1. These four appeals arise out of a decree in Suit No. 1108 of 1981 of the file of the original side of this court wherein the learned single judge has passed a decree directing that the register of members of defendant No. 8-company, that is, the National Rayon Corporation Limited, be rectified by deleting therefrom the names of defendants Nos. 1 to 7 as holders of shares as mentioned below :
------------------------------------------------------------------------Names of the institution Equity shares held Distinctive numberson 5-6-1979------------------------------------------------------------------------Unit Trust of India(Defendant 31,250 500365 to 531614No.1)General Insurance Corporationof India (Defendant No. 2) 1,250 537865 to 539114Oriental Fire and GeneralInsurance Co. Ltd. (Defen 1,250 541615 to 542864dant No. 3)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 541614Limited (Defendant No.6)Industrial Credit and Invesment 6,250 531615 to 537864Corporation of India(Defendant No.7)------------------------------------------------------------------------
2. 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 (hereinafter referred to as 'ICICI'). Appeal no. 392 of 1982 is filed by defendants Nos. 2 to 6, namely, The General Insurance Corporation Of India (hereinafter referred to as 'GIC'). The Oriental Fire and General Insurance Co. Ltd. (hereinafter referred to as 'OFGI'), The United India Insurance Co. Ltd. (hereinafter referred to as 'UI'), The National Insurance Co. Ltd. (hereinafter referred to as 'NIC') and The New India Assurance Co. Ltd. (hereinafter referred to as'NIA'). Appeal No. 393 of 1982 is filed by defendant No. 8, i.e., The National Rayon Corporation Ltd. (hereinafter referred to as 'NRC'). Whenever defendants Nos. 1 to 7 are to be referred to collectively, they would be referred to as 'financial institutions'. As the appellant in one appeal is the respondent in the other, it would also be convenient to refer to the parties not as appellants and respondents but as plaintiffs and defendants.
3. As observed in the judgment of the learned single judge, the plaint is verbose and argumentative. It runs into 270 pages including the annexures of about 100 pages. The written statements are also equally lengthy. There are separate written statements of defendants Nos. 1,, 7 and 8. In addition defendant Nos. 2 to 6 have also filed another written statement. In substance, the plaintiffs case is that the allotment of shares as mentioned in paragraph 1 above is illegal. Defendants Nos. 1 to 7 have advanced the following loans to defendant No. 8 :
Rs.Defendant No. 1 250 lakhsDefendant No. 2 10 lakhsDefendant No. 3 10 lakhsDefendant No. 4 10 lakhsDefendant No. 5 10 lakhsDefendant No. 6 10 lakhsDefendant No. 7 50 lakhs
4. These loans were given on the basis that there would be debentures in respect thereof. A debenture trust deed was executed by the company in favour of the trustee, namely, The Bank of Baroda. 20 per cent. of the debenture loan of each of these defendants was, at the option of the respective financial institutions, convertible into equity shares. Defendants Nos. 1 to 7 were to pay Rs. 160 per share including the premium amount of Rs. 60. It is in this way that the NCR as per the said option has issued shares in favour of the said financial institutions. According to the plaintiffs, the said transactions were not 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 still 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 the financial institutions would give one month's notice while exercising the option of converting 20 per cent. of the debentures into shares. The NRC waived this period of notice and allotted the shares. This was done within a few days from the date of notice. The learned single judge came to the conclusion that this waiver of notice on the part of defendant No. 8 was mala fide and as such the consequent allotment of shares in favour of the financial institutions was bad. It is in this way that the suit was decreed and defendants have filed these appeals. The plaintiffs have filed their cross-objections challenging the findings of the learned single judge that are recorded against them.
5. During the course of the hearing, some statements have been made by Mr. Cooper giving up certain points. In addition some other points were not pressed before the learned single judge. Hence, we do not propose to give the detailed and verbose averments in the plaint and consequent detailed denials of these allegations. The appeal memos and the cross-objections are equally lengthy and contain many grounds. In this background we propose to follow the procedure of referring only to those relevant points that are argued before us and at that time, if necessary, we would give the concerned details of the pleadings.
6. Both the plaintiffs had no concern with NRC at any time before April, 1977. It is in this month that plaintiff No. 1 became a holder of 2,736 shares of NRC. It seems that before April, 1977, the affairs of NRC were being conducted in a manner prejudicial to the interest of the company and also of the members. Hence, on 11th July, 1977, the company law board passed an order (Exhibit B, Part II-A, page 1202 of the paper-book) under s. 408(1) of the Companies Act, appointing eight directors for a period of three years. Shri R. K. Talwar was named as the chairman. However, as he declined to accept the appointment, Shri B. R. Patel was appointed as the chairman in his place on 5th August, 1977.
7. It seems that the company was in financial difficulties and was in need of loans. There is no dispute that loans to the extent of Rs. 408 lakhs were advanced by the financial institutions. In this case, we are concerned with the loan of Rs. 350 lakhs. The contention of the plaintiffs is that the true and real nature of the transaction was of a grant of loan of 80 per cent. 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 s. 81(3) without any prior resolution of the company. It would be convenient to reproduce s. 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 not being less than fifteen days from the date of the offer within which the offer, if not accepted, will be deemed to have been declined;
(c) unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person; and the notice referred to in clause (b) shall contain a statement of this right;
(d) after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the board of directors may dispose of them in such manner as they think most beneficial to the company.
Explanation. - In this sub-section, 'equity share capital' and 'equity shares' have the same meaning as in section 85.
(1A) Notwithstanding anything contained in sub-section (1), the further shares aforesaid may be offered to any persons whether or not those persons include the persons referred to in clause (a) of sub-section (1) in any manner whatsoever -
(a) if a special resolution to that effect is passed by the company in general meeting, or
(b) where no such special resolution is passed, if the votes cast (whether on a show of hands, or on a poll, as the case may be) in favour of the proposal contained in the resolution moved in that general meeting (including the casting vote, if any, of the chairman) by members who, being entitled so to do, vote in person, or where proxies are allowed, by proxy, exceed the votes, if any, cast against the proposal by members so entitled and voting and the Central Government is satisfied, on an application made by the board of directors in this behalf, that the proposal is most beneficial to the company.
(2) Nothing in clause (c) of sub-section (1) shall be deemed -
(a) to extend the time within which the offer should be accepted, or
(b) to authorise any person to exercise the right of renunciation for a second time, on the ground that the person in whose favour the renunciation was first made has declined to take the shares comprised in the renunciation.
(3) Nothing in this section shall apply -
(a) to a private company; or
(b) to the increase of the subscribed capital of a public company caused by the exercise of an option attached to debentures issued or loans raised by the company -
(i) to convert such debentures or loans into shares in the company, or
(ii) to subscribed 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-s. (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 proposal is beneficial to the company. Sub-s. (3) permits another mode of allotment of shares. This can be done by exercise of the option to convert the debentures into shares. However, the terms providing such option must be approved by the Central Govt. Financial institutions (namely, defendants Nos. 1 to 7) are the specified institutions as contemplated by prov. (4) to sub-s. (3) and hence there is no need of having any resolution of the company. This prov. (4) has been challenged by the plaintiffs as ultra vires the Constitution. But that aspect can be conveniently kept aside for the present. There is no dispute that if the suit transaction is ere allotment of shares of 20 per cent. of loan, it falls under sub-s. (1A) and the allotment of shares would be bad because there is no special resolution and there is no ordinary resolution coupled with the approval of the Central Govt. similarly, the allotment of shares in favour of defendants Nos. 1 to 7 would be good if the allotment complies with the provisions of sub-s. (3). It is in this background that the plaintiffs have contended that the true and real nature of the transactions is straight allotment of shares while the defendants contend that the allotment was in exercise of the option in debentures.
8. However, before considering this aspect we would like to state the initial objection of Mr. Nariman that though the plaint is verbose and vague still there is no pleading that the real nature of the transaction is of direct allotment of shares. As stated earlier, the plaintiffs have given up certain contentions either before the recording of the evidence or at the time of the arguments. The pleading as to the nature of the transaction appears in para. 73A. Under the Capital Issues (Control) Act there is provision that no company shall, except by the consent of the Central Govt., make an issue of capital. Issue of debentures is covered by this provision. However, on account of the Capital Issues (Exemption) Order, 1969, issue of convertible debentures with an option to convert part of debentures are taken up by certain specified institutions and those institutions include financial institutions, namely, defendants Nos. 1 to 7. After referring to this legal provision the plaintiffs have stated that though the shares were already agreed to be allotted a mere show of issue of debentures in question was made so as to avoid the provisions of s. 81(1)(a) or s. 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 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 Company Act and section 3(2) and section 4(2) of the Capital Issues (Control) Act.'
9. It was submitted that the various circumstances or facts on which the plaintiffs want to rely for the purpose of contending that the transaction in question is of direct allotment of shares and not of convertible debentures are required to be pleaded in the plaint and that in the absence of such a pleading the plaintiffs would not be entitled to urge anything about the nature of the transaction. It is true that there is the above lacuna in the plaint. However, we do not propose to reject the contention of the plaintiffs on this ground alone as the matter has been argued before us at great length on the basis of the documents that are available on record. We think that it will be appropriate to discuss the merits or otherwise of the plaintiffs' contentions about the nature of the transaction
10. Mr. Cooper contended that it is necessary to consider all the correspondence and the surrounding circumstances while deciding upon the nature of the transaction. He relied upon few decisions for this proposition. For example, the Supreme Court in the case of S. Chattanatha Karayalar v. Central Bank of India Ltd.  35 Comp Cas 610: AIR 1965 SC 1865, has held that where a transaction between the same parties is contained in more than one document, they must be read and interpreted together and they have the same legal effect for all purposes as if they are one document. In that case, three defendants executed a promissory note and in the suit filed to enforce it, one of the defendants contended that his liability was not as a principal debtor but as a surety. The Supreme Court took into account the promissory note as well as certain other connected documents, namely, the letters and the hypothecation agreement and held that the said defendant was only a surety. The Supreme Court, while deciding this case considered the decision in the case of Manks v. Whiteley reported in  1 Ch. D. 735, and more particularly the portion of the judgement at page 754 by Moulton L.J., wherein it is observed as follows :
'Where several deeds form part of one transaction and are contemporaneously executed they have the same effect for all purposes such as are relevant to this case as if they were one deed. Each is executed on the faith of all the others being executed also and is intended to speak only as part of the one transaction, and if one is seeking to make equities apply to the parties they must be equities arising out of the transaction as a whole.'
11. In the case of N. Pattay Gounder v. P. L. Bapuswami : AIR1961Mad276 , 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 : 2SCR828 . 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.
12. 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 the State for India in Council  56 IA 51: AIR 1929 PC 34. The question arose as to whether antecedent correspondence can be considered in construing a particular deed and on pages 56 and 57, the Privy Council has observed as followsAIR 1929 PC 36 :
'The learned trial judge examined with great care the correspondence which took place between the parties before the deed of 1847 was granted, and he came to his opinion on the true meaning of the deed, as he puts it himself, 'after a careful consideration of the deed in the light of the correspondence.' Their Lordships must say at once that this way of approaching the true construction of the deed is quite illegitimate. The learned judge in another passage says that because the correspondence is referred to in the deed, that makes, it part and parcel of it. The only reference to the correspondence is in the narrative in the preamble of the deed, that there had been such correspondence, but it is a vital mistake to suppose that that introduces the correspondence as a part of the deed. Nothing is better settled than that when parties have entered into a formal contract that contract must be construed according to its own terms and not be explained or interpreted by the antecedent communing which led up to it. This is especially true of a conveyance. There, even if there has been a formal antecedent contract, that contract cannot be looked at to control the terms of the conveyance; much less can mere communing which could only show what parties meant to do but cannot show what they did.'
13. A similar view has been expressed in para. 1480 of Halsbury's Laws of England, Vol. XII. It will thus be seen that primarily, the documents and the terms thereof would be decisive. Of course, the surrounding circumstances would be relevant if the meaning of the contents of the document is vague or uncertain. Similarly, such circumstances would be relevant if those circumstances are incompatible with the terms of the document.
14. Bearing in mind this principle, we would consider the nature of the transaction.
15. The NRC was in financial difficulties and was thus in need of loans. There is correspondence between NRC and the financial institutions about these loans and both the parties relied upon that very correspondence for the purpose of making their submissions about the nature of the transaction. Of course, the plaintiffs have laid much stress 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.
16. 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 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 terms that ICICI would have a right to convert at their option a part of the loan amount into fully paid up equity shares.
17. On 17th January, 1978, UTI also agreed to advance Rs. 50 lakhs on debentures and one of the terms was that UTI would have an option to convert a portion of the amount into equity shares on terms and conditions to be decided later. The letter is at Exhibit I (part II-A, page 1415 of the paper-book). On 27th March, 1978, UTI handed over a cheque for Rs. 50 lakhs (Exhibit Q, part II-A, page 1555 of the paper-book) as advance deposit against subscription to private debentures. These two loans of Rs. 58 lakhs and Rs. 50 lakhs were to be utilized for the Nylon Tyre Cord Project and the said project was completed by about April, 1978, though the documents, namely, the loan agreement in favour of ICICI and the debentures in favour of UTI had remained to be executed. Mr. Nariman relied upon the contents of the above correspondence which supports the defendant's allegation that the parties intended to have an option to convert a part of the loan into shares.
18. The annual general meeting (AGM) was fixed on 29th June, 1978, and a notice of that meeting was issued to its shareholders on 28th, April, 1978 (vide Exhibit 16(2), part II-D, page 3531 of the paper-book). Section 293(1)(a) of the Companies Act provides that the whole or substantial transfer of the company's properties by sale, mortgage or otherwise is not permissible unless the company passes a resolution in that respect. In this notice a draft resolution was included for creating a charge in favour of ICICI for the loan amount of Rs. 58 lakhs and for issuing debenture to UTI. An explanatory statement annexed to the notice has also referred to two letters dated 20th December, 1977, and 17th January, 1978, of ICICI and UTI, respectively. As stated earlier, these letters have made a mention that the two financial institutions would have an option of converting a part of the loan into equity shares.
19. The various proposals pending with the financial institutions are considered in the Senior Executive Meeting (known as SEM). These two proposals of ICICI and UTI for loan of Rs. 58 lakhs and Rs. 50 lakhs were considered in such a SEM on 19th May, 1978 (Exhibit Z-68, part II-C, page 2716 of the paper-book). The agenda of that meeting mentioned that these proposals contemplate 20% conversion into equity shares 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.
20. 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 that the UTI wanted to have a transaction of debentures with consequent option of conversion.
21. On 29th May, 1978, NRC wrote a letter (Exhibit V, part II-A, page 1581 with note page 1583 of the paper-book) to UTI informing that the board of directors of NRC has considered the above proposal and it was felt that the offer of UTI of a loan of Rs. 1 crore should be accepted as additional assistance instead of an alternative for the consortium term loan from the bank. In that letter NRC informed UTI that NRC had in mind a modernisation programme which would cost about Rs. 408 lakhs and that the capital expenditure of that programme in the first phase would cost about RS. 300 lakhs. NRC made a query as to whether UTI would be able to give this additional term loan on the basis of debentures to be issued on usual terms and conditions. Along with this letter NRC also sent a note on the said modernisation programme. It appears that the figures given in the letter were tentative and the exact amount to be worked out. On 31st May, 1978 UTI studied the proposal of NRC for the modernisation programme. The note of such study (Exhibit Z-66, PART II-C, page 2702 of the paper-book) was prepared for being placed before the Inter-Institutional Meeting (known as IIM). In the note it was recommended that an amount of Rs. 200 lakhs be sanctioned. The financial institutions held IIM in order to scrutinize and sanction the various proposals for financial assistance. The IIM was held on that very day, that is. on 31st May, 1978. In that meeting proposals of various companies were considered. The minutes of the meeting are Exhibit-6, part-II-D at pages 3474 and 3475 of the paper-book. The IIM came to the conclusion that Rs. 300 lakhs should be sanctioned by UTI on the basis of debentures on normal terms and conditions with an option to convert 20 per cent. of the debentures into equity shares. The premium to be paid was Rs. 60 per share of Rs. 100. This was, of course, subject to Government approval. The option was to be exercisable during the period from 15th June, 1978, and 14th June, 1980. The letter of NRC dated 28th May, 1979, and the IIM resolution are consistent with the defendants' case.
22. But the plaintiffs rely upon the following correspondence which followed in June, 1978, for suggesting that the contemplated transaction was really one under sub-s. (1A), i.e., allotment of shares directly and not of debentures with the exercise of the option for converting debentures into shares.
23. 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. Me. 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 options to acquire in lieu of conversion equity shares of Rs. 60 lakhs inclusive of premium and constitutes 20 per cent. of the assistance of Rs. 300 lakhs the trust has agreed to provide. The shares will be acquired at a price on payment of Rs. 160 per share of Rs. 100 (i.e., at Rs. 60 premium) or at such premium as may be approved by Controller of Capital Issues. The period of conversion would be 15th June, 1978, to 14th June, 1980. The Company should approach the Controller of Capital Issues-Government of India for necessary approval.'
24. According to the plaintiffs, the abovementioned underlined portion 'to acquire in lieu of conversion' would mean that the parties agreed that in the said transaction there would be direct allotment of shares of Rs. 60 lakhs and that there was no question of debentures with an option to convert debentures worth Rs. 60 lakhs into equity shares. The plaintiffs contend that it is in this way that the parties really intended to directly allot shares and that instead of having a transaction of such an allotment, the parties made a show that they agreed to have debentures with a convertibility clause.
25. We have already observed that UTI has agreed by its letter dated 17th January, 1978, to give financial assistance of Rs. 50 lakhs for Nylon Tyre Cord Project. On 6th June, 1978, UTI wrote a letter (Ex. Z-3, Pt. II-A, page 1604 of the paper book) giving a notice to NRC of the intention of UTI to acquire fully paid up shares in lieu of conversion for the amount of Rs. 10 lakhs at the rate of Rs. 100 per share with a premium of Rs. 60 per share. In the letter, it is stated that NRC should get the debenture trust executed for the remaining amount of Rs. 40 lakhs. UTI wrote a similar letter dated 8th June, 1978, (Ex. Z-5, Pt. II-A, page 1612 of the paper book, so far as the acquisition of shares of 60 lakhs (from out of the transaction of Rs. 300 lakhs). It is not necessary to give the contents of this letter as it is worded practically in terms of the letter dated 6th June, 1978. Mr. Cooper relied upon the contents of these letters and urged that the UTI really wanted immediately shares of Rs. 10 lakhs from the loan amount of Rs. 50 lakhs. Similarly, UTI had informed its dealer to get shares of Rs. 60 lakhs from out of the loan of Rs. 300 lakhs. He argued that all this would mean that UTI was keen in getting shares straightaway and that there was no question of conversion of debentures into equity shares as contemplated by s. 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 letter will have to be construed and understood along with the various surrounding factors.
26. 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 decided by the Trust in consultation with other financial institutions. This will be advised to the company in due course.'
27. While under condition No. 17, it is provided that the draft trust deed should be submitted for the approval of the UTI for being finalised, the letter is closed with a statement that the offer by that letter should not be treated as binding unless the debenture trust deed is executed by the company in such form as may be required by the UTI. Thus, the plaintiffs would not be able to make use of any of the contents of this letter in support of their contention.
28. Now, let us read the letter dated 1st June, 1978, in its entirety. The offer of the UTI for the assistance of Rs. 300 lakhs is contained in the letter dated 1st June, 1978. We have already observed above that Mr. Cooper relies upon condition No. 7. in that letter. The said condition is reproduced in paragraph No. 17. That condition says that the option was to acquire in lieu of conversion equity shares of Rs. 60 lakhs inclusive of premium. The term 'in lieu of' would normally mean 'by substitution of' and it is in this way that Mr. Cooper urged that there was not to be any conversion at all but what was agreed was the allotment of shares in substitution of the conversion clause. It is true that condition No. 7 read by itself would convey this meaning but what is urged by Mr. Nariman is that the rest of the contents of the letter should also be taken into account for the purpose of deciding as to what was the overall intention of the UTI when it wrote the letter. Before mentioning the various conditions, UTI has informed NRC that the financial assistance from the UTI would be in the form of subscription to the privately placed debentures of Rs. 300 lakhs. It then states that those debentures will be on the condition that follow. Condition No. 1 states that the offer to subscribe for such debentures will be open during the end of November, 1978, or such extended period. According to condition No. 3, the commitment of UTI shall be deemed to have been discharged as soon as the application for Rs. 300 lakhs face value on debentures would be made. As per condition No. 8, it is provided that the NRC should agree to the free transfer of the shares obtained by the trust through conversion. Under condition No. 15, the debenture trust is required to be submitted to the UTI for approval before completing it and any alterations or changes suggested or indicated by UTI 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 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 expect condition No. 7, all the rest of the conditions and other parts of the letter are consistent with the defendant's 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 specially 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' case. At the same time Mr. Nariman is also right when he urges that all that the rest of the letter indicates is that the parties wanted to have the usual convertible debentures. As to how such a type of document has to be construed by the Supreme Court in the case of Delhi Development Authority v. Durga Chand Kaushish, : 1SCR535 . It was a case dealing with the construction of a document of lease. Through the document intended to create a lease of 90 years, still there were certain clauses which conveyed a meaning that the lease was to be for 20 years. The Supreme Court considered that particular provision, which carried such a meaning, in the background of the rest of the contents of the document and has held that such a clause should not be torn off from the context. This is what the Supreme Court has held in para. 18 at page 2613 :
'The difficulty in tearing the few words in the proviso away from the context of the rest of the covenant as well as from all other parts of the deed is that it would, if that were done, override not merely the words of demise, giving the duration of the initial lease as 90 years but would also conflict with the contents of covenant 9 itself.'
29. The Supreme Court held that in the context of the rest of the document, the deed was of 90 years. The Supreme Court has also considered the aspect as to what is to be done if there are inconsistent or conflicting clauses in the same document. We would like to reproduce the relevant headnote :
'In construing a document one must have regard, not to the presumed intention of the parties, but to the meaning of the words they have used. If two interpretations of the document are possible, the one which would give effect and meaning to all its parts should be adopted and for the purpose, the words creating uncertainty in the document can be ignored.'
30. It would also be convenient to see how this letter dated 1st June, 1978, was read and understood by the other financial institutions who decided to participate in the financial assistance of Rs. 300 lakhs. ICICI has decided to participate in the transaction of Rs. 300 lakhs to the extent of Rs. 50 lakhs. ICICI also wrote letter (Exhibit Z-4, part-II-A, page 1608 of the paper-book). This letter mentions about the debentures and the right of ICICI to exercise the option to convert debenture of Rs. 10 lakhs into equity 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 (Exhibit 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 advance would be on the terms and conditions already intimated by GIC. The letter from NIA is dated 25th October, 1978 (Exhibit Z-19-C, part II-A, page 1901 of the paper-book). Though in this letter there is a mention of the GIC letter dated 16th October, 1978, there is also an additional statement that NIA was agreeable to contribute Rs. 10 lakhs on the basis of debentures subject to the condition that NIA will have a right to convert 20% of the debentures (i.e., Rs. 2 lakh debentures) into equity shares. Thus, the other financial institutions (participating in the financial assistance in question) namely, ICICI and NIA have written that the transaction would be on the basis of debentures with the usual option. They have not asked for immediate allotment of shares. As against this, the GIC has stated that it would get the shares in lieu of conversion. But it has not asked for allotment of shares immediately. The other subsidiaries of GIC (except NIA) have only stated that they were ready to participate on terms proposed by GIC. As the transaction of Rs. 350 lakhs is pleaded by the plaintiffs as one composite transaction, the fact that ICICI and NIA wanted to have a transaction of usual debentures with option to convert a part into shares, will also be relevant J. In this background, it will be very difficult for Mr. Cooper to contend that the letter dated 1st June, 1978, should be interpreted in favour of the plaintiffs for assessing the exact nature of the transaction.
