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Miheer Hemant Mafatlal Versus Mafatlal Industries Ltd.

1987 (1) TMI 492 - BOMBAY HIGH COURT

Dated:- 22-1-1987 - M Kania and P Shah, JJ. JUDGMENT M.H. Kania, C.J. 1. This is an appeal against a judgment and order of a learned single judge dated October 20, 1986 dismissing the Appellants' Notice of Motion No. 2264 of 1986 taken out in the aforesaid Suit No. 2614 of 1986 filed on the Original Side of this Court. Although the appeal is against the dismissal of Notice of Motion, it is agreed by counsel that the decision in this appeal will govern the decision of the suit, and that the s .....

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der the provisions of the Indian Companies Act, 1913. The said Company was incorporated on January 20, 1913. Clause V of the Memorandum of Articles of the said Company, as it stood before the amendment which is challenged in the suit, provided thus: The Authorised Capital of the Company is ₹ 10,00,00,000/- divided into 8,00,000 shares of ₹ 125/- each with power to increase or decrease the Capital of the Company or to decrease the number of shares or to increase or decrease the face v .....

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es one hundred twenty-five) each.... (underlining supplied) Between 1557 and 1973 the Authorised Capital of the Company was increased on a number of occasions. On each of these occasions the increase was effected by the passing of a Special Resolution amending Article 5 of the Articles of Association of the said Company. The position at the time when the disputed amendments were effected was that ths authorised share capital of the said Company was ₹ 10,00,00,000/- (Rupees ten crores) and .....

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ed that an ordinary resolution should be passed providing, inter alia, that each of the existing equity shares of ₹ 125/- in the capital of the Company on which the sum of ₹ 125/- is credited as. paid-up be sub-divided into one full Equity share of ₹ 100/-, upon which the sum of ₹ 100/- shall be credited as paid-up and a fractional certificate of ₹ 25/- representing one-fourth of an equity share of ₹ 100/- resulting upon such sub-division, upon which the sum o .....

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se V of the Memorandum of Association the figures and words ₹ 10,00,00,000 divided into 8,00,000 shares of ₹ 125 each' be substituted by the figures and words ₹ 50,03,00,000 (Rupees fifty crores) divided into 50,00,000 (fifty lacs) Shares of ₹ 100 (Rupees one hundred) each. Item 13 was to consider passing a resolution that the existing Article 5 of the Articles of Association should be deleted. On August 22, 1986 it was decided that no resolution would be proposed at .....

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nges should be made by the Registrar in accordance with the provisions of Section 97 of the Companies Act. 1956. On September 24, 1986 the present suit No. 2614 of 1986 was filed by the plaintiffs as shareholders holding 26% of the share capital of the said Company in which it was contended that the said resolutions set out in items 10, 11 and 12 of the said notice dated June 26. 1986 were illegal, null and void and not binding. In the said suit the plaintiffs took out the aforesaid Notice of Mo .....

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Association of the said Company do not give any authority to the shareholders to amend Clause V of the Memorandum of Association and hence that clause either could not be amended at all or could be amended only by a Special Resolution, but not by an Ordinary Resolution as has been sought to be done in the present case. The next submission of Mr. Parekh was that, in any event and, irrespective of the provisions of Clause V of the Memorandum of Association, Article 5 of the Articles of Associatio .....

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in the construction of the relevant Articles of Association, then the past practice of amending Article 5 by a Special Resolution suggested that it was an accepted position that on a true construction of the Articles of Association of the said Company, the authorised share capital of the Company could be increased only by passing a Special Resolution. 4. In order to consider the submissions of Mr. Parekh it is desirable to take note of certain provisions in the Memorandum of Association and Arti .....

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lot or otherwise dispose off' the same or any of them to such persons, in such proportion and on such terms and conditions...as they may from time to time think fit.... Article 62 of the Articles of Association is material. That Article comes under the heading "Increase, Reduction and Alteration of Capital" and runs as follows: 62. The Company may from time to time in General Meeting increase its Share Capital by the issue of new shares of such amount as it thinks expedient." .....

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r and transmission, forfeiture, lien, surrender voting and otherwise. Article 66 deals with the power of division and sub-division of the Share Capital. That Article confers the said power on the Company in General Meeting to be exercised by Ordinary Resolution subject to the conditions of its Memorandum. 5. Section 13 of The Companies Act deals with the requirements with respect to Memorandum of Association. Clause (a) of Sub-section (4) of Section 13 runs as follows: Unless the company is an u .....

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other specific provision of the Companies Act to be stated in the Memorandum of Association will be deemed to be the conditions contained in its Memorandum. Relevant portion of Sub-section (1) of Section 31 provides as follows: (1) Subject to the provisions of this Act and to the conditions contained in its. Memorandum, a Company may, by special resolution, alter its articles. Section 94 deals with the power of a limited company to alter its share capital. The relevant part of that section reads .....

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within thirty days after the passing of the resolution authorising the increase and the Registrar shall record the increase and also make necessary alterations in the Company's memorandum or articles or both. Sub-section (1) of Section 17, inter alia, provides that if the registered office of the Company is to be changed from the place mentioned in the Memorandum of Association to another State, this can be done only by a Special Resolution and after confirmation by the Company Law Board on .....

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arge extent turns on the interpretation of Article 62. Article 62,. as we have pointed out, in terms, provides that the Company may from time to time in its General Meeting increase its share capital by the issue of new shares of such amount as it thinks expedient. It was submitted by Mr. Cooper that this Article gives a power to the Company at its General Meeting to increase its Share Capital beyond the limits prescribed in the Memorandum of Association, by an Ordinary Resolution providing for .....

