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Om Prakash Berlia and Another Vs. Unit Trust of India and Others (No. 2) - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtMumbai High Court
Decided On
Case NumberCivil Jurisdiction Suit No. 1108 of 1981
Judge
Reported in[1983]54CompCas469(Bom)
Acts Companies Act, 1956 - Sections 75, 80, 81, 81(1), 81(1A), 81(3), 81(3), 85, 100, 101, 102, 103, 104, 105, 108, 108A, 108D, 155, 166, 293 and 408
AppellantOm Prakash Berlia and Another
RespondentUnit Trust of India and Others (No. 2)
Excerpt:
the case dealt with the meaning of the expression 'contents of a document' within the frame work of sections 61-63, 65,67,74-90, 114 of the evidence act, 1872 - the court ruled that the expression 'contents of a document' referred only to contents and not the truth- so the certified copy of return of allotments filed with registrar of the companies was proof of contents- however, the certified extract of the annual return filed by the company under section 159 of the companies act, 1956, proved by reason of section 164 of that act was a prima facie evidence of what was stated therein - maharashtra scheduled castes, scheduled tribes, de-notified tribes (vimukta jatis), nomadic tribes, other backward classes and special backward category (regulation of issuance and verification of) caste.....introduction1. this is a suit for rectification of the register of shares of the national rayon corporation ltd., the 8th defendant. rectification is sought in respect of 43,750 shares standing in the names of the unit trust of india (uti), the 1st defendant, industrial credit and investment corporation of india (icici), the 7th defendant, general insurance corporation of india (gic), the 2nd defendant, and four subsidiaries of gic, being the 3rd, 4th, 5th and 6th defendants. on may 31, 1979, the company issued to the said financial institutions 35,000, 11% convertible debentures of the nominal amount of rs. 1,000 each, privately placed with them. each of the debenture-holders was entitled to convert 20% of the value of the debentures held by it into equity shares. each of the.....
Judgment:

INTRODUCTION

1. This is a suit for rectification of the register of shares of the National Rayon Corporation Ltd., the 8th defendant. Rectification is sought in respect of 43,750 shares standing in the names of the Unit Trust Of India (UTI), the 1st defendant, Industrial Credit and Investment Corporation of India (ICICI), the 7th defendant, General Insurance Corporation of India (GIC), the 2nd defendant, and four subsidiaries of GIC, being the 3rd, 4th, 5th and 6th defendants. On May 31, 1979, the company issued to the said financial institutions 35,000, 11% convertible debentures of the nominal amount of Rs. 1,000 each, privately placed with them. Each of the debenture-holders was entitled to convert 20% of the value of the debentures held by it into equity shares. Each of the debenture-holders exercised the option to convert to the full extent on May 31, 1979, itself and was allotted the 43.750 shares on June 5, 1979. The shares are more particularly described in Ex.S. to the plaint.

2. The suit is filed by two shareholders of the company, members of the Berlia family who are shareholders of the company in a substantial way.

3. The plaint is verbose, even argumentative. It sets out the history of the Berlia shareholding in the company, the freezing order under s. 108D of the Companies Act passed in respect thereof, the writ petition filed to quash it, the failure of the company to register further shares of the Berlias, and the proceedings adopted to compel registration thereof. The plaint also sets out the history of the debentures and shares in suit. The plaint challenges the whole issue of the debentures and the issue of the shares upon their conversion. Many of these challenges are not pressed. In considering the challenges that are pressed, it will be necessary to refer to portions of the plaint. It is, therefore, that I do not here undertake the laborious task of summarising the plaint. The written statements are, necessarily, almost as long as the plaint; they raise some technical defences and, for the rest and for the most part, contain denials. Upon the pleadings a large number of issues we re raised, some now rendered redundant.

4. Little oral evidence has been led : really, only that of two witnesses, Shingal and Atmaramani, officers of the institutions. Two other witnesses on behalf of the institutions gave evidence on tangential points which do not much advance the case. Other witnesses led by both sides proved documents. The plaintiffs did not examine themselves; no director or officer of the company was examined. This has caused much comment on either side. The bulk of the evidence on record - and it is of a fair bulk - is documentary and, as the notes of evidence will show, it could not be brought on record before the party seeking to do so had navigated reefs and shoals of objection to admissibility.

5. Section 81, the Companies Act, 1956

6. Pivotal to this suit are the provisions of s. 81, sub-ss. (1), (1A) and (3) of the Companies Act. Section 81(1) to (3) reads :

'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 they think most beneficial to the company.

