TMI Blog1994 (5) TMI 275X X X X Extracts X X X X X X X X Extracts X X X X ..... The said deposit was to be secured by the pledge of 20,000 shares of the 3rd respondent. On 6-6-1992, a letter of pledge was executed by the 18th respondent in favour of the petitioner which inter alia entitled the petitioner to enjoy all legal right as a shareholder of the 3rd respondent, including exercise of voting rights and entitlement to all accretions of the said shares during the period of pledge. 3. Pursuant to the said letter of pledge, the petitioner, under cover of a letter dated 7-6-1992, despatched the following documents to the 3rd respondent: (a) Duly executed and stamped transfer deed dated 5-6-1992 relating to the said 20,000 equity shares executed by the 18th respondent in favour of the petitioner. (b) The original share certificates relating to the said 20,000 equity shares. (c) Extract from the minutes of the meeting of the Board of Directors of the petitioner held on 5-6-1992, containing the resolution authorising the pledge of shares in favour of the petitioner. (d) A true copy of the letter of pledge dated 6-6-1992 from the 18th respondent in favour of the petitioner. (e) A copy of the memorandum and Articles of Association of the Pet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the Karnataka High Court by way of a writ petition against the impugned order and the Karnataka High Court granted interim status quo order. Subsequently, the said writ petition was withdrawn by the petitioner. On a memo filed by it, without prejudice to its rights, the Karnataka High Court was pleased to dismiss the writ petition on the ground that it did not have jurisdiction to entertain the same. Meanwhile, the 18th respondent appears to have filed an appeal before the Delhi High Court against the impugned order under Section 10-F of the Act and on a preliminary objection being taken by respondents 4 and 5 on the question of jurisdiction, which culminated before the Supreme Court, which by its judgment dated 5-10-1993 held that the proper forum to file the appeal would be the Madras High Court within whose jurisdiction the registered office of the 3rd respondent is situate. It is further understood that the 3rd respondent has filed an appeal against the impugned order under Section 10-F of the Act before the Madras High Court. The petitioner is not a party to any of the proceedings or the appeal. The petitioner has not approached any other forum except the Karnataka High Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said documents as directed, the 1st respondent failed to discharge the petitioner from further appearance. It is thus obvious that the petitioner was neither a stranger nor a by-passer in the proceedings of the CLB but an active participant, who not merely delivered or produced the documents but advanced arguments to ensure that its rights are protected. (c) The language of Section 10F of the Act does not give any room for ambiguity but makes it clear that any person aggrieved by the order of CLB could prefer an appeal. (d) The rights of the petitioner to the shares which formed the subject-matter of the dispute adjudicated by the CLB, are that of a pledges. The jural relationship between the 18th respondent and the petitioner is that of a pledger and pledgee. The petitioner did not subscribe to the shares of the 3rd respondent and no shares were allotted to it. (e) The CLB issued notices to all the parties concerned including the petitioner and afforded a reasonable opportunity to file their replies and documents. The hearing lasted nearly eight months and elaborate affidavits were filed. The petitioner was present throughout the hearing. The petitioner not only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the petitioner is the owner of 20,000 shares as its name is found in the Register of Members maintained by the 3rd respondent and therefore, the direction given by the CLB for removal of the petitioner's name from the Register of Members is not only violative of the principles of natural justice but also against the mandatory provisions of Section 111(5) of the Act. The learned Senior counsel, in support of his contention cited the decision reported in The Jawahar Mills Ltd. Salem v. Sha Mulchand and Co. AIR1951Mad572 , and the decision of the Supreme Court reported in Life Insurance Corporation of India v. Escorts Ltd. 1986(8)ECC189 . The learned senior counsel further contended that the petitioner's property rights have been affected by the order of the CLB and that the petitioner had made an oral application before the CLB for impleading it and the same was wrongly disallowed. 