31. The three letters dated 1st June, 1978, 6th June, 1978, and 8th June, 1978, were written after the matter was processed by the UTI and IIM. Exhibit 7, part II-D, p. 3481 is a note prepared by the secretary of the UTI for the circular resolution to be approved by the executive committee. The note clearly states that the financial assistance would be in the form of privately placed debentures and that the trust would exercise its rights to convert Rs. 60 lakhs, (20% of the proposed assistance) into equity shares. This can be seen at pp. 3489 and 3490. The secretary has requested the members of the executive committee to approve the proposal. The resolution appears below this note (p. 3491) and the resolution is of the approval of the proposal for subscribing the privately placed debentures up to Rs. 300 lakhs.
32. It would also be convenient to consider the subsequent happenings which result in the finalisation to the transaction. On 17th June, 1978, the government has passed an order (vide Exh. 27, part II, p. 1616) under s. 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 field 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 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 lakhs but also the additional loan of Rs. 300 lakhs. The amendment resolution made a mention that from out of the total transaction of Rs. 408 lakhs, there was to be a loan of Rs. 58 lakhs and the remaining amount was to be subscribed on the basis of the debentures, i.e., debentures of Rs. 250 lakhs by UTI, Rs. 50 lakhs by ICICI, Rs. 50 lakhs and Rs. 50 lakhs by GIC and its subsidiaries. In terms of the orders passed in Writ. Pet. No. 1904 of 1978, plaintiffs voted for this amended resolution, which covered the entire transaction of Rs. 408 lakhs. If the parties intended to have direct allotment of shares of Rs. 70 lakhs and the loan of Rs. 280 lakhs these resolution would have been necessary only with respect to Rs. 280 lakhs, as there could not have been any question of AGM granting sanction under s. 293(1)(a) for Rs. 70 lakhs. On the contrary, for any direct allotment of shares there should have been a specific resolution under s. 81(1A) and the company would have to move the Central Govt. for the approval under that very sub-section for such direct allotment. It is common ground that no resolution under s. 81(1A) was passed and no approval of government was sought. On the contrary, sanction of the government under s. 81(3) was asked for. This conduct is again consistent with the defendant's case that the parties intended to have convertible debentures with usual option. Later on, the CLB was informed about the participation by other financial institutions. The approvals have been accordingly amended and the last such amendments is dated 6th February, 1978. By 6th February, 1978, the approvals under s. 81(3) of the Companies Act, were available. Thus the fact that the NRC indicates that the intention of the parties was to proceed under s. 81(3) and not under s. 8(1A)
33. As stated in para. 15 above, the request of the NRC dated 29th May, 1978, was based on tentative figures. The actual payment of Rs. 300 lakhs as sanctioned by IIM was possible only after the matter was processed in detail. Hence, on 18th October, 1978, the NRC submitted modernisation proposals and ICICI which was the lead institute, has made a detailed appraisal of that proposal in November, 1978. The permission under Urban Land (Ceiling and Regulations) Act was granted on 7th May, 1979. 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 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 pp. 117 to 121 of the paper-book) has reproduced in verbatim the resolution so passed. The passing of those resolutions is again consistent with the defendants' case that the transaction was to be of convertible debentures.
34. Messrs. Amarchand Mangaldas Hirachand and CO. (who were the common attorneys for the financial institutions and the NRC), addressed a letter dated 29th May, 1979 (Exh. Z-3, part II-A, p. 1949) to the financial institutions, the NRC, as also to the Bank Of Baroda. The letter is based on the earlier discussions which took place among the parties when it was decided that the transaction was to be completed on 31st May, 1979. The attorneys informed that the debenture trust deed is being lodged for adjudication. A short note on the various points for the completion of above transaction was prepared and enclosed with that letter. Accordingly, on 31st May, 1979, the debenture trust deed (Exh. Z-33, part II-B, p. 2038) was executed. We may refer to some portion of the preamble of the debenture trust deed. In cl. (3), there is a statement that UTI, ICICI, GIC, NIC, OFGI, NIA and UI have agreed to subscribe for privately placed debentures of the normal value of Rs. 250 lakhs, Rs. 50 lakhs, Rs. 10 lakhs, Rs. 10 lakhs, Rs. 10 lakhs, Rs. 10 lakhs and Rs. 10 lakhs, respectively.
35. Clause (6) mentions certain prior correspondence to the various financial institutions. We would like to reproduce in verbatim sub-cl. (a) :
'By letters bearing No. UT/9598/RS (N-14)-77, dated 17th January, 1978, and UT/14973/RS (N-14)-78, dated 1st day of June, 1978, issued by UTI and accepted by the company (hereinafter collectively referred to as 'UTI loan agreements'), UTI has agreed to subscribe for privately placed debentures of the nominal value of Rs. 2,50,00,000 (two hundred and fifty lakhs) to be issued by the company to UTI upon the terms and conditions therein mentioned.
The rest of the sub-cls. (b), (c), (d), (e), (f) and (g) are with respect to similar loan agreements and the various letters written by the other financial institutions (to which reference has already been made by us earlier) were treated as the loan agreements. It is material to note that two letters dated 6th June, 1978, and 8th June, 1978, find no place when the parties decided to narrate the various loan agreements and Mr. Nariman laid much stress on this fact for the purpose of contending that at the time if finalising the transaction, these two letters and the statements made therein were not at all taken in to 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 cl. (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 mean, the debentures issued as per series 'A' to 'G' and the debenture-holders would mean the 'holders so entered in the register of the debentures'. Clause (2) then deals about the issue of 35,000-11% convertible debentures (series 'A to G') of the nominal value of Rs. 1,000 each in favour of each of the financial institutions. Clause (3) has made a provision as to how the amount of 'A' series debentures totalling Rs. 250 lakhs is to be repaid and the debentures should be redeemed. The period of redemption is spread over from 1982 to 1988, but the important factor is that this clause contemplates a contingency of redemption of all the debentures. The clause also provides about the need for redemption of lesser number of debentures if the amount of debentures after conversion into equity shares is less than Rs. 250 lakhs. Similar provision about redemption of the remaining series of the debentures is made in that very clause. Clause (4)(a) provides the exercise of option by UTI to convert the debentures of the nominal value of Rs. 50 lakhs into equity shares. That clause reads as follows : 'UTI as the registered holder of the series 'A' debentures shall at any time and from time to time between the 15th day of June, 1978, and 14th day of June, 1980, have the right to convert series 'A' debentures of the nominal amount not exceeding Rs. 50,00,000 (Rupees fifty lakhs) into fully paid up equity shares of the company at a premium of Rs. 68 per share of a face value of Rs. 100 and shall be entitled as such registered holder to call for allotment of 31,250 fully paid up equity shares of Rs. 100 each of the company at a premium of Rs. 60 per share or pro-rata of an equivalent nominal value in respect of such series 'A' debentures for which the right is so exercised by UTI in the manner set out in the form of debentures in Part I of the Fifth Schedule hereunder written.'
36. The remaining sub-cls. (b) to (g) have made a similar provision about the conversion of 20% of the debentures (b), (c), (d), (e), (f) and (g) that were to be executed in favour of ICICI, GIC, NIC, NIA, OFGI and UI. Clause (5) says that the principal money secured by the said debenture trust would be of Rs. 350 lakhs. Under cl. (23) of the said deed, the debenture-holders are required to surrender those debentures in respect of which an option to convert into equity shares has been exercised, cl. (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 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 agreement 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 of Rs. 60 per share or pro-rata of an equivalent nominal value in respect of such series 'A' debentures so intended to be converted and to be applied towards the nominal value of each such equity share and to require the company to apply the nominal value of such equity shares and to require the company to apply the nominal value of such converted series 'A' debentures in full payment of such equity shares inclusive of premium and the company shall allot to UTI in satisfaction of the amount of such converted series 'A' debentures such equity shares as aforesaid credited as fully paid up and ranking for dividend from the date of allotment of such equity shares and shall pay to UTI interest in respect of such converted series 'A' debentures up to the date of allotment aforesaid.'
37. That form also contemplates the execution of a contract for the allotment of equity shares on conversion.
38. All these various recitals in the debenture trust deed show as to how the parties understood the previous correspondence between them and how they treated that transaction as the convertible debentures of Rs. 350 lakhs and not that of direct allotment of shares to the tune of Rs. 70 lakhs and the debentures of Rs. 280 lakhs. The loan agreements mentioned in the debenture trust deed are in fact the correspondence between the parties and this correspondence has been treated by the parties in a particular fashion. It will be very difficult to accept the contention of Mr. Cooper that though the parties intended to construe certain correspondence in a particular manner, still the court should interpret it in another manner. This is more so when the surrounding circumstances including the various actions taken by the parties in further finalisation of the matter are consistent with the transaction being that of convertible debentures.
39. On the very day, i.e., 31st May, 1979, the following further events have taken place. It appears that the financial institutions gave letters for subscription of the respective debentures in their favour. The letters of allotment of debentures were issued. This fact is admitted in para. 73(d) of the plaint. Mr. Cooper, learned counsel for the plaintiffs wanted to get over this admission by reference to the recitals at some other place. However, the admission is so clear that it would not be possible to accept the submission. Each of the financial institutions gave a notice exercising the option to convert 20% of its debentures into equity shares. These notices are at (Ex Z-34 to Z-41, part II-B, pp. 2388 to 2499). The notice 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 cl. (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, 1979 (vide Ex. 17, part II-D, p. 3578). All this is again consistent with the defendants' case.
40. As stated above on May 31,1979, a number of events have taken place. The debenture trust deed was executed. The financial institutions sent letters of subscription to the privately placed debentures. On the same day, the company issued letters of allotment of debentures. The financial institutions then issued notices of converting 20% of debentures into equity shares. These transactions were preceded by letter dated May 29,1979, from Amarchand Mangaldas, the common attorney of the financial institutions and the company that the transaction has been decided to be completed on May 31, 1979. A note attached to the letter also indicates as to various actions to be taken for completing the transaction and these actions included the execution of the trust deed, applications for debentures, issue of allotment letters and issue of conversion notice. Mr. Cooper contended that the various happenings of May 31,1979, would indicate that the parties had predetermined that on the date of the debenture trust deed itself, the necessary consequential documents including conversion notice should be completed. He also argued that the term 'option' contemplates that the concerned party should have a choice and if there is no scope of such a choice account of the pre-determination of the course of action, the transaction would be not of debentures with a conversion clause. In our opinion, these circumstances would not indicate that the nature of the transaction was that of an allotment of shares. A party which intends to have a conversion clause in the debentures can very well take a prior decision that it would exercise the option of conversion and if such a decision is taken, such a party would necessarily act in the manner in which the financial institutions have acted here. Hence, the fact that various documents came into existence on May 31,1979, cannot be construed in favour of the plaintiffs. The trust deed dated May 31,1979, provides for the exercise of the option within two years from June 15,1978, to June 14,1980. This covers the period even prior to the execution of the trust deed, i.e., a period from June 15,1978, to May 31, 1979. It is true that two years' period of option mentioned in the debenture trust deed also covers a part of the period earlier to the execution 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 instances when the option was agreed to be exercised not during the fixed period but at any time during the currency of the loan. Entry at Serial No. 2 of part II of the statement (p. 3234) shows that Rs. 11,00,000 were granted to Nagpal Petrochem on March 4,1980, and the option was to be exercised during the currency of the loan. The option was exercised within about 10 days, i.e., on 14th March, 1980. The more important item is about the loan of Rs. 60 lakhs to Motor Industries (serial No. 3, p. 3234). On October 1,1973, Rs. 60 lakhs were advanced on debentures. The period of conversion was stipulated to be before 3rd October, 1973, i.e., 2 days from the date of the issue of the loan. A copy of the relevant contract of the allotment of shares in this case is at p. 3237. It shows that the parties had agreed that the conversion should be exercised by giving a fortnight's notice in writing. However, the option was exercised on the very day on which the loan was advanced and the shares were also allotted on the same day. It would thus be seen that the exercise of option and the allotment of shares on the day on which the loan was advanced is not the peculiar feature of the suit transaction. Similarly, a provision of prescribing a period of conversion beginning from the date earlier to the grant of loan is not abnormal. Hence these factors are irrelevant to consider the nature of the transaction.
41. On 28th June, 1979, the AGM of the NRC was held. The chairman stated in the meeting about the debentures in question and also about the issue of 51,000 equity shares on the strength of the option to convert the debentures. This includes the debentures and the converted shares in question. The statement of the chairman is at (Ex. 11, part II-D, p. 3503, relevant pages 3511 and 3512). Plaintiff No. 1 and his advocates were present at this meeting. On 23rd August, 1979, the NRC filed the return with the Registrar of Companies and this return contains a statement about the issue of the debentures in question and also the concerned allotment of equity shares in exercise of the option (vide Ex. 18, part II-D, p. 3646, relevant pp. 3646 and 3647). It would thus be clear that all these documents do not support the plaintiff's case. On the contrary, the tenor of these documents is that the parties intended to have convertible debentures.
42. On March 6,1980, the Company Law 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 director's 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. Plaintiff 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.
43. It would thus be clear that all the correspondence 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 the direct allotment of the shares. We may add that it is material to note that the plaintiffs have not referred to the two letters dated June 6,1978, and June 8,1978, in their plaint. The plaint is silent about these letters. Similarly, the trust deed also does not refer to these two letters. For all these reasons it will not be possible to hold that the parties ever intended a direct allotment of shares as contemplated by s. 81(1A) of the Act. This is more so when we look to certain guidelines issued by the Government as to how the financial institutions should behave while advancing loan to others. The plaintiffs have examined solicitor, Mr. B. K. Pandya as their witness. The examination-in-chief is not relevant for the purpose of deciding this point about the nature of the transaction but a certain cross-examination is important. The witness was working as an attorney and solicitor for the plaintiffs till the end of 1978 and he has deposed that he is familiar with the regulations concerning the advancement of loans by the financial institutions. He has stated that the documents in this respect included a term providing for conversion of loans into equity shares. He has added that the normal percentage mentioned in the convertibility clause used to be 20% of the loan. He has produced the guidelines in the court. A copy of the guidelines is at Ex. 5, part II, p. 3433. These are government guidelines for the financial institutions and the commercial banks. Guideline No. 4 (iii) is important and it reads as follows :
'A convertibility clause should normally be written in all cases where the aggregate financial assistance exceeds Rs. 50 lakhs. If in any case the writing of convertibility clause is proposed to the waived, the financial institution or institutions concerned should make a prior reference through the Industrial Development Bank of India to the Government in the Department of Banking and obtain the Government's observation and advice before finalising the terms and conditions of financial assistance.'
44. Clause 3(A) provides that the convertibility clause should conform to the provisions of s. 81(3) of the Companies Act. Clause 6 deals with mechanics of conversion and it provides that the concerned financial institutions should in consultation with the Industrial Development Bank determine the maximum amount of loan which can be converted into equity capital. Under cl. 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 have been framed by the financial institutions including the Industrial Development Bank. The IIM dated May 31,1978, was attended by all the financial institutions as also by the Industrial Development Bank and it is in this meeting that the period of conversion is determined as between June 15,1978, to June 14,1980. In this background it will not be possible to accept the contention of Mr. Cooper that it was necessary to have a further decision about the period of conversion. Apart from that, Mr. Cooper did not contend that such alleged breach would itself make the transaction as that of direct allotment of shares. What he urged is that that the said breach is an indication that the parties intended to have the allotment of shares and not the convertible debentures. We are not able to accept this contention. Thus, here is a case where the government guidelines specifically provide that any assistance exceeding Rs. 50 lakhs must contain a convertibility clause. These financial institutions, viz., defendants 1 to 7, are expected to follow these guidelines and their contention is that they have actually followed the guidelines by entering into a transaction which contained a convertibility clause. The existence of the guidelines which makes imperative to have such a convertibility clause goes against the plaintiffs' case and it will not be possible to hold that in spite of such a clause, the parties intended to have an agreement of the direct allotment of shares when issuing the debentures in question.
45. Certain arguments were advanced before us by Mr. Cooper as to how the NRC and the financial institutions hurriedly processed the matter of the additional loan of Rs. 300 lakhs. We have already mentioned that when the NRC informed the UTI that the NRC intended to have a loan Rs. 1 crore from the consortium of banks, the UTI voluntarily agreed to render this assistance on the ground that the bank's assistance would be costly from the interest point of view. It was urged that UTI had no business to make such a voluntary offer. It is common ground that the UTI and certain other financial institutions were holding a number of shares in the NRC. The company was in doldrums and hence the Government has appointed its own directors in 1977. In this background, the move by the UTI to offer the loan which would be more beneficial as compared to the loan from the bank 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 the NRC has been referred in the report of Mr. Atmaramani. Not only that there is a reference to this letter in the subsequent correspondence between the NRC and the UTI dated June 1, 1978 (p. 1588) and dated June 2,1978 (p. 1603). A copy of the letter was forwarded to the CLB by the NRC itself on July 6,1978. This can be seen from p. 1714. The usual practice of sanctioning the loan by the financial institutions is to have a detailed prior appraisal of the proposal made by the applicant company. In the present case, the IIM sanctioned the loan without such an appraisal and the argument of Mr. Cooper is that this hurry would indicate that the transaction of allotment of shares in that of direct allotment of the shares. The IIM resolution specifies that the sanction is subject to the detailed appraisal. Mr. Atmaramani has given an explanation as to why the detailed appraisal was postponed to a later date. He has stated that he had discussions with Trivedi of NRC and, at that time, Mr. Atmaramani was informed that a decision about the sanction was urgently necessary so that the company could pass a resolution under s. 293 at its AGM scheduled in June, 1978. Mr. Atmaramani has also deposed that Trivedi told him that the company intended to take in hand modernisation programme immediately. Another reason for the urgency was that IIM was to be held within a couple of days and it was felt that the matter should be placed before IIM on that day. The detailed appraisal of the proposal was made in November, 1978. Mr. Cooper has cross-examined Mr. Atmaramani as regards the difference in the original tentative proposal and the final proposal which was appraised in detail. There is also certain cross-examination suggestion that Mr. Atmaramani had no concern with this proposal. It seems that some time after completing the transaction the NRC wanted to alter the mode of expenditure of loan amount. This request was accepted by ICICI as can be seen from the letter dated October 16, 1979 (vide Ex.Z-69, part II, p. 2754). By that letter, the NRC was informed that ICICI was agreeable to the proposal of NRC to defer the expenditure of Rs. 179 lakhs for the modernisation programme and to utilise Rs. 148 lakhs for setting up some unit other than that mentioned in the original modernisation programme. In our opinion, all this cross-examination might have been relevant when 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 ?'
46. 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 s. 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 transaction was a mala fide one. When Issue No. 20 pertaining to these allegations has not been pressed at the time of the argument in the court, we are not able to see as to how all the above cross-examination of Mr. Atmaramani is relevant for deciding the nature of the transaction. It is for this reason that we do not propose to discuss in detail the various submissions made by Mr. Cooper that the company was not in any urgent need of the finances. As a matter of fact, we would like to state that at one stage of the argument Mr. Cooper did not challenge the financial need of the company. His grievance is that there was no urgent need. But this grievance falls in the background once the plaintiffs have given up their contentions in para. 73(e) of the plaint. At any rate this aspect has no bearing while considering the question as to whether the nature of the transaction is of direct allotment of shares to the extent of 20% of the loan.
47. Nareshchandra Singhal, who is the Chief of the Project Department of the ICICI, has given certain details about that part of the debenture loan which has been subscribed by ICICI. He has produced the detailed notes, Exs. 2 and 3, prepared by the ICICI with respect to the earlier loan applications from the NRC. The grievance of Mr. Cooper is that these notes have been wrongly exhibited as they are not proved. We do not propose to go into this controversy as the said notes have no direct bearing when we have to consider the nature of the transaction in question and hence we are deciding the controversy without taking into account the said notes. It is not, therefore, necessary to discuss in detail the evidence of Singhal about the proof of these documents, Exs. 2 and 3.
48. Thus all the evidence and the circumstances discussed above do not find favour with the plaintiffs' allegations. The plaintiffs have also urged that certain events prior to the suit transaction would be relevant while considering the nature of the transaction. Those events are two fold, viz., (i) refusal by the NRC to register the shares purchased by Berlias, and (ii) the freezing order issued under s. 108D of the Companies Act. In order to find out as to whether these events would be relevant for considering the nature of transaction, it will be necessary to give some details thereof.
49. Plaintiff No. 1 became a shareholder of the NRC some time 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 shares are that the NRC had wrongly refused to register the transfer of shares in their favour. These suits were filed on 1st 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 s. 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 above shares. Similar Petition No. 736 of 1977 was filed with respect to 2,450 shares which were the subject-matter of Suit No. 6692/77. The meeting of the company (NRC) was fixed on 23rd September, 1977. A question arose in Company Petition No. 677 of 1977 as to what interim orders should be passed. This court on 21st September, 1977, passed an order that the meeting as scheduled should be held. However, it was ordered that item No. 2 in the agenda, viz., the question of the election of a director in place of Dr. Rossi should not be considered or voted till the decision of the petition. These four proceedings came to an end on 8th December, 1977, as Berlias and the NRC entered into a settlement. The copy of the settlement is at Ex. Z-59, part II, p. 2673. As per this settlement, the NRC agreed to transfer the equity shares in favour of Berlias and Berlias agreed to withdraw the above mentioned suits, viz., 6691 and 6692 of 1977, as also the Company Petition No. 607 and 737 of 1977. It is needless to say that Berlias accordingly withdrew the abovementioned proceedings and the NRC transferred the shares in their favour.
50. Mr. Cooper for the plaintiffs made a grievance that the two letters dated 12th December, 1977, marked for identification as (X-18, p. 3890) and dated 3rd February, 1978, marked for identification as (X-1, p. 3784) have wrongly been held as not proved by the learned single judge. The corresponding office copies of these letters are also produced at (X-27 and X-19) respectively. There is one more letter dated 3rd February, 1968, written by the NRC to the CLB. A copy thereof though provided is not exhibited but marked for identifications as (X-2), p. 3795. Signatures on these documents are not proved as nobody has deposed that the documents have been signed by a particular person. It was urged by Mr. Cooper that such evidence is not necessary and the execution of these letters can be proved in any other manner.
51. He relied upon the decision of the Supreme Court in the case of Mobarik Ali Ahmed v. State of Bombay, : 1957CriLJ1346 , wherein it is held that the execution of a document can be proved by a number of methods. The evidence may be direct, viz., a person who saw the document being written or signed can give evidence in that respect. The handwriting may be proved by one of the modes provided by ss. 45 and 47 of the Indian Evidence 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.'
52. 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, the plaintiffs themselves have not entered the witness box to speak anything about the link of these documents forming a chain of correspondence. It is true that Mr. Cooper relied upon some other letters for the purpose of contending that the authorship of the above-mentioned letters should be held proved. But in our opinion, the procedure sought to be adopted by Mr. Cooper is too risky and flimsy to prove the authorship, particularly on account of the absence of the evidence of the recipient of the letters. It would not, therefore, be possible for Mr. Cooper to contend that the above letters should be admitted in evidence. However, the plaintiffs are relieved of the responsibility in this respect, so far as the letter marked X-1 for identification which is similar to the letter, Ex. X-9, is concerned. During the course of his argument, Mr. Nariman made a concession that this letter may be admitted in evidence. Accordingly, the said letter is marked as Ex. Z-84 but the other two letters, namely, Exs. X-2 and X-18, cannot be admitted in evidence. The admission or otherwise of these two letters as evidence would not make any serious difference when the letter, Ex. Z-84, is there.
53. Exhibit Z-84, p. 3784, of the paper book is addressed to the CLB, and it gives the details as to how the company initially refused to transfer the shares in favour of Berlias and later on agreed or consented for such transfer. Mr. Cooper urged that the contents of the letter would give an indication about the adamant attitude of the NRC against Berlias. As against this, Mr. Nariman submitted that the letter would show that the NRC had certain reasonable apprehension and hence of the NRC initially hesitated to transfer shares in favour of Berlias. For the appreciation of these rival contentions, we would like to give in a nutshell the sum and substance as to what the NRC had conveyed to the CLB. It proceeds with a statement that the company had applied under ss. 187C and 187D and also under s. 247 of the Companies Act, 1956, and that pending this application, the board of directors of the NRC decided on 12th September, 1977, that all pending application should be rejected. The company has sent to the CLB a copy of the specimen of the letter addressed to the various shareholders whose applications were so rejected. The company then informed the CLB that this question was considered in the AGM held on 23rd September, 1977, and a reminder 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 favour Berlias. The company has also stated in the letter that such a decision was taken in the background that even after the transfer of the shares in favour Berlias, their total holding would come to 68,853 and that as against the holding of 1,14,696 by the financial institutions. The company has further stated that Berlias were not to get any controlling interest of the company on account of the transfer of the shares.
54. It is thus clear that the NRC had taken certain decisions not to transfer the shares in favour of Berlias. Mr. Cooper urged that this attitude was a purposeful one inasmuch as the then board of directors wanted to harass Berlias. It is true that the company was avoiding to transfer shares in favour of Berlias. However, the above-mentioned letter itself shows as to how the initial decision was taken not to transfer shares of anyone and how it was later on modified from time to time. The latter also indicates that the NRC agreed to transfer shares in favour of Berlias on account of the advice given by the advocates. We are not therefore, able to hold that the NRC was acting in any mala fide manner. It appears that the company entertained certain apprehensions against Kapadias and Berlias and hence initially it took a decision not to sanction the transfer of shares in favour of Berlias. The conduct of the NRC in applying for an appointment of an inspector and the fact that such an inspector was appointed is relevant. Taking into account all these factors, we do not think that this letter can be interpreted to mean that the NRC has taken any mala find decision to withhold transfers in favour of Berlias. All this, however, is about the transfer application made by Berlias in 1977.
55. Between March and June, 1978, Berlias lodged 8,350 preference shares and 16,346 equity shares for being transferred in their favour but those shares were not transferred by the NRC. Hence, the Berlias filed Company Petition No. 702 of 1978, under s. 155 of the Act, for rectification of the share register by making necessary entry of the transfer of the above-mentioned shares. Ex. Z-18-B, part II-A, p. 1813, is a copy of that petition. Berlias filed another Company Petition No. 16 of 1979 for rectification of the share register in connection with the additional 12,000 preference shares. Exhibit Z-18-A, part II-B, p. 1759, is a copy of Company Petition 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 judgement 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 particularly when the company had certain apprehensions as discussed above. The result therefore, is that thought 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 institutions decided to outvote Berlias by entering into a transaction of allotment of shares in the garb of debentures with a conversional option. Before closing this discussion, we may also observe that in all these proceedings there is no allegation that the financial institutions were behind the back of the NRC in refusing the transfer of shares. In fact, the plaintiffs' solicitor Mr. D. k. Pandya, has admitted that Berlias did not have any complaint against defendants Nos. 1 to 7 (financial institutions) in regard to the affairs of the NRC. Hence, this circumstance would not have much bearing while deciding the nature of the transaction.
56. Mr. Cooper also relied upon another circumstance. On 17th June, 1979, the Central Govt. issued a freezing order under section 108D of the Companies Act. A copy of the order is at Ex. Z-7, part II, p. 1616. It is not necessary to reproduce that order in detail. Suffice it to say that the Central Government directed the NRC not to give effect to any transfer of shares in favour of Berlias. Similarly, there is a direction that in the case of transfers already registered, the NRC should not permit the transferee or his nominee to exercise any voting pewer. As far as the shares the transfer of which has not been registered, there is a further direction that the transferor or his proxies should not be permitted to exercise voting attached to such shares. It is material to note that this order is preceded by certain other documents. In February, 1978, the NRC had applied to the Central Government for issue of an order under s. 108D of the Act. The Central Government rejected that application on the ground that the company has not supplied adequate data for issuing such order. The government letter is at Ex. Z-51, part II, p. 2570. We have already observed that Berlias had started purchasing shares of the NRC in good number. The Department of Company Affairs became panicky as this action of Berlias was likely to be prejudicial to the company's interest. A meeting of the various officers of the said department was held on April 26, 1978, and Ex. Z-54part II, p. 2633, are the minutes of the said meeting. The meeting was attended by the following officers :
(1) Shri P. Krishna Murti, Secretary, Department of Company Affairs.
(2) Shri A. Neela Kamalan, Joint Secretary, Department of Company Affairs.
(3) Shri S. C. Mital, Joint 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.
57. 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 Company Affairs should examine whether further directions under s. 108D should be issued. The copy of the minutes was sent to the Director of Department of Economic Affairs for taking appropriate action. This can be seen from the letter dated 5th May, 1978 (Ex. Z-54, part II, page 2632). The UTI was also informed about his meeting and it appears that its views were called. Hence, on 23rd May, 1978, the UTI wrote a letter (which is part of Ex. Z-52, part II, P. 2572) to the Director (Investment), Department of Economic Affairs, New Delhi. The UTI informed the said director that the matter is somewhat serious as the plaintiffs were hand in glove with Kapadias and they helped Kapadias to indulge in malpractices.
58. It may be noted that in 1977, appointments of eight directors were made by the government in view of these malpractices. The UTI, therefore, suggested that an action under s. 108D of the Act be taken and that the UTI would be ready to pay the fair value for the shares as may be decided by the Controller of Capital Issues. On 30th May, 1978, the director of the Department of Economic Affairs sent a copy of the above letter to the Director of Department of the Company Affairs. On 6th June, 1978, the UTI and GIC wrote a letter (Ex. Z-53, part II, p. 2525) making a grievance that Berlias were hand in gloves with Kapadia group, which was instrumental indulging in a sort of malpractice and this was the reason for inducing eight new directors by the government. There was also an apprehension that if Berlias Group came to power they would not allow the NRC to probe into the past misdeeds and several crores of rupees would be lost. It is also stated in the letter that if a director is appointed or elected by Berlias Group, any action contemplated by the NRC to be taken against Kapadia Group and others would be known to these adversaries and as such no effective steps would be possible. With these observations there was a request for an order under section 108D of the Companies Act. It is this background in which the order under s. 108D was issued by the government on 17th June, 1978, as the AGM of the NRC was to be held on 29th June, 1978.
59. The obvious result of the said order would have been that Berlias Group would not have been able to exercise their voting power on the basis of the additional shares purchased by them from time to time 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.
60. 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 institutions. 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 s. 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. Thereafter, the two concerned Departments of the Govt. of India held a meeting and took certain decisions. There is nothing on record to show that either the NRC or the financial institutions have persuaded the Govt. of India to take any particular decision in the meeting. Under these circumstances, though a freezing order just prior to the AGM of 1978 was issued, still it will be very difficult for the plaintiffs to contend that such an order was a result of any move of the NRC and the financial institutions. At any rate, even if it is assumed that the said order was at the instance of the financial institutions, still it will not be possible to connect that order with the suit transaction for the purpose of deciding the nature of the suit transaction.
61. These are the submissions that have been made by Mr. Cooper and Mr. Nariman as regards the nature of the transaction and we think that the learned single judge is right in holding that the transaction was not of any direct allotment of shares so as to contravene the provisions of s. 81(1)(a) or s. 81(1A) of the Companies Act. The nature of the transaction is thus that of debentures with an option to convert 20% of them into equity shares.
62. It was next urged that the allotment is bad on certain other grounds. To appreciate this contention, Mr. Cooper wants to rely on certain provisions of the debenture trust deed, i.e., cl. 4(a) of the trust deed as also cl. 5 of the form of the debentures. We have already reproduced these clauses in para. 26 above. He also relied upon cl. 23 of the trust deed. Before considering the above-mentioned clauses, we may also state that the debenture trust has defined the term 'debenture' to mean the debenture issued and allotted to various financial institutions and the term 'holder of the debenture' means the holders for the time being as entered in the register of debentures. Mr. Cooper has submitted that for exercising the option, the following conditions are necessary :
(1) There must be debentures issued in favour of each of the financial institutions.
(2) The financial institutions must be the holders of the debentures, i.e., their names must be entered in the register of debentures.
(3) The financial institutions should identify or earmark particular debentures up to 20 per cent. of the total debentures by necessary appropriation for being converted 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.
63. 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 holders and which debentures are to be converted into equity shares.
64. The term debenture is defined in s. 2(12) of the Companies Act, 1956. It is an inclusive definition. It is true that the parties intended that debentures in the prescribed from should be issued. But the question is as to what would be the effect of omission in that respect. Our attention is drawn to the following observation on p. 146 of Palmer's Company Precedents, 16th edn :
'Where a company offers debentures for subscription and states the security offered, and any debentures are taken up on the faith of the prospectus, the subscribers stand in equity in the same position as if the securities had been actually granted, for equity treats that as done which ought to have been done.'
65. In that very book it is also observed that a person having called for the debentures was in equity a holder thereof. It is true that the cases where such observations have been made arose when the company has neglected to issue debentures. The grievance of Mr. Cooper is that in the present case, there was no such neglect. He argued that, on the contrary, parties rushed through the transaction without observing the condition for issue of debentures. In our opinion, the issue of debentures though desirable, would not always be mandatory. Omission in this respect would be immaterial and innocuous particularly when the parties who are entitled to the debentures are not prejudicially affected. In the present case, the financial institutions as well as the NRC have acted in terms of the debenture trust deed. There is no grievance on the part of the financial institutions about the non-issue of the debentures. We have already observed that the letters of allotment have been issued by the NRC. Obviously, those letters make it clear as to in whose favour the debentures were to be issued. The actual issue of debentures would thus be a procedural aspect and an omission thereof would not vitiate the issue of shares on conversion.
66. It was next urged that as per the debenture trust no debentures could be converted into shares unless a notice of such conversion is given. The argument is that till such a notice is given there would not be any identification of those debentures which are to be converted into shares. In other words, there was no earmarking or appropriation of particular debentures for conversion. 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, the omission to surrender the debentures would be immaterial and it would not affect the legality of issue of the shares.
67. The Controller of Capital Issue has granted approval for the incorporation of the option clause in the debentures of the value of Rs. 70 lakhs (out of Rs. 350 lakhs). It was urged by Mr. Cooper that on account of this approval, the company should have issued two types of debentures, debentures worth Rs. 70 lakhs with an option clause and the debentures of Rs. 280 lakhs without such a clause. Instead, the debenture trust deed speaks only of the total debentures being of Rs. 350 lakhs and then a provision is made that 20% thereof can be converted. In our opinion, the omission of issuing separate debentures with the option clause does not make any difference inasmuch as the document provided conversion of 20% of the total debentures of Rs. 350 lakhs. Thus, the object and meaning contemplated by the order of the Controller of Capital Issues has been achieved and conveyed by using different words. Consequently, there is no substance in the contention of Mr. Cooper that the debentures are not issued in terms of the approval of the said authority.
68. There is one more submission, viz., that as per the articles of association of the company it was necessary that there should be a sanction by the general body resolution for incorporating an option clause in the debentures. Clauses 15 deals with the issue of shares. That clause is practically similar to the provisions of s. 81 of the Companies Act. Clause 16 then provides that subject to the other provisions of the articles of association, the allotment of shares would be in the control of the directors. However, the sanction of the general body is necessary if issue of shares contemplates an option to call for further shares. Clause 18 deals with the powers of the company and it provides the necessary resolution as contemplated by s. 81. The clause further states that the general body may also vote for an option to call for further shares. A plain reading of cl. 18 shows that resolution of the G.M. is necessary only when at the time of allotting shares a further option for additional shares is contemplated. Clauses 77 deals with borrowing powers of the directors. Such a power is given in general terms without any restrictions. Under cl. 78, a provision is made for issue of debentures 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.'
69. Thus the debentures can contain certain privileges. Mr. Nariman contended that the word 'otherwise' would show that the posers 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 are 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.
70. The net result of the above discussion is that the transaction in question is not liable to be challenged on any of the grounds mentioned above.
71. Before going to certain other points raised by the plaintiffs as well as by the defendants, we would like to dispose of the contention of the plaintiffs about the constitutional invalidity of s. 81(3) of the Companies Act. In a nutshell that sub-section confers powers on the Central Government to specify certain institutions. The effect of this specification is that in the case of debentures (with option to convert into equity shares a part of the debentures) to these institutions, it is not necessary that the proposal about the debentures is to be got approved by a special resolution of the company. In the present case, defendants Nos. 2 to 7 have been accordingly specified by the Government. The argument of Mr. Cooper is that the provision in s. 81(3) which enables the government to specify such institutions, grants wide untrammelled and unguided discretion to the government and that such a power without any guidelines would be bad as being violative of articles 14 and 19. With this submission Mr. Cooper wants to contend that if the power under s. 81(3) of specifying institution is bad, consequently, the specification of defendants Nos. 2 to 7 as the institutions under s. 81(3) would be bad. He further argued that in this background the grant of debentures with an option of conversion is itself bad. He also submitted that if the debentures are bad the conversion of a part of the debentures into shares would also be illegal. In our opinion, all these submissions are not tenable for two reasons. Mr. Cooper has made a statement during the course of the trial that the plaintiffs would not be challenging the debenture trust deed. It includes a conversion clause. the learned single judge has held that, after making such a statement, the plaintiffs cannot be allowed to impeach the validity of any part of the debenture trust deed by challenging the above provision of s. 81(3). We do not find anything wrong in this approach.
72. Secondly, the very purpose of attacking the abovementioned provisions of s. 81(3) is to challenge the legality of an order of the Central Govt. by which defendants Nos. 2 to 7 have been specified as the institutions. It will not be possible for the plaintiffs to urge that they only want quashing of the abovementioned part of s. 81(3) without actually praying that the notifications issued under the impugned part of s. 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 s. 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 s. 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 s. 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 the trial court has issued such a notice and that, therefore, there would not be any difficulty in deciding the question about the validity of the above mentioned part of s. 81(3). It is true that a notice to the Attorney General is so provided. But if any notification is issued on the basis of the powers under a section which is challenged as unconstitutional, the authority which has issued the notification has every right to urge the validity of the notification on all the counts including the validity of the concerned section. It is for this reason that we told Mr. Cooper that we would not allow him to agitate this constitutional point when the Union of India is not a party to this litigation.
73. The learned single judge has decreed the suit on the ground that waiver of one mouth's notice was mala fide and that the issue of shares after such mala fide waiver was bad. This finding is challenged by Mr. Nariman, while Mr. Cooper argued that the said finding is correct. There were certain arguments advanced before us that the plaint did not contain the plea of mala fides. However, averments in para. 73D show that there is an averment that one month's notice was mandatory and that such a notice cannot be waived. Thereafter, it is alleged as follows :
'The plaintiffs submit that in any event the purported waiver by defendants Nos. 1 to 7 themselves and the purported acceptance thereof by the directors was wholly mala fide and an abuse of the fiduciary position, illegal and invalid.'
74. Thus, there is a sort of pleading of mala fides in waiving the notice.
75. Mr Nariman then contended that at least the plaint does not give material particulars of the mala fides. He drew our attention to the fact that in para. 72 (material portion on p. 121 of the paper-book), there is a specific plea that just before the closure of the register of members in connection with the thirty-first annual general meeting (which was held on 29th June, 1978), hectic efforts were made to complete the transaction and there was undue haste on the part of the directors in that respect. The grievance of Mr. Nariman is that there is no mention of a similar there should have been a specific mention that the waiver of notice was mala fide with a view to have additional voting strength for that the waiver of notice was mala fide with a view to have additional voting strength for that meeting. 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 ......'
76. 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 word and figures '29th June, 1978', were a mistake and that they should read as 28th June, 1979. However, no formal amendment application was made in the trial court and the court corrected the date. The order of the court dated 6th July, 1982, reads as follows :
'Mr. Cooper, referring to para. 72(V), of the plaint, had stated in his opening that the dater in the first sentence read '29th June, 1978' by mistake and that it should read '28th June, 1979'. The question now having arisen, Mr. Cooper reaffirms that statement. The date accordingly will read as '28th June, 1979', and the court has altered the date in the original plaint without formal amendment.'
77. Thus, at the time when the parties led evidence there was a mere statement about the mistake but the plaint was not actually amended. There is, however, much substance in that contention of the defendants that the plaint is silent as to what was likely to happen in the intervening period of one month from 31st May, 1979, and how the financial institutions wanted to utilise the additional voting strength. It was rightly urged by Mr. Nariman that there should have been a specific pleading of particulars of mala fides. The absence of such a pleading is very much relevant. This is more so when Mr. Cooper submitted that an adverse inference should be drawn against the defendants as none of the directors have entered the witness box to depose as to why the notice was waived. In the first place, the plaint, as it stood at the time of evidence, did not specifically allege that the additional voting strength was to be utilised for the meeting of 1979. As stated earlier, the unamended portion of the plaint gave an indication that this additional voting strength was to be for the purpose of passing resolutions in the 1978 meeting. It is needless to state that in fact no controversial or debatable resolution was moved in the said meeting. To a certain extent the defendants can contend that they were taken by surprise by the above amendment of the plaint after the evidence was over. However, we cannot attach too much importance to this. But the other objections of Mr. Nariman is more relevant. The plaint did not contain any particulars of mala fides by alleging that any debatable or controversial topics or resolutions were intended to be brought before the meeting of 1979 either by Berlias or by anybody else. Kaniayalal Naraindas Atmaramani is the Joint General Manager (Investments) of UTI. He has given evidence 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.'
78. 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 strength for the meeting of 1979. Relying upon this omission Mr. Nariman contended that the evidence of Atmaramani as far as the happenings in 1979 remained unchallenged. He drew our attention to a decision of the Calcutta High Court in the case of A. E. G. Carapiet V. A. Y. Derderian : AIR1961Cal359 , wherein it is laid down that the omission to put one's case in the cross-examination should be interpreted to mean that the said party, so to say, accepts the account given by the witness earlier in the examination-in-chief. Mr. Cooper did not challenge this legal position. He, however, urged that the need for putting the case to a witness would arise only with respect to the evidence given by the witness in examination-in-chief.He further contended that it was not necessary for the plaintiffs to put the plaintiffs' case to Atmaramani about the events of 1979 when Atmaramani has not deposed anything about them in the examination-in-chief. It is true that putting up of a case would have relevancy in the background of what the witness has deposed in the examination-in-chief. However, we are not able to accept the contention of Mr. Cooper that Atmaramani has not deposed anything about the happenings of 1979. At Ex. Z-25, part II, p. 1925, of the paper book, there is a note dated April, 7,1979, prepared by the common advocates of the defendants as to how the transaction was to be finalised. It is made on the basis of the discussions that have taken place between the advocates and the representatives of the company as also of the financial institutions. The note shows that Atmaramani was present on behalf of UTI and the note states that the financial institutions indicated that the transaction should be completed by the end of May, 1979. The note also shows as to what steps were expected to be taken for the preparation of the draft debenture trust deed and the execution thereof. Certain other facts are also included in the note. Atmaramani was present on 31st May, 1979, when the transaction was completed. He has deposed that he has signed the subscription letter which is at Ex. 9 part II, p. 3500, of the paper-book. Not only that but the notice of exercising option (Ex. Z-34, part II, p. 2388) has also been given to the company under his signature and he had deposed that he handed over that notice to the company on 31st May, 1979. He has then added that he has attended 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.
79. 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.
80. Mr. Cooper wanted to rely upon a number of previous antecedent events for the purpose of contending that the waiver of notice was malafide. 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, and the correspondence pertaining thereto. We have, in the earlier part of the judgment, discussed the details thereof. Mr. Cooper has also relied upon the fact that in April, 1978, Berlias had lodged proxies to the extent of 1,74,500 as against the financial institutions' voting strength of 1,04,000 odd. It is on the basis of these various circumstances that a submission was made that the waiver of notice was a mala fide one. The learned single judge has come to a conclusion that a prima facie case of mala fides in the waiver of notice has been made out and that it was necessary for the company to lead evidence to disprove this prima facie case. It is also observed that in the absence of such evidence, the plaintiffs would be entitled to succeed on the question of these mala fides. We have already observed the reason why the directors have not entered the witness box. But the more important question is whether, in fact, the plaintiffs have made our any case of mala fides.
81. In the trial court, no arguments were advanced that the shares were issued mala fide. In para. 33 above, we have already observed that in the lower court Mr. Cooper has not pressed and has given up Issue No. 20, which reads as follows :
'Whether the granting of loans 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 plea ?'
82. In addition Mr. Cooper did not advance any arguments before us to suggest that the allotment of shares is itself mala fide. The only mala fides alleged are with respect to the waiver of notice. The effect of the waiver was to accelerate the allotment of shares earlier, i.e., before the expiry of one month's notice.
83. It is true that by and large, the directors of the company are not expected to act maliciously or improperly and that the main idea in their mind should be the interest of the company. A number of cases were cited on behalf of both the sides and it is material to note that they all deal with the issue of shares. For an example, in the case of Nanalal Zaver v. Bombay Life Assurance Co. Ltd. (1949) 19 Comp Cas 26 (Bom), it is held that other motives of the directors would be irrelevant once it was established that company was in need of additional funds and that fresh issue of shares is decided to make good these funds. 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.  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 numbers of shares in favour of Howard smith Ltd. Thus, in view of the fact that the majority shareholders did not want that Howard Smith Ltd. should take over the Millers Company, the court held that the allotment of shares to Howard Smith Ltd. was mala fide. Obviously, what was relevant was the fact that on 27th June, the majority shareholders opposed the offer of Howard Smith Ltd. and within ten days, the directors issued shares in favor of Howard Smith Ltd. It is thus clear that there was evidence of mala fides. In the case of Piercy v. S. Mills and Co. Ltd. (1920) 1 Ch 77 (Ch D), the facts were of a similar type. The plaintiff in that case was serving as a manager in the company. Differences arose between him and the two directors of the company. The directors felt that the plaintiff was not suitable to work as manager. In the meantime, the plaintiff (the manager in the company) acquired majority shares of the company and he desired to be one of the directors of the company. In fact, on 17th September, he intimated the then directors about this desire. He also sent a notice that he wanted to nominate two persons as directors in the next general meeting. Obviously, on account of the majority shares which he held, the plaintiff would have been successful in this respect. On 17th October, the plaintiff was dismissed from service and on 18th October one of the directors wrote to the other director that the issue of additional sufficient shares to these very directors to these very directors seemed to be the best way to outvote the plaintiff. Thereafter, the directors allotted certain shares to themselves and this allotment was declared as in valid. It is clear that here also mala fides were writ large, as, in the impending general meeting the plaintiff manager wanted to get himself and his two nominees elected as directors. The allotment of additional shares was thus an attempt to defeat the plaintiff by increasing the voting strength of the other side. In Punt v. Symons & Co. (1903) 2 Ch 506 (Ch D), the facts were quite different. Under the articles of association of the company, one George Green Symons was to be the governing director with power to appoint other directors. It was also provided in the articles of association that, after his death, his executors and trustees would have similar power. G. G. Symons died. The executors appointed John Jay as managing director of the company. Differences 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 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.'
84. 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 disturb the majority for a particular sinister purpose. In Clemens v. Clemens Bros. Ltd. (1976) 2 All ER 268 , the allotment of shares was held bad because there was evidence and circumstances to indicate that this was done for a definite purpose to have control of the company.
85. Two other cases were also cited before us, namely, W. M. Roith Ltd., In re (1967) 1 All ER 427 and Lee, Behrens & Co. Ltd., In re (1932) All ER 889. Both these cases deal with the question as to whether the grant of pension to the legal representatives of the erstwhile director of the company was a bona fide action and, on the facts that were available there, it was held that such action should not be permitted. Halsbury has discussed the powers of the directors in para. 499 of Vol. VII in following words :
'Directors in exercise of their powers are fiduciary agents for the company and they owe a duty to the company to exercise an independent judgement accordingly, Their powers of making calls and forfeiting shares, etc., must not be used to favour themselves above other shareholders or to favour particular classes of shareholders ... The exercise by the directors of discretionary powers will not be interfered with unless it is proved that they have acted from some improper motive or arbitrarily or capriciously.'
86. In footnote No. 9 in that paragraph, it is observed as follows :
'In the absence of evidence to the contrary the court will take it for granted that they have acted reasonably and in good faith.'
87. It is thus clear that the allotment of shares should not be made for any improper motive and if there is evidence of such motive, the allotment is liable to be struck down as bad. Mr. Cooper contended that on the same analogy the action of the directors in waiving the notice period should be scrutinised. It is true that Mr. Nariman argued that the period of notice and its waiver would be a contractual obligation and the directors would not be under any fiduciary duty similar to one while alloting shares. However, one must not forget that the directors are not expected to act with any mala fide motive and Mr. Cooper would be right when he contends that the waiver of notice would be bad if mala fides are proved.
88. Hence, it is necessary to decide as to whether there were any mala fides on the part of the directors when they waived the notice period. 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 that 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 ever thought that the financial institutions should require this additional voting strength in the meeting of 28th June, 1979. Was there anything suggest that the company or the financial institutions ever thought that they would be requiring additional voting strength of 43,750 shares None of the plaintiffs have entered the witness box to depose that he intended to raise certain objections or to put certain resolutions which would require voting. As a matter of fact nothing controversial took place in the said meeting. No resolution was moved on which there was any debate. There was thus no occasion for exercising voting power for or against any resolution. There is no evidence to suggest that the plaintiffs or any other shareholder had given prior indication to the company or the financial institutions that there was the possibility of any debatable issue being raised in the meeting. The plaint also does not allege anything in this respect. Thus, the evidence, as it stands in this respect. Thus, the evidence, as it stands in this case, does not prove that there was any immediate need to increase the voting strength of the financial for being utilised in the meeting of 28th June, 1979. In the absence of such evidence, it will be very difficult for the plaintiffs to contend that there were any mala fides simply because the notice was waived.
89. The question of waiver of notice and its mala fides can also be viewed from another angle. There is no legal provision that the debenture trust deed or the debenture must contain a clause that for exercising an option for converting the debentures into shares, a notice of a particular period should be given by the debenture holder. Statute does not provide for any such notice. It is only the debenture trust deed and the debenture which has to make provision as to how the option should exercised and there is no legal bar if a provision is made that the option should be exercised by giving a simple notice without providing that the option should be exercised by giving a simple notice without providing that the said notice should be of a particular period. Notice of 1979 AGM was issued on 28th April, 1979. The draft of the debenture trust deed was prepared on 24th May, 1979. On that day, the parties were knowing that the next AGM was to be held on 28th June, 1979. The board of directors held the meeting on 24th May, 1979, and had passed a resolution authorising certain directors to finalise, settle and incorporate any modifications and changes in the draft debenture trust deed. The resolution also authorised the execution of the debenture trust deed with any such modifications or changes. There was nothing to prevent the board of directors 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 as not compulsory and nothing prevented the parties to provide the exercise of option without such one month's notice.
90. In para. 29, we have already referred to the cross-examination of Shri Nareshchandra Singhal and the statement (Ex. Z-75, part II, p. 3232, onwards), which he has produced at the instance of the plaintiffs. That statement shows that there are a number of instances when the period of option was agreed to commence even before the advancement of loan. Similarly, there are instances where the option was exercisable at any time during the currency of the loan and not on or before a particular date. The loan to motor industries was advanced on 1st October 1973. The option was exercised and the shares were allotted on the very day, though 15 days' notice was contemplated before exercising such an option. Mr. Nariman is right when he contends that this is another indication that there was anything irregular or mala fide in getting the shares immediately. We, therefore, hold that the allotment of shares is not at all vitiated as there were no mala fides when the notice was waived. Similarly, it will not be possible for the plaintiffs to contend that adverse inference should be drawn against the defendants because they have not examined any director of the company as a witness. We have already discussed in the earlier part of the judgement this contention of the plaintiffs in details. The net result, therefore, is that the plaintiffs fail on all the counts and the suit is liable to be dismissed.
91. The defendants have also raised certain defences to the suit. These defences need not be considered as the suit is liable to be dismissed in view of the above findings. However, in order to make the judgement complete, we propose to discuss and decide them as they have been urged before us. It was urged on behalf of the defendants that the suit is not maintainable and would be bad for not joining the debenture trustee, namely, the Bank of Baroda, as a party. The said debenture trust has made a provision for the issue of debentures worth Rs. 350 lakhs. It also contains a convertibility clause as discussed above. The plaintiffs case is that the conversion of 20 per cent. of the debentures is bad. On account of the conversion, the total value of debentures, was reduced to Rs. 280 lakhs. The plaintiffs' grievance is that the convertibility is bad and thus 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 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, : AIR1976Bom190 , 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 the subject-matter in dispute against a party, it is not necessary to join any other party, whether it is Government or others. In the present case, as already stated above, the contention of the plaintiffs was that the auction sale of the suit land was ultra vires, illegal, unauthorised and void and, therefore, the possession of the defendant was also illegal. The plaintiffs were entitled to a complete and effective relief by obtaining possession of the land from the defendant. They sought no relief against the Government. They were not bound to seek any relief against the Government.'
92. In the case of Narayan Chandra Garai v. Matri Bhander Pvt. Ltd. : AIR1974Cal358 , the Calcutta High Court held as follows (at p. 358) :
'A person is not to be added as a defendant merely because he or she would be incidentally affected by the judgement. The main consideration is whether or not the presence of such a person is necessary to enable the court to effectually and completely adjudicate upon and settle the questions involved in the suit. If the question at issue between the parties can be worked out without anyone else being brought in, the stranger should not be added as a party.'
93. Reliance is also placed on the Full Bench decision of the Rajasthan High Court in the case of Hardeva v. Ismail, . There a property was sold to the defendant by a third party. Plaintiff, who claimed ownership over the very property filed a suit against the defendant claiming possession on the strength of plaintiffs own title. The High Court held that the third party who has sold the property to the defendant was not a necessary party inasmuch as effectual decree for possession can be passed against the defendant. Certain other decisions were also cited by Mr. Cooper. We do not think it necessary to make mention thereof, as we are satisfied that the learned single judge has rightly held that the trustee, namely, the Bank of Baroda, is not a necessary party to this suit.
94. Another contention of Mr. Nariman is that even if the plaintiffs case is accepted in its entirety, the plaintiffs would be barred from getting any reliefs on account of acquiescence, ratification and laches. His argument is two-fold. He argued that if the transaction is of a direct allotment of shares in breach of s. 81(1) and s. 81(A), the defendants would be barred from contending 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 concerning financial assistance of Rs. 300 lakhs sanctioned by the financial institutions for modernisation has been completed. Subscriptions have been received from all the institutions against the privately placed debentures issued for the purpose. Some orders have been released on vendors for supply of machinery and equipment for modernisation. Other proposals are being processed and orders will be released in the near future. 10. CAPITAL STRUCTURE : In accordance with the term of financial assistance sanctioned by the Institutions for financing the Nylon Phase II programme and also the modernisation programme, in all amounting to Rs. 408 lakhs, the institutions have opted to convert Rs. 81.6 lakhs into equity shares at a premium of Rs. 60 per share. Accordingly, 51,000 equity shares have been issued to UTI, ICICI and GIC and its subsidiaries. Consequently, the paid up equity share capital of the company stands increased by Rs. 51 lakhs to Rs. 551 lakhs and the reserves and surplus now stand at Rs. 696 lakhs.'
95. On 27th June, 1979, the company had submitted a return to the Registrar of Companies showing the allotment of 51,000 shares to the financial institutions, to convert all debentures. This return is at Ex. 17, part II-7, p. 3578. The return though filed in 1979, was actually ordered to be registered on August 16, 1980. There is an annual return dated August 23, 1979, which also says about the convertible debentures dated May 31, 1979, and the allotment of share on 5th June, 1979. This return is at Ex. 18, part II, p. 3637. Plaintiff No. 2 became a director of the company in March, 1980. The board of directors held a meeting on March 27, 1980, when plaintiff No. 2 was present. The plaintiffs have in para. 66 of the plaint made a mention of the minutes of the various meetings of the board of directors and it includes the minutes dated March 27, 1980. Along with the plaint, the plaintiffs had filed a list of documents on which they wanted to rely. This list is at p. 177 of the paper book. At serial No. 13, it is mentioned that the minutes of the meeting of the board of directors held after July 11, 1971, to the filing of the suit would be the documents on which the plaintiffs would rely. The defendants offered to tender the various minutes including the one dated March 27, 1980, and the plaintiffs objected to this. This can be seen from the record No. 32, 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 plaintiff No. 2 attended the meeting. In that meeting, the board of directors considered and discussed the annual accounts of the financial year ending 31st December, 1979. Similarly, the balance-sheet and profit and loss account for the year 1979 were approved by the board of directors. The directors' report was also approved with certain changes. The said directors' report as well as profit and loss account are at p. 207 onwards of vol. 8. On p. 220, there is a reference to the allotment of shares in the year 1979 to the financial institutions on account of conversion. Needless to say that this includes the allotment in dispute. The profit and loss account and more particularly the position of the share capital as mentioned therein show the increase of the share capital, and this increase pertains to the disputed allotment of shares to the financial institutions. There is also a note that the debentures were issued in the year with certain option as detailed in schedule III. From p. 235, it can be seen that there is a mention of the disputed debentures and of the debenture holders having exercised their rights and converted 20% into equity shares. There is not a serious dispute that in the AGM dated May 15, 1980, plaintiff No. 1 was present and that the abovementioned directors' report and the balance-sheet have been passed in the meeting. The next AGM was held on 25th June, 1981 and at that time, plaintiff No. 2 was a director. The directors' report accompanied by the profit and loss account is at p. 266 onwards of vol. 8. In para. 6 of the report (p. 275), there is a mention of the completion the first phase of modernisation programme and increase in the share capital that took place in the earlier period is restated in the balance-sheet.
96. The plea of acquiescence, ratification and laches is based on the above facts. It will be appropriate to consider this question not separately under each head of estoppel, ratification, acquiescence, etc., as in our opinion, these defences are interconnected and all the points require a consolidated consideration. Mr. Cooper relied upon a decision in the case of Willmott v. Barber  15 Ch 96 , where the question of acquiescence as also estoppel is considered. The relevant observation reads as follows (at p. 105) :
'It has been said that the acquiescence which will deprive a man of his legal rights must 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 these elements exist, there is fraud of such a nature as will entitle the court to restrain the possessor of the legal right from exercising it, but, in my judgement, nothing short of this will do.'
97. It is, however, material to note that the Privy Council in the case of Sarat Chunder Dey v. Gopal Chunder Laha  LR 19 IA 203, has considered this aspect in a different manner as mentioned below :
'It is quite unnecessary in order to create estoppel that the person whose acts or declarations induced another to act must have been under no mistake himself, or must have acted with in intention to mislead or deceive. Estoppel mainly results from the fact that another has been induced, in reliance upon personal representations, acts, or omissions, to act as he otherwise would not have acted.'
98. This court in the case of Sitabai v. Wasantrao Nana Moroba  3 Bom LR 201, has held that the concerned party in the litigation, viz., Sitabai, was estopped from challenging the transaction as her conduct induced the other side to believe that she had consented to the sale deed in question. Similarly, in the case of Canadian Pacific Rly. Co. v. King , it is observed that the party would be estopped if one party has acted upon the faith of a statement or conduct. In the case of Smt. Premila Devi v. Peoples Bank of Northern India Ltd.  9 Comp Cas 1 (PC), it was held that there cannot be any ratification without an intention to ratify an illegal act and there can be no intention to ratify without knowledge of the illegality. Similar view has been taken in Firestone Tyre and Rubber Co. v. Synthetics and Chemicals Ltd. : 41ITR377(Bom) , where it is held that there can be no ratification except with the full knowledge of the fact. In Thakur Fatesingji v. Bamanji Ardeshir Dalal  5 Bom LR 274 , it is decided that the estoppel by acquiescence has no application to an ex-post facto submission not amounting to ratification, and that there should be accord and satisfaction with full knowledge. In De Bussche v. Alt  LR 8 Ch.D. 286 , it is held that mere submission to the injury for any time short of the period limited by statute cannot take away such right though under the name of laches it may afford a ground for refusing relief under some particular circumstance.