7. Explanation. - In this sub-section, 'equity share capital' and 'equity shares' have the same meaning as in section 85.

8. (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 subscribe for shares in the company :

Provided that the terms of issue of such debentures or the terms of such loans include a term providing for such option and such term -

(a) either had 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.'

9. Excluding verbiage irrelevant for the purposes of this suit, these provisions say this :

Where it is proposed to increase the share capital of the company by allotment of further shares, such further shares shall be offered to the company's shareholders at the date of the offer. The offer shall be made by notice limiting a time within which the offer, if not accepted, will be deemed to have been declined. After the expiry of the time specified in the notice or on receipt of earlier intimation from the shareholder that he declines to accept the shares offered, the board of directors may dispose of them.

10. The further shares may be offered to any persons other than the shareholders if a special resolution to that effect is passed by the company in general meeting or if the votes cast in favour of the resolution exceed the votes cast against and the Central Govt. is satisfied that the proposal is beneficial to the company.

11. Nothing in the section shall apply to the increase of the subscribed capital of a public company caused by the exercise of an option attached to debentures issued by the company to convert such debentures into shares in the company, provided that the terms of issue of such debentures include a term providing for such option and such term has been approved by the Central Govt. before the issue of the debentures and, in case of debentures other than debentures issued to any institution specified by the Central Govt. in this behalf, such term has also been approved by a special resolution passed by the company in general meeting before the issue of the debentures.

12. The facts regarding the issue of the debentures and shares have to be appreciated in the light of certain surrounding circumstances commencing with the date, July 11, 1977, when the Company Law Board, in exercise of the powers under s. 408 of the Companies Act, appointed 8 persons to hold office as directors of the company from the date of the order in order to prevent the affairs of the company from being conducted in a manner prejudicial to it. At that point of time, the two plaintiffs held about 26,000 shares in the company. On September 1, 1977, the plaintiffs field against the company suits in the Bombay City Civil Court for declarations that transfer applications made to the company by the plaintiffs in respect of the company's shares should be deemed to have been accepted and for orders that the company's share register as transferees and owners of those shares. On September 20, 1977, the plaintiffs field against the company in this court a petition under s. 155 of the Companies Act requiring the rectification of the register of shares of the company in respect of 27,183 shares (which were some of the shares in the aforesaid suits). A similar petition was later filed in respect of the other shares in the aforesaid suits. On September 21, 1977, this court passed an interim order in the petition wherein it was directed that the annual general meeting of the company scheduled for September 23, 1977, should proceed as scheduled but the item on the agenda thereof to elect a director in place of a retiring director should not be considered until the petition was heard and disposed of. An agreement was arrived at on December 8, 1977, between the Berlias and the company, whereunder the company agreed to transfer 2,633 equity shares of the company lodged by the Berlias to their names and the Berlias agreed to withdraw the aforesaid suits and petitions. The agreement also provided that it would be open to the company to refuse the transfer of further shares the at may be lodged by the Berlias and that it would be open to the Berlias to challenge and contest such refusal. Accordingly, the aforesaid suits and petitions were withdrawn.

13. It appears that the company had moved the Central Govt. for the issuance of directions under s. 108D of the Companies Act in respect of the acquisition of shares in the company by the Berlia group. The application is not on record. On March 15, 1978, the company was informed that it had not submitted adequate grounds for the Central Govt. to issue such directions. On April 26, 1978, a meeting was held under the Chairmanship of the Secretary, Dept. of Company Affairs, to consider steps to be taken to prevent the Berlia group from acquiring shares to gain a controlling interest in the company. The minutes of the meeting are on record. They show that the chairman explained that the Berlias had already registered in their names 68,853 equity shares and they had also got transferred some 6,000 preference shares; that there was a strong suspicion that most of the transferees of 23,113 equity shares which had been lodged with the company for registration were nominees of the Berlia group; that according to reports received by the committee, the Berlia group had obtained a total of 1,74,127 proxies as against 1,08,000 mustered by the institutions; that the Berlias had filed nominations for the appointment of 2 directors on the company's board. In view of the large number of proxies obtained by the Berlias it was obvious to the committee that the Berlias were trying to gain controlling interest in the company and this would be prejudicial to the company's board they would be able to gain knowledge of all the happenings in the company to further their interests. It was decided by the committee that directions should be given to the company either under s. 108D or under s. 408 not to effect transfers of shares exceeding a block of 50 shares lodged by any individual or body corporate. In order to protect the interests of persons who wanted to transfer shares for genuine reasons, it was suggested that shares exceeding a block of 50 should be purchased by the institutions. It was also decided that the Dept. of Company Affairs would examine whether the directions to the company should be issued under s. 108D or under s. 408.

14. On April 28, 1978, the company gave notice that the 31st AGM of the company would be held on June 29, 1978.

15. On May 5, 1978, the Director, Dept. of Company Affairs, wrote to the Director, Dept. of Economics Affairs, enclosing therewith a copy of the said minutes. He stated that necessary action to issue directions to the company under s. 108D was being taken. He requested that immediate steps be taken for giving directions to the institutions to purchase shares of the company exceeding a block of 50 shares that may be lodged for transfer with the company. On May 15, 1978, the Director (Investment) in the Dept. of Economic Affairs wrote to the Chairman, UTI, enclosing a copy of the letter dated May 5, 1978, and asked for the Chairman's views. On May 23, 1978, UTI's Chairman replied. According to him, the matter was rather serious. He felt that the Berlia group with the support of some other group was trying to take control of the company. It was, therefore, of vital importance to protect the interests of the institutions who had sunk huge funds into the company and who had a bigger stake than any other share holder and also the interests of small shareholders, that the Berlias and their supporters should be prevented from gaining control of the company. The chairman suggested that not only should action be taken under s. 108 but also, simultaneously, under section 408, and it should be taken fast. He was prepared to render all assistance. On May 30, 1978, the Director (Investment), Dept. of Economic Affairs, sent a copy of the Chairman's letter to the Director of Company Affairs.

16. On June 6, 1978, UTI's and GIC's chairman wrote a confidential letter to the chairman, CLB, stating that they were given to understand that the chairman of the company had by its letter dated April 28, 1978 (which is not on record) advanced cogent reasons why the Company Law Board should take action, inter alia, under s. 108A. The letter stated that the Berlia group had participated in the malpractices of the earlier group in management, the Kapadias. The letter stated that the Berlia group had a large quantity of shares which they had got transferred in their own names or in the names of their nominees. The annual general meeting (AGM) of the company was now scheduled to be held on June 29, 1978. After April 3, 1978, the Berlia group had lodged several transfer applications in respect of equity and preference shares of the company in their names and in the names of their nominees. The shareholders of the company had been issued a circular purported to have been signed by R. M. Goculdas, Chairman of M/s. Dharamsi Morarji Chemical Co. Ltd., R. V. Ramani, Managing Director of Mettur Chemicals and Industrial Corporation Ltd., and S.C.L. Jain, managing director of M/s. Punjab National Fertilisers and Chemicals Ltd. They had been told by Gokuldas that he had not signed the circular. They were awaiting replies from the other two gentlemen. The circular recommended to the shareholders that they issue proxies in favour of one or the other of the plaintiffs or their father. The circular had been posted by the Berlia concerns. From this it was obvious that the Berlias were trying to get the control of the company and if they were allowed to control the company it would be most harmful to the interests of the company and to the public interest at large. If they were allowed to appoint a director, he would obtain knowledge of what was happening at the board meetings. For these reasons the signatories asked that directions be given to the company not to give effect to transfers of the blocks of shares listed in the annexure thereto; where the transfer of such shares had already been registered, not to permit the transfer or any nominee or proxy of the transferee to exercise any voting or other rights attached to such shares; where the transfer of such shares had not been registered, not to permit any nominee or proxy of the transferor to exercise any rights attached to such shares; and, regardless of whether transfers of such shares had taken place or not, the voting rights in respect of the shares listed in the annexure should be frozen so as to disbar the registered holders thereof, whoever they may be, from exercising the registered holders thereof, whoever they may be from exercising them. This would prevent the Berlias from gaining control of the company and from having any of their nominees on the board of directors either at the forthcoming AGM of the shareholders 'on June 29, 1978, or at any other general meeting'. The list annexed to the letter stated the folio number and the number of the shares, equity or preference, that had been forwarded to the company for transfer and the names and addresses of (apparently) the transferors. It is a long list. It is not clear upon what basis the letter stated that the transferees of these shares were Berlia nominees. It is clear that the list was supplied to the signatories of the letter by the company.

17. On June 17, 1978, the Joint Secretary to the Govt. of India in the Dept. of Company Affairs issued an order under s. 108D which can aptly be called the freezing order. The order stated that it had been brought to the notice of the Central Govt. that the Berlia group were making concerted efforts to gain a controlling interest in the company; that certain persons alleged to belong to the Berlia group had lodged transfers of 27,263 shares in bulk with the company in order to gain controlling interest in the company; that the Berlia group had lodged proxies numbering over 1,74,500 for the extraordinary general meeting of the company held on April 3, 1978, for the appointment of two of their nominees as directors of the company; that the Berlia group had been involved in a number of irregularities committed by the Kapadia group in the affairs of the company prior to the appointment by the Central Govt. of persons to hold office as directors of the company under s. 408; that the Central Govt. was satisfied upon the facts enumerated above and upon the report received from the company that, as a result of the transfer of any share or block of shares of the company, a change in the controlling interest of the company was likely to take place and that such change was prejudicial to the interests of the company. The order directed the company not to give effect to the transfer of any such shares or block of shares and (a) where the transfer of such share or block of shares had already been registered, not to permit any nominee or proxy of the transferee to exercise any voting or other rights attached to such share or block of shares, and (b) where the transfer of such share or block of shares had not been registered, not to permit any nominee or proxy of the transferor to exercise any voting or other rights attached to such share or block of shares. The copy of the freezing order received by the company, which is on record, shows that the company received it on June 19, 1978.

18. On June 26, 1978, the plaintiffs' attorneys wrote to the company recording that the 2nd plaintiff had attended the registered office of the company to lodge proxies for the AGM of June 29, 1978. He had then been told that the proxies were useless, for, an order had been received by the company, whereby voting by Berlia group had been frozen. The letter requested the company to forthwith hand over to the 2nd plaintiff, (sic) and their advocate-assistant, who were the bearers of the letter, a copy of the order. The evidence of the advocate-assistant, Mahimkar, discloses what transpired when he went to the company's office and thereafter to the office of the Registrar of Companies. There is also correspondence in this regard. On June 26, 1978, the plaintiff's attorneys wrote to the company recording that the 2nd plaintiff with the advocate-assistant had attended the company's office to deliver the said letter. They had been told that the company's chairman was out of station. They had seen T. S. Narayanan, the company's Dy. Secretary, and had handed over the letter to him. They were informed by Narayanan that he had no knowledge of any order and that he would make enquiries and send a reply. The correspondence on record discloses that the advocate-assistant went to the office of the Registrar of Companies to take inspection of the order and was informed that it was not a public document and could not be inspected. Upon inspection of the files relating to the company it was found that the order was not therein. On June 26, 1978, the company wrote to the plaintiffs' attorneys stating that it had handed over the letter containing the demand for the copy of the order to its advocates. The letter was received on June 27, 1978. On June 27, 1978, the plaintiffs' attorneys informed the company that the plaintiffs had lodged a writ petition in this court impugning the order (without annexing it) and that an application for interim relief would be made on the next day. The company was required to produce the order at the time of the application. On June 27, 1978, the company sent the plaintiffs' attorneys a photostat copy of the freezing order. On June 28, 1978, this court passed the interim order, inter alia, in these terms :

'There would be an injunction in terms of prayer (c) on the following conditions. At the meeting to be held on June 29, 1978, or at the adjourned meeting in respect of items 2 and 4 on the agenda of the meeting or any amendment thereof as mentioned by the learned counsel for respondent No. 3 (the draft of which has been handed over to the court and which is taken on file) the petitioners undertake to the court to exercise their voting rights in respect of their 69,633 shares mentioned in para. I of the petition and in respect of proxies held by them in respect of which the petitioners are entitled to vote in favour of said items and the said amendment thereof.

As regards items 1 and 3 on the said agenda and also as regards those terms or resolution in respect of which notice of moving resolution at the said meeting has been given to the 3rd respondent, the petitioners are at liberty to exercise at the said meeting or adjourned meeting all their rights including voting rights, a right to demand poll and right to contest.

The chairman of the meeting, however, shall not declare the result of the voting on poll being demanded, on any resolution either under the said items 1 and 3 or in respect of any matters for which notice has been given to the 3rd respondent, until further orders of the court ....'

19. On June 29, 1978, the 31st AGM was held. The plaintiffs voted thereat in accordance with their undertaking. The election results were not declared.

20. On October 13, 1978, the plaintiffs filed in this court a petition under s. 155 of the Companies Act, 1956, for a rectification of the share register of the company in respect of the shares lodged for transfer by them. A similar petition was filed in respect of other shares some time in the beginning of 1979. On November 11, 1979, shah J. delivered the judgment in the writ petition filed by the plaintiffs in respect of the freezing order. He quashed the order.

21. On December 7, 1979, this court delivered a judgment in the two petitions for rectification. It was held therein that the refusal of the company's board to register the shares was inconsistent, arbitrary and capricious. It was observed that the arguments addressed by counsel for the petitioners therein upon the alleged mala fides of the company in harassing the petitioners had not impressed the court.

22. On December 12, 1979, this court dismissed the appeal filed by the Union of India against the order in the writ petition. To enable the Union of India to prefer an appeal to the Supreme Court of India, it was directed that the results of the voting at the 1978 AGM should not be declared until January 9, 1980.

23. It appears that on November 28, 1979, a representation was addressed on behalf of the 2nd plaintiff to the Union Minister for Law, Justice and Company Affairs and that on January 4, 1980, the 2nd plaintiff with his counsel and instructing advocate met the CLB. Pursuant to their discussions, the plaintiffs' attorneys on January 5, 1980, wrote to the CLB. placing on record proposals with a view to end all disputes and causes of friction between the Berlias, the company and the Government. The proposals suggested, inter alia, that the order that the order under s. 408 be continued for a further period not exceeding 3 years; that the company should transfer all shares proposed for transfer and register them; and that the Government should confirm and sanction the appointment of the two directors of the Berlias on the company's board.

24. On January 9, 1980, the Supreme Court heard the special leave petition filed by the Union of India in respect of the order on the writ petition. The Supreme Court recorded that the Solicitor-General had made a statement on behalf of the CLB and the Govt. of India that the proposals in the letter written by the plaintiffs' advocates to the CLB were acceptable. Accordingly, the Supreme Court passed an order in terms of the proposals contained in the letter and stated that these were deemed to be the directions of the court. The Supreme Court stated that in view of these final orders, the findings of the trial court would not remain in operation but the final order passed by the trial court would. The special leave petition was allowed to be withdrawn.

25. On January 21, 1980, the CLB informed the company of the order passed by the Supreme Court and directed the company to implement fully the proposals in the letter of January 5, 1980, a copy whereof was enclosed.

26. There was considerable correspondence between the attorneys of the plaintiffs and the attorneys of the company, subsequent to the passing of the order by Shah J. on the writ petition in respect of the declaration of the result of the election at the 1978 AGM. On February 13, 1980, the result was ultimately declared and it was found that the 2nd plaintiff had been elected a director. On March 6, 1980, the CLB confirmed the appointment of the second plaintiff as a director. It appears that the second plaintiff attended his first board meeting on March 27, 1980.

27. Proved facts : Debentures and shares

28. It appears that an application for some financial assistance had been made by the company to the institutions. On December 20, 1977, ICICI informed the company that it had considered the company's application and was prepared to provide a rupee term loan of Rs. 58 lakhs to meet a part of the cost of the company's scheme to complete the nylon tyre cord project, to set up a monomer recovery plant, to complete essential maintenance and to incur capital expenditure deferred earlier. The letter stipulated the terms and conditions upon which the loan would be given. One of the terms stated that ICICI would have the option to convert a part of the loan into shares on terms to be decided later. (It must be immediately mentioned that this loan of Rs. 58 lakhs is the subject-matter not of this suit but of O.O.C.J . Suit No. 1110 of 1981. It is, however, of some relevance to this suit.)

29. On January 17, 1978, UTI wrote to the company in respect of the company's application for financial assistance for the nylon tyre cord project (phase II). The letter informed the company that UTI was agreeable in principle to provide financial assistance to the extent of Rs. 50 lakhs by way of subscription to the proposed issue of privately placed debentures for financing a part of the costs of phase II of this project. The commitment would be on the understanding and subject to the conditions set out in the letter. Clause 8 of those conditions stated that the company should agree to vest in UTI the option to convert a portion of the amount into shares on terms and conditions to be decided by UTI in consultation with other institutions, which would be advised to the company in due course. The letter concluded that UTI would be prepared to place an advance deposit of Rs. 50 lakhs with the company.

30. On February 8, 1978, a bridging loan agreement was entered into between ICICI and the company in respect of the sum of Rs. 40 lakhs out of the total loan of Rs. 58 lakhs. On February 9, 1978, and February 13, 1978, respectively, ICICI forwarded to the company cheques for Rs. 20,00,000 each towards the disbursement of the bridging loan of Rs. 40,00,000. On March 8, 1978, ICICI wrote to the company with reference to the loan of Rs. 48 lakhs and sent therewith a draft loan agreement. Article 3(2) