private companies were not required to amend their articles by introducing the fourth clause (d) in its Articles to retain their character of a private company. 50. SUBMISSIONS BY THE RESPONDENTS: (i) With the introduction of the Amendment Act of 2000 on 13th December 2000, an existing private company that does not have clause (d) in its articles becomes a public company. Any other construction of the amendment would result in the creation of two classes of private companies leading to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt in the case of Vodafone International Holdings B.V. v. Union of India, (2012) 6 SCC 613. EXAMINATION OF THE CORRECTNESS OF THE CONCLUSIONS OF THE HIGH COURT: (A) 51. When the High Court recorded that there was nothing which permitted such public company (companies covered under Section 43A, emphasis supplied) to again become private company , obviously, Section 43A, sub-section (4) escaped the attention of the High Court. Sub-section (4) is on the statute book since the inception of Section 43A. At the cost of repetition, I reproduce it. (4) A private company which has become a public company by virtue of this section shall continue to be a public company until it has, with the approval of the Central Government and in accordance with the provisions of this Act, again become a private company. 52. Parliament always recognized the possibility of a private company (which becomes a public company by virtue of operation of Section 43A) once again reverting back to its status of a private company. 53. The reasons are obvious. Each one of the events stipulated under Section 43A sub-sections (1), (1A), (1B) and (1C) which have the effect of converting a public co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssions covered by the statute and are saved by the express provisions under the repealed act or by virtue of the provisions of the General Clauses Act. Therefore, by repealing Section 43A, Parliament could have put an end to the existence of all HYBRID companies. We are aware that there can be other technics by which the same result can be achieved. Therefore, it is required to be examined whether the Act 53 of 2000 refers to achieve the same result. It does not repeal Section 43A. Sub-section (11) which came to be inserted by the said amendment in Section 43A only declares:- (11). Nothing contained in this section, except sub-section (2A), shall apply on and after the commencement of the Companies (Amendment) Act, 2000. 56. What exactly is the meaning of sub-section (11) is to be examined? 57. There must be innumerable private companies in this country. For the purpose of our analysis, they can be classified into two categories, (i) private companies which came into existence prior to the Amendment Act 53 of 2000 (w.e.f. 31.12.2000); and (ii) private companies which came into existence after the abovementioned date. 58. Insofar as the first of the abovementioned two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nition inheres in the shareholders of a private company and protected by virtue of proviso to Section 43A(1C) notwithstanding the fact that such companies were treated as public companies prior to 13.12.2000. To deprive the shareholders of HYBRID companies such a collective right would be too drastic a change overnight without giving any option or time to the HYBRID company and its members to retain the basic character of the company as a private company. 63. Though, in theory, it is open to the legislature to create such a situation, whether the Parliament intended such a drastic course of action is the question. It must be remembered that in the ultimate analysis a company is a voluntary association of its members who have a fundamental right to form associations under Article 19(1)(c) of the Constitution of India, the inference which is obvious from the text of the Constitution and also on cumulative reading of the decisions of this Court in Damyanti Naranga v. The Union of India Others, (1971) 1 SCC 678, Rustom Cavasjee Cooper v. Union of India, (1970) 1 SCC 248, Bennett Coleman Co. Others v. Union of India Others, (1972) 2 SCC 788. The fundamental right to form an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould have the effect of retrospectively taking away the rights collectively enjoyed by the shareholders (of private companies which became HYBRID companies) from 1956 onwards. In this context, it is worth remembering the words of this Court in K.C. Arora Another v. State of Haryana Others, (1984) 3 SCC 281 at 294: The legislation is pure and simple, self-deceptive, if we may use such an expression with reference to a legislature-made law. The legislature is undoubtedly competent to legislate with retrospective effect to take away or impair any vested right acquired under existing laws but since the laws are made under a written Constitution, and have to conform to the dos and don ts of the Constitution, neither prospective nor retrospective laws can be made so as to contravene fundamental rights. The law must satisfy the requirements of the Constitution today taking into account the accrued or acquired rights of the parties today. The law cannot say, 20 years ago the parties had no rights, therefore, the requirements of the Constitution will be satisfied if the law is dated back by 20 years. We are concerned with today s rights and not yesterday s. A legislature cannot legi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specified in clause (a), (b) and (c). By virtue of the Act 53 of 2000 w.e.f. 13.12.2000 a private company s Articles of Association are required to contain additional stipulations relating to the matter contained in clause (d) also. The question is whether the newly introduced requirement is applicable to existing private companies also or only to those which come into existence subsequent to the commencement of the Act 53 of 2000? 