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n Ordinary Resolution was passed expressly altering Clause V of the Memorandum of Association to provide for raising the share capital of the said Company to ₹ 50,00,00,000/-. In our view there is considerable substance in this submission. It will be noticed that Section 94 of the Companies Act deals with the powers of the limited company to alter its share capital. We have already set out the relevant part of Sub-section (1) of Section 94. A reading of that sub-section shows that it deals .....

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lls Co. Ltd. v. State . It was held in that case that the increase of share capital within the meaning of Section 97(7) takes place by creation of new shares simpliciter and it is not necessary that to amount to such increase the new shares should have been offered, allotted or the names of the shareholders registered in the books of the company. So even though the shares have not been offered or allotted to any one, they are still "issued" within the meaning of Section 94(7)(a) when t .....

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language, it is, in our view, clear that the share capital referred to in this Article h the authorised share capital of the Company, and not the issued share capital, as was submitted by Mr. Parekh. The similarity in language beween Section 94(1) and Article 62 would clearly lead to the conclusion that what is referred to in Article 62 was the same share capital as referred to in Sub-section (1) of Section 94, namely the Authorised Share Capital or the nominal share capital of the Company. In .....

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interpret the expression "Share Capital" in Article 62 as meaning the "Issued Capital", and not "Authorised Share Capital", we would render nugatory the provisions of Article 10 which clearly provides that it is open to the Directors to allot the shares which are already created but not allotted, as they may from time to time deem fit. Such an interpretation cannot be given. It is, therefore, not possible to interpret the expression "Share Capital" in Arti .....

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rease in the share capital is to be effected by any particular type of Resolution, namely whether this could be done by an Ordinary Resolution or by a Special Resolution. In this connection reference may be made to the observations in Palmer's Company Law, Twenty-Third Edition, at page 747 in paragraph 56-04. This paragraph is under the Heading "Ordinary Resolutions", and the relevant observations run thus: Where it is provided that 'the company in general meeting may' do s .....

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oes not by its articles specify the kind of resolution required to increase its capital, it is unnecessary to do more than pass an ordinary resolution. Where a company had no power to increase its capital, it was held that a single special resolution, purporting to make the increase, sufficed, for this in substance effected the alteration of the articles so as to authorize the increase. In the light of this legal position, in our opinion, as Article 62 does not specify that the power to increase .....

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le authority to show that, where there is no particular type of Resolution referred to in the Articles of Association as required in order to enable the Company to do any particular act, an Ordinary Resolution to that effect will suffice. Merely because the amendment of Article 5 would require a Special Resolution, it cannot lead to the conclusion that the provisions of Article 62 must be read in such a manner as to so limit the power of the Company to increase the Share Capital that this can be .....

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t submission of Mr. Parekh that, even assuming that the Resolutions passed as aforesaid increasing the Authorised Capital or Share Capital of the said Company have the effect of amending Clause V of the Memorandum of Association, still the provisions of Article 5 of the Articles of Association continue to remain unchanged in the absence of any Special Resolution being passed and the Ordinary Resolution passed for increasing the capital is void and inoperative as it conflicts with Article 5. It w .....

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anies Act. In the present case, however, it is significant that Article 5 is in substance similar to Clause V of the Memorandum of Association of the said Company and it states, inter alia, that The Authorised Capital of the Company is ₹ 10,00,00,000/-, divided into 6,48,000 equity shares of ₹ 125/-... divided into.... (emphasis supplied). It was submitted by Mr. Cooper that the word "is" used in the said Article indicates that the Article is merely descriptive of the exist .....

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w of this we should read Article 5 as if the words "Subject to the provisions of Article 62" were added at the beginning of Article 5 or read Article 62 as if the words "Notwithstanding the provisions of Article 5" had been inserted at the beginning of that Article. In this connection Mr. Cooper placed very strong reliance on the decision of the Privy Council in Ram Kissendas Dhanuka v. Satya Charan Law [1950] A.I.R. P.C. 81 : (1949) 52 Bom. L.R. 501 (P.C.). In that case Arti .....

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ross references reconciling them. It was held that in order to reconcile Articles 109 and 126 and to give effective content to the opening words of Article 126, it was necessary to imply some such opening words as "subject to Article 126" in Article 109 or "notwithstanding anything contained in Article 109" in Article 126. It was further held that in this view the company had the power to increase the number of directors beyond the maximum prescribed by Article 109 by an ordi .....

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cles would be textually inconsistent. In view of this, in our opinion, it would be proper to read Article 5 as if the words "Subject to the provisions of Article 62" were included at the beginning of that Article or we must read Article 62 as if the words "Notwithstanding the provisions of Article 5"' were included at the beginning of that Article. This is clearly permissible in view of the aforesaid decision of the Privy Council in Ram Kissendas Dhanuka (supra). In view .....

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cision need not be considered, as it was impliedly over-ruled by the aforesaid decision of the Privy Council in Ram Kissendas Dhanuka (supra). 9. It was urged by Mr. Cooper in the further alternative that even if Article 5 were to be read as imposing a limit on the Authorised Share Capital of the Company and without any such words as aforesaid being read before it, even then, in view of the amendment of Clause V of the Memorandum, the said Article became inconsistent with Clause V of the Memoran .....

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