14. Mr. T. Raghavan learned counsel appearing for the 3rd respondent, supporting the contention of Mr. R. Krishnamurthi, contended that it makes no difference as to whether a person is a pledgee or owner and that so long as the person's name is found in the Register of Members, the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Register of Members has to be taken as such and the presumption that all the members whose names are entered in the company's register of Members are valid members. In view of the above, when the admitted fact is, that the petitioner having become a share-holder and shown in the Register of Members, it's name cannot be deleted in proceedings under Sections 397 and 398 of the Act, that too without being heard. 18. The order of the CLB, which has in effect set aside the status of the petitioner as a share-holder having been issued without hearing the petitioner is in violation of the principles of natural justice. The CLB admittedly did not issue notice to the petitioner notwithstanding the fact that the attention of the CLB was drawn to the fact that before granting reliefs prayed for in the petition, the petitioner, whose interests are sought to be prejudicially affected, ought to be heard. The failure of the CLB to implead the petitioner as party to the proceedings has deprived the petitioner of a valuable right as a share-holder of the 3rd respondent. 19. Even otherwise, according to Mr. T. Raghavan, the CLB ought to have seen that in a proceeding for rectification ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her invited my attention to the provisions of sub-sections (e) and (f) of Section 402 of the Act and contended that the order of the CLB has set aside an agreement without hearing the petitioner and therefore, the same is bad in law. 22. Mr. A. L. Somayaji took the lead on behalf of the contesting respondents and replied first on behalf of the 5th respondent and has taken the Court through the complete history leading to the filing of the company petition and gave a chronology of events. From a perusal of the chronological events, it could be seen that in April, 1992, there was a split in Chhabria's family. The 14th respondent stood on one side and the other members stood on the other side. 23. According to Mr. A.L. Somayaji, the 7th respondent's group issued a notice on 22-4-1992 to the 3rd respondent about its affairs. On 30-4-1992, the disputed meeting of the Board of Directors of the 3rd respondent was held in which it was decided to increase the shares in the 3rd respondent from 5,000 to 25,000. On 2-5-1992, a letter of offer was purported to be sent to the existing shareholders of the 3rd respondent. On 5-5-1992, the 13th respondent Tiled a petition under Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to Mr. M. L. Sotnayaji, all the events alleged to have taken place in the 3rd respondent are disputed by the 5th respondent. The 5th respondent gave a notice under Section 169 of the Act to the 3rd respondent to call for an extraordinary general body meeting in which the subject matter proposed was the removal of the Board of Directors of the 3rd respondent. On 5-7-1993 the 3rd respondent received the notice and on 19-7-1993, the 3rd respondent rejected the request of the requisitionist. On 22-7-1993, the 18th respondent filed an appeal in the Delhi High Court. On 25-7-1993, C.M.A. No. 743 of 1993 was filed by the 3rd respondent but no stay was granted. On 27-7-1993 the petitioner filed a writ petition in the Karnataka High Court and obtained an order of status quo. But, on 12-8-1993, the same was withdrawn. On 25-10-1993, the present writ petition has been filed. 26. After reciting the aforesaid dates of events, Mr. M. L. Somayaji submitted as follows ; (a) The petitioner having appeared through counsel in the proceedings before the CLB is not entitled to complain that it should have been impleaded or that notice should have been given to it before the impugned order was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... awn with leave under O. 23, R. 1, C.P.C . when there was an alternative relief of appeal provided under S. 10F of the Act, the petitioner is not entitled to file, a writ petition. k) That the CLB had found fraud had been played in the affairs of the 3rd respondent and had referred to the findings of CLB in its order and said that if any intervention is made in the order of CLB in this writ petition, it would amount to blessing a fraudulent act. 27. Mr. A. L. Somayaji relied on the passage contained in page 894 in the Book Law of Writs Fifth Edition by Mr. V. G. Ramachandran. He also relied on the decision reported in the Chairman Board of Mining Examination v. Ramjee [1977]2SCR904 for the proposition that natural justice is not an unruly horse. He also relied on the decision reported in Ved Gupta v. M/s. Apsara Theatres, Jammu [1983]3SCR575 to say that the petitioner should have a legal right to challenge a particular order, the petitioner does not possess that right. He further relied on the decision reported in State of Uttar Pradesh v. District Judge. Unnao AIR1984SC1401 and the Hindustan Construction Co. v. G. K. Patnakar (1976)ILLJ460SC for the proposition that violation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grant the relief even if such a petition is filed. The Delhi High Court had approved the judgment of the Madras High Court reported in M/s. E. V. Swaminathan v. KM. MA, Industries and Roadways Private Limited (1993) 76 Cora Cas 1. Therefore, according to Mr. C. Harikrishnan, Mr. T. Raghavan was not correct in his submission about restriction regarding rectification of share register. 