99. It will be convenient to refer to some other decisions; for example, in the case of Abdul Karim Babu Khan v. Sirpur Paper Mills. Ltd. , 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 consider (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 has 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 the plaintiffs and they could not be said to have voted in favour of the resolution approving the appointment for a further term with knowledge of the interest or concern of the solicitor-director and its consequent effect on the resolution of the board. There can be no ratification except with full knowledge of the facts and the shareholders were never asked to ratify the said resolution after the aforesaid facts were made known to them.'
100. Mr. Nariman relied upon a decision of this court in the case of V. N. Bhajekar v. K. M. Shinkar  36 Bom LR 438:  4 Comp Cas 434, where the question of ratification by the general body of an action by a director was considered in the following words (at p. 443 of 4 Comp Cas) :
'...... a company cannot confirm or ratify anything which is beyond its powers, express or implied, in the memorandum or conferred by statute. Short of that a transaction by the directors which is beyond their own powers but within the powers of the company can be ratified by a resolution of the company in a general meeting or even by acquiescence, provided that the shareholders have knowledge of the facts relating to the transaction to be ratified or the means of knowledge are available to them ....... a company may by a resolution at a subsequent meeting ratify any business which it purported to transact at a meeting informally called.'
101. The question of knowledge is many a time relevant and this aspect is discussed by Phipson's Book on Evidence from page 169 onwards. He has observed that knowledge may be inferred circumstantially from the fact that a party had reasonable means of knowledge, that is possession of or access to documents containing the information. It is further observed that sometimes access to documents may raise presumption of knowledge. In the case of Manji Karimbhai v. Hoorbai  12 Bom LR 1910, it is observed that knowledge can be imputed to a party who has abstained from making any inquiry.
102. It is thus clear that initially a sort of rigid view was taken in the case of Willmott v. Barber  15 Ch.D. 96 (Ch), that there must exist five conditions for invoking the applicability of the principles of acquiescence, estoppel, etc. However, that decision has not been implicitly followed in subsequent decisions. The Privy Council decision in Sarat Chunder Dey v. Gopal Chunder Laha  LR 19 IA 203 (PC), specifically states that it is not necessary to have all the conditions mentioned in Willmott v. Barber  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  1 All ER 897:  2 WLR 576 . It is a detailed and exhaustive judgement. 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 represented 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 themselves created.'
103. This decision has considered a number of other cases. The relevant portion of some of the decisions have been reproduced in the judgement and, in addition, the learned judge while deciding that case has also recorded certain findings. We would like to reproduce certain portions of the judgement including the observations in the earlier decisions. After considering the case of Willmott v. Barber  15 Ch 96 (Ch D) and certain other cases, it observed as follows (  1 All ER 911 : 2 WLR 588 :
'Now, convenient and attractive as I find counsel's submission as a matter of argument, I am not at all sure that so orderly and tidy a theory is really deducible from the authorities-certainly from the more recent authorities which seem to me to support a much wider equitable jurisdiction to interfere in cases where the assertion of strict legal rights is found by the court to be unconscionable.'
 1 ALL ER 91:  2 WLR 590 :
'The fact is that acquiescence or encouragement may take a variety of forms. It may take the form of standing by in silence while one party unwittingly infringes another's legal rights. It may take the form of passive or active encouragement of expenditure or alteration of legal position upon the footing of some unilateral or shared legal or factual supposition. Or it may, for example, take the form of stimulating, or not objecting to some change of legal position on the faith of a unilateral or a shared assumption as to the future conduct of one or other party. I am not at all convinced that it is desirable or possible to lay down hard and fast rules which seek to dictate in every combination of circumstances, the considerations which will persuade the court that a departure by the acquiescing party from the previously supposed state of law or fact is so unconscionable that a court of equity will interfere. Nor, in my judgement, do the authorities support so inflexible an approach, and that is particularly so in case in which the decision has been based on the principle stated by Lord Kingsdown.'
 1 ALL ER 915 :  2 WLR 593 :
'That, however, does not necessarily imply his acceptance of the proposition that all the probanda are applicable to every case of estoppel by acquiescence and it seems clear from his earlier pronouncement in Electrolux Ltd. v. Electrolux Ltd.  71 RPC 23 (CA) that that was not, indeed, his view.
Furthermore, the more recent cases indicate, in my judgement, that the application of Ramsden v. Dyson  LR 1 HL 129, principle-whether you call it proprietary 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 unconscionable 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.'
 1 ALL ER 106 :  2 WLR 594 :
'Indeed I cannot see why in considering whether the defendants were behaving unconscionably it should have made the slightest difference to the result if, at the time when the plaintiff was encouraged to open his access to the road, the defendants had thought that they were bound to grant it ......
The particularly interesting features of the case in the context of the present dispute are, first, the virtual equation of promissory estoppel and proprietary estoppel or estoppel by acquiescence as mere facets of the same principle and, secondly, the very broad approach of both Lord Denning MR and Scarman L.J., both of whom emphasised the flexibility of the equitable doctrine.'
107. Similar subject is also discussed in the case of Amalgamated Investment and Property Ltd. (In liquidation) v. Texas Commerce International Bank Ltd.  1 ALL ER 923:  2 WLR 554 (QB). The relevant headnote reads as follows :
'Where there was a representation by one party to another that a transaction between them had an effect which in law it did not have, an estoppel arose if it was then unconscionable for the represent or to go back on his representation because it had caused or contributed to the represented's error as to his true legal rights or deprived him of the opportunity to renegotiate the transaction to render it legally enforceable in terms of the representation.'
108. The case of Willmott v. Barber  15 Ch 96 (Ch D), was also considered and to a certain extent was disapproved. Hence, it would also be advantageous to reproduce certain parts of the judgement on pp. 935 and a  1 ALL ER 916  2 WLR 569 :
'Now I have to say at once that despite his meticulous scholarship, I find this approach difficult to accept. Of all doctrines, equitable estoppel is surely one of the most flexible.'
109. There was a reference to the doctrine of estoppel, the doctrine of encouragement, the doctrine of promissory estoppel and then it is observed as follows  2 WLR 569 :
'But all these have been statements of aspects of a wider doctrine; none has sought to be exclusive. It is no doubt helpful to establish, in broad terms, the criteria which, in certain situations, must be fulfilled before an equitable estoppel can be established; but it cannot be right to restrict equitable estoppel to certain defined categories, 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 judgement in two related actions, Taylors Fashions Ltd. v. Liverpool Victoria Trustees Co. Ltd. and Old & Campbell Ltd. v. Liverpool Victoria Friendly Society  1 All ER 897:  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.'
110. 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, 1980. The plaintiffs have alleged in the plaint mala fides in the waiver of notice. This means that before the filing of the suit, the plaintiffs had obtained the knowledge about the mala fide waiver. However, the plaint is silent as to when they received this knowledge. This omission has an importance. If the plaintiffs had such knowledge before the abovementioned meetings dated March 27, 1980, and May 15, 1980, they would not have acted in the manner mentioned above. On the contrary, they would have raised a grudge about the allotment of the shares. It is for this reason that the date on which they received the knowledge was relevant. Not only that there is no pleading in this respect but none of the plaintiffs have entered the witness box to depose as to when he came to know about the alleged mala fides. The question is as to on whom the burden of proving such knowledge need not detain us any longer in the background of plaintiffs' omission to enter the witness box. The fact that the plaintiffs obtained the abovementioned information on a particular day would be within their exclusive knowledge and an adverse inference will have to be drawn against the plaintiffs, for not entering the witness box for deposing anything in this respect. Under these circumstances, it will not be open for the plaintiffs to contend that they had no knowledge or information about the alleged mala fides before March 27, 1980, and May 15, 1980. Their conduct on these two dates with previous knowledge would be a bar so as to prevent them from urging the alleged mala fides.
111. There is another important factor which is to be borne in mind. The financial institutions were entitled to exercise option before June 14, 1980. Had the plaintiffs taken any action on the basis of the alleged mala fides prior to that date, the financial institutions would have been able to issue one month's notice as contemplated by the debenture trust and on that basis they would have obtained the allotment of the shares. The position has now become precarious from the point of view of the financial institutions inasmuch as on the date on which the plaintiffs filed the suit the period for exercising option had already expired. Thus, granting any decree on the basis of the alleged mala fides would be prejudicial to the defendants. This is more so when the nature of the transaction was to be that 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.
112. 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.
113. This aspect is considered in the case of Bellerby v. Rowland & Marwood's Steamship Co. Ltd.  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 refused by holding that the discretionary relief should not be granted. The relevant observations on p. 273 are as follows :
'It does not follow that because the surrenders of shares were bad the plaintiffs are now entitled to succeed in their claim to be restored to the register in respect of them. The power of rectifying the register given by the 35th section of the Act of 1862 is discretionary in this sense-that the court properly can only exercise it if satisfied of the justice of the case, and on many applications the court has declined to exercise this power on the ground that it would not be fair to do so, or, to put it more technically, that the applicant has not established any equity to disturb the existing state of things. And, in considering this, the court has always had regard to the lapse of time, and to any facts and circumstances indicating acquiescence in the existing state of things by those on whose behalf the application is made to disturb it.'
114. The discretion can be exercised by passing orders which would be appropriate in a given set of circumstances. The case, In re Sussex Brick Co. Ltd. [1904 1 Ch.D. 598 (CA), is relevant in this respect. Certain shares were transferred on March 3, 1903, under the articles of association. The transferor is to be deemed to remain holder until the name of the transferee was entered in the register. On March 14, 1903, the transferee applied to the company for transfer of the shares. The share certificates were also sent to the company. On March 14, 1903, the company sent a reply acknowledging the receipt of the transfer application. The transferee was informed that new certificates would be ready by March 28, 1903, after placing the matter before the board of directors. However, in between, the Secretary resigned and another person was appointed in his place. He did not place the transfer application before the board. The transferee, therefore, wrote to the company asking for the transfer certificates. In the meantime, winding-up proceedings began. The transferee gave a notice of dissent regarding the resolution of winding up. The liquidator refused to take cognizance of the notice as the transfer was not registered. The transferee made an application for rectification of the register. The court granted rectification but from the date on which the order was passed. The contention of the transferee was 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 protime', 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.
115. 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.
116. Mr. Cooper urged that the present proceedings are not an application under s. 155 of the Act as the plaintiffs have field 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 under s. 155 of the Companies Act. That application was withdrawn on the ground that the matter involved a complicated question. But this would (not ?) alter the position in favour of the plaintiffs. Otherwise there would be an anomaly, i.e., the relief would be discretionary if an application is filed under s. 144; while the court would be bound to grant a rectification decision if the chooses to file a suit. In our opinion, rectification of share register, whether claimed in an application under s. 155 of the Act or in a substantive suit would be a discretionary relief. The present case does not appear to be a fit one for granting such an equitable relief particularly when we take into account the conduct of the plaintiffs as well as the precarious position to which the defendants would be reduced if the allotment of shares is cancelled.
117. For the reasons mentioned above, it is clear that the issue of shares to the financial institutions is quite legal and proper and, consequently, the plaintiffs' suit deserves to be dismissed. Hence, we pass the following order :
Appeals Nos. 390, 391,392 and 393 of 1982 are allowed with costs. The cross-objections are dismissed. The decree passed by the learned single judge in Suit No. 1108 of 1981, is set aside and that suit is dismissed with costs.
118. Costs payable to defendant No. 8, both in the trial court and in the appeal court, to be determined in accordance with the rules, for two counsel. So far as the financial institutions are concerned, we quantify the total costs of Rs. 20,000 separately for the suit and for all the appeals.
119. Leave to appeal to Supreme Court prayed for by Mr. Cooper rejected.
120.Status quo as prior to the judgement till today to continue till the 25th June, 1983.