73. Section 27(3) mandates that the articles of a private company having share capital (such as the one on hand) shall only contain provisions relating to matters specified in clauses (a), (b) and (c) of Section 3(1)(iii) but not matters relating to clause (d). In other words, though the Parliament chose to introduce clause (d) in Section 3(1)(iii) (by an amendment in the year 2000), did not think it necessary to make a corresponding amendment to Section 27(3). Whether such an omission is accidental or by a design is required to be examined? If it is by a design what is the purpose sought to be achieved of such a design requires an examination? 74. The Companies Act never prohibited the acceptance of deposits. Prior to the Amendment Act of 2000, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a private company could have either permitted or prohibited the company from accepting deposits from PUBLIC or stipulated conditions subject to which deposits could be taken. If a company s internal policy prohibited the acceptance of deposits from PUBLIC and contrary to such internal policy deposits are collected from PUBLIC it was always open to the members of the company to deal with the situation and the persons violating the company s policy. 78. In 1988, the Parliament thought it necessary to provide for a more rigorous control and scrutiny of the activities of accepting deposits from PUBLIC by private companies and introduced sub-section (1C) of Section 43A, thereby enabling the State to have a greater control over such activity of such private companies by treating them as public companies. The regulations, control and supervision to which the management of public companies is subjected to under the Act is higher in degree compared to the regulations, control and supervision to which the management of a private companies is subjected to under the Act. The control contemplated under Section 43A(1C) is in addition to the regulations and supervision brought in by virtue o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter, in none of the four contingencies contemplated under Section 43A(1), (1A), (1B) and (1C), Parliament thought it necessary to restrict such collective right of the shareholders of a private company. Such private companies are to be treated as public companies for certain purposes. 81. If a private company chooses not to incorporate the prohibition, such as the one contemplated under Section 3(1) (iii)(d), and accepts deposits from the public then such collection of deposits is regulated by Section 58A. If it chooses to incorporate a stipulation but fails to comply with the same, it would attract the consequences mentioned in Section 43 which consequences are also avoidable under the proviso to Section 43. 82. It must be remembered that the kind of control which the Parliament sought to impose on private companies which earlier attracted sub-sections (1) to (1B) of Section 43A is now thought clearly not necessary by the Parliament. An inference obvious from Section 43A(11) whatever be the other implications of those sub-sections. 83. Even during the period when Section 43A operated, the Parliament never thought of curtailing the collective right of the members of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e features of the private companies if the shareholders choose to retain them. Therefore, the question of discrimination does not arise. 88. Therefore, in our opinion, the failure of the first respondent company to amend its Articles of Association to give effect to clause (d) of Section 3(1)(iii) does not effect the operation of its Article 57. 89. That leaves us with two more questions raised by the respondents herein. They are contained in submissions (iv), (v) and (vi) noted earlier in the judgment. In fact, submissions (iv) and (v) are interconnected. The substance is that in view of the fact that the appellants herein opposed the resolution to amend the articles of association of the first respondent company to bring them in tune with the newly inserted clause (d) of Section 3(1)(iii), they are estopped from arguing that the first respondent company is not a public company and secondly in view of the judgment of the Bombay High Court dated 14.11.2008 in Company Petition No.77 of 1990 to which the appellants herein were originally the parties but withdrew from the said company petition later where the Bombay High Court held as follows: Insofar as the present Petiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en heard and finally decided. 94. The question whether the first respondent Company is a public company or a HYBRID company or a private company was never directly and substantially in issue in Company Petition No.77 of 1990. The parties to the said company petition proceeded on the basis that in view of the fact that an amendment to the Articles of Association to give effect to the newly inserted clause (d) of Section 3(1)(iii) could not be carried on, the first respondent company became a public company. Therefore, the Court never examined that question of law. Hence, it cannot be said that the appellants are precluded from raising such a question of law in the instant appeal. 95. We therefore, do not propose to examine the question as to what is the effect of the appellant s withdrawal from the abovementioned company petition. 96. The only other submission of the respondent which requires to be dealt with is regarding the transfer of five shares of the appellant which, according to the respondents, resulted in the membership of the first respondent company exceeding fifty thereby rendering the first respondent a public company. Unfortunately, though the High Court noted ..... X X X X Extracts X X X X X X X X Extracts X X X X
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