30. Proceeding further, Mr. C. Harikrishnan pointed out that the judgment of K. Shanmukham, J., in Meenakshi Mills case was considering only a prima facie case for the grant of interim order and though the learned Judge held that on a prima facie reading of S. 155 of the Act, it appeared that rectification could be made only under S. 155 of the Act, still the learned Judge concluded saying that it was only his prima facie view and that the petitioner in the said case could still agitate the matter in the proceedings. Therefore, it cannot be a governing precedent for the proposition argued by Mr. T. Raghavan. Mr. C. Harikrishnan further proceeded to submit that a reading of S, 111 of the Act itself would indicate that interpretation of Mr. T. Raghavan cannot be correct as the expression 'may' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thout any specific direction by the CLB. 33. According to Mr. C. Harikrishnan while that would be the state of legal position, it would be futile to contend that the CLB has passed orders only questioning the share transaction. Once it is held that there are no shares, it would amount to a pledge of non-existing security and therefore, if the petitioner has suffered on account of that, it is a matter between the 18th respondent and the petitioner. Regarding the point of hearing, he submitted that the proceeding under Ss. 397 and 398 of the Act are representatives in character and the petitioner, who claims to be a shareholder and who had knowledge of the proceedings, ought to have made its representations, if any, and therefore, not justified in complaining. 34. Mr. C. Harikrishnan would submit that the relief under Ss. 397 and 398 of the Act (sic) said to be urgent in nature and to say that a person should spend time in applying for rectification, to say the least, is shocking answering Mr. Habulla Badsha, Mr. C. Harikrishnan submitted that when the interest of the petitioner was safeguarded if the 18th respondent is not entitled to complain and if the 18th respondent now su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ister of Members, it should be considered that it is a shareholder, that is a proposition which is unsound not only in law but also on facts. Mr. C. Harikrishnan took out the form filed by the 3rd respondent under Section 187C of the Act and showed it to the court that the 3rd respondent itself had filed the form to say that the petitioner was only holding beneficial interest in the shares of the 18th respondent such forms are also filed by the petitioner as could be seen from page 111 of the typed set of papers furnished by the respondents. In the face of such Form, to say that the petitioner is the owner of the shares is misleading. To be a shareholder of a company, he should be in a position to contest for the post of a Director. The 18th respondent's name still continues as holder of 20,000 share in the Register of Members. If that be the case, if the petitioner's alleged holding is also taken into account, then the total number of shares would exceed even the issued share capital of the company. Therefore, to say that the petitioner is the owner is totally unacceptable. Mr. C. Harikrishnan further said that merely because a person's name is entered in the Register ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has no right to be heard. 40. According to Mr. G. Suhramaniam, a party cannot be complemented for his omission to be vigilant despite his knowledge that his interest was a subject matter of litigation before a Tribunal or Court of competent jurisdiction. The normal course of human conduct, about which the Court can draw a Presumption under Section 114 of the Evidence Act, is that when somebody is informed that his interests are in a litigation, he will immediately seek either to get himself impleaded or to see that his interest are safeguarded through somebody. In the instant case, as seen from the impugned order, notice was taken by the petitioner and it produced the documents and was present throughout. The order of the CLB at page 49 (internal page 36) of the typed set is to the following effect. It is an admitted position both by Malleswara and Bhankerpur that the only interest Malleswara has in these shares is as a pledgee. It is also clear from the documents relating to this pledge filed before us that the intercorporate deposit is for a period of three years and once it is repaid as per terms and conditions, the interest of Malleswara in these shares comes to an end ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the proceedings as a pledgee of the shares having voting right to receive dividends etc. 44. In the Karnataka High Court, the petitioner has sworn to an affidavit, which is at page 85 of the typed set, staling as under: Even after the petitioner produced the said documents, as directed, the 1st respondent failed to discharge the petitioner from further appearance . Even in the present affidavit at paragraph 5 it is clearly stated that a pledge was made. Right through, the petitioner has been putting only a case of pledge. It is only now the petitioner shifts the stand as a shareholder. This aspect as to whether the petitioner can be called a shareholder has already been dealt with by me while considering the arguments of Mr. C. Harikrishnan and Mr. Vedantam Srinivasan. 45. The petitioner has no consistent case and it is only trying to divert the attention of the court from main issues which fall for consideration in the regular appeal against the CLB's order under Section 10F of the Act. In the writ petition, the court is not going to decide whether the petitioner js a shareholder or a pledgee. Even that will necessitate a determination of fact. If the attitude of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing two decisions in support of this contention: D.L.F. Housing Construction Ltd. v. Delhi Municipal Corporation AIR1976SC386 and Hari Singh v. State of Uttar Pradesh [1984]3SCR417 . 49. The point about non-compliance with natural justice is answered by Mr. G. Subramaniam by the following submission. It is not an invariable rule that in a litigation everybody who is interested must be made a party. The interest of anyone interested if sufficiently safeguarded or litigated upon by another party on record, that will be sufficient compliance with the legal requirements relating to the joinder of parties. In this connection, it is to be remembered that a proceeding under Sections 397 and 398 of the Act is representative in character. This Court in the decision reported in L. RMK Narayanan v. The Puthuthotam Estates, (1943) Ltd. (1992) 1 MLJ 253 held so. In that case, this Court followed the ruling reported in Raj Mathura Prasad v. Hanuman Prasad Bhagat, (1984) 56 Com Cas 467 : 1984 Tax LR 2111 . It is representative action, them under Order I, Rule 8, Clause 2, C.P.C., everybody can come on record on his own. An order passed in a representative capacity is binding on all person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judicial discipline and comity of Court require that the Court should adopt a sense of self-imposed restriction and limitation in order to observe the judicial discipline and comity of Courts. Court will not exercise its discretion, for otherwise it will be impinging propriety. The court should observe constitutional propriety and commit or Courts imposing self-discipline and decline to interfere any proceedings under Art. 226 of the Constitution. 54. Mr. Vedantam Srinivasan, learned counsel appearing for the 7th respondent made the following submissions. To become a member of a company, there is a definite procedure prescribed under Section 11 read with Section 82 of the Act. A mere entry of name in the register of Members of the company would not confer on such a person rights as that of a member of the company. In the instant case, the entry of the name of the petitioner in the Register of Member of the 3rd respondent is fraudulent and at any rate, the petitioner at best could be only a pledge of the shares issued by the 3rd respondent and therefore would not be claimed membership of the Company. Article 9 of Articles of Association of the 3rd respondent prohibits any third ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accepted, it is for !he petitioner to have made representations. 57. Contending about the alternative remedy, Mr. Vedantam Srinivasan pointed out that Rule 30 of the CLB Regulations has provided that even if a person has not been partly to the proceedings, he would be entitled to as a matter of right a copy of the order and the complaints of the petitioner that no order was communicated to it and therefore it was not able to file an appeal is an afterthought and mis-construction of terms of the said rule, The petitioner could have obtained a copy and filed an appeal. He concluded by saying that the petitioner and respondents 3 and 18 had played a fraud in the affairs of the company and it was held so by the CLB and the Court should not come to the assistance of a person who had played a fraud on the statutory Tribunal. He relied on the decisions reported in Thansingh Nathmal v. The Superintendent of Taxes [1964]6SCR654 ; The British Indian Steam Navigation Co. Ltd. v. Jasjit Singh AIR1964SC1451 and Girdharlal Banisidhar v. The Union of India 1964CriLJ461 wherein the Supreme Court had laid down the rules as to what all the circumstances a person could be allowed to invoke the po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 397 and 398 of the Act are comprehensive enough, the CLB when it decided to set aside the issues of shares should follow the procedure prescribed under Section III of the Act. 61. In so far as the declaration under Section 187(c) of the Act is concerned, Mr. T. Raghavan would submit that the real owner is the petitioner and that the beneficial owner is the 18th respondent. 62. Mr. Habibulla Badsha, learned Senior counsel stated that he was misunderstood by the other side about his contention relating to sub-sections (e) and (f) of Section 402 of the Act. What he wanted to contend was that when a provision is made for setting aside an agreement even with regard to third parties, a similar right should also be extended to shareholder. He also refuted the contention that alternative remedy is controlled by any fixed rule and the courts will always adhere to the rule of issuing a writ in spite of availability of alternative remedy in appropriate cases. The case on hand is one such instance and, therefore, the Court should set aside the order of the CLB. 63. In order to appreciate the respective contentions of the parties, it is necessary to decide the rights of Malleswara ov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the pledge is in possession of valid transfer deeds. Clause 17 makes it clear that the shares are the absolute property of Bhankerpur. Inasmuch as the letter of pledge and other connected documents have been sent by Malleswara to SSPL, it is to be presumed that SSPL is fully aware of the nature of transaction between Malleswara and Bhankerpur. In fact on 7th June, 1992 Malleswara has sent a certified true copy of the letter of pledge along with certain other documents to SSPL. No doubt, SSPL has recorded the name Malleswara in the register of members but that is only for the purpose of enabling Malleswara to exercise. Voting rights and receive dividend during the period of pledge in accordance with the terms and conditions of pledge. I am of the view that a reading of the Board resolutions of Malleswara's letter of pledge make it clear and beyond doubt that Malleswara is only a pledgee of the shares of SSPL held by Bhankerpur. In fact, the Company Law Board has said in its order : It is an admitted position both by Malleswara and Bhankerpur that the only interest Malleswara has in these shares in as a pledgee. No exception has been taken to the said statement in the affidavit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strange that Malleswara should keep quite and watch the proceedings without moving its little finger. Therefore Malleswara cannot complain at this stage that the impugned order is in violation of the principles of natural justice and that it was not heard by the Company Law Board. Principles of natural justice cannot be invoked by Malleswara, which has been adopting an supine indifference before the Company Law Board. If it was really interested, it could have taken necessary steps to get itself impleaded as a party before the Company Law Board. 68. As a matter of fact, Bhankerpur in the counter before the Company Law Board have admitted that they have pledged their shares in favour of Malleswara. In the affidavit field in support of the writ petition before the Karnataka High Court, in para 11 Malleswara has stated that if the order of the Company Law Board is allowed to stand it will have no security. 69. I may also refer to the conduct of Malleswara in the courses of proceedings before the Company Law Board. As already noticed Malleswara did not take steps to get itself impleaded as a party even though the parties to the petition under Section 397 were seriously agitating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her words, independently Malleswara cannot claim any interest or right in the shares merely on the ground that they have given voting is (sic) made available to them only as a pledgee under the terms of the letter of pledge. 71. It is next contended that when once the name of Malleswara is recorded in the Register of Members the Company Law Board cannot direct rectification of membership Register to remove the name of Malleswara without hearing Malleswara. I am unable to accept this contention. I have already taken the view that when once the allotment and issue of shares of SSPL in favour of Bhankerpur is set aside the share register in respect of these 20,000 equity shares has to be automatically rectified. When once the allotment is set aside, there is no scope for invoking the aid of Section 111. With the setting aside of the allotment, the allotment itself becomes non est in law. In this connection, I refer to the following decision of the Madras High Court reported in V. Radhakrishnan v. P. R. Ramakrishnan, (1994) 79 Com Cas 694 : One argument, however, which does not appear to be of any serious consequence, we may dispose of before we part with this Judgment. Objec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by directing Bhankerpur to return the inter corporate deposit with interest. 73. Even otherwise the principles of natural justice can be invoked only when a right of a person is adversely or prejudicially affected. In this case, the Company Law Board has amply protected the interest of the petitioner as a pledgee. Therefore there is no scope for invoking the principles of natural justice. 74. It is well settled principle that natural justice cannot be imprisoned in a strait jacket family. Principles of natural justice has to be applied depending upon the facts and circumstances of each particular case and they are viable. On the contrary natural justice is not static. Principles of natural justice has been evolved to vindicate one's rights. A person who complains of violation of natural justice should have been prejudicially affected, Natural Justice is not a 'Mantra' which can be invoked on all and sundry occasions and to deduce them to mechanical ritual. Hence, a person who complains of violation of natural justice has to establish his rights first and then demonstrate such rights have been prejudicially affected. WADE in his book Constitutional Administrat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed with the Court of law, viz., clear and timely advance notice of charges or the case to be met all evidence upon which the decision is to be based to be openly livable to affected parties, opportunities to make representations to counter such charges or allegations to produce witnesses and to cross-examine the witnesses by the other side, no hearing of one side in the absence of other and in appropriate cases the opportunities to be represented by a Lawyer. P. P. Craig in his book on Administrative Law (2nd Ed) at page 210 the author has observed as follows. The Court will lake into account a wide variety of factors; the type of decision being given; whether it is final or preliminary, the nature of individual interest, the type of subject matter and how far it is felt necessary to supplement the statutory procedure, to name but a few. None of these principles will be determinable. De Smith's on Judicial Review of Administrative action (4th E.d. at p. 158) has observed as follows : No proposition can be more clearly established than that a man cannot incur the loss of liberty or property for an offence by judicial proceedings until he has had a fairy opportunity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tended that his right to receive the dividend and right to vote has been taken away by the Company Law Board under the impugned order. This contention does not merit any consideration. The very right to exercise voting rights flows only from the terms of the letter of pledge which specifically confers on the right to the petitioner. But for the terms contained in the letter of pledge, the petitioner cannot exercise the voting right and claim dividends. Therefore I am unable to lend support to the contention raised on behalf of the petitioner on this aspect of the matter. 77. It is next contended that when once the name of the petitioner is recorded in the Register of Members, it cannot be removed without hearing him. The name of the petitioner has been recorded pursuant to the letter of pledge so as to enable the petitioner to exercise voting rights and claim dividends. In my opinion, this is not a case wherein the name of the petitioner has been recorded in the Register of Members pursuant to the sale or transfer of shares. In my opinion, it is only because of the express terms of the letter of pledge the name of the petitioner has been recorded in the Register of Members. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions 397 and 398 of the Act. The Judgment rendered at the interlocutory stage may not constitute a binding precedent, Even otherwise that was a case where the learned judge was considering the question of an interlocutory stage before the allotment of shares was set aside. Whereas in the present case the Company Law Board has already found in the impugned order that the allotment and issue of further capital by SSPL to the extent of two lakhs to Bhankerpur is illegal and has set aside the same. Therefore the order made by Shanmugham J. is not of any assistance for deciding the present case. 80. Further the Division Bench ruling reported in Radhakrishnan case (1993) 78 Com Cas 694 Madras referred to an extracted supra will clearly apply to the facts of the present case. The ruling of the Division Bench is binding on me and I respectfully follow the same. Therefore, when once the allotment is held to be null and void it is to follow as a matter of course that the Register of Members has to be rectified. Otherwise, it will lead to strange situation wherein notwithstanding the setting aside of the allotment the name of the person to whom the shares have been allotted of transferred ..... X X X X Extracts X X X X X X X X Extracts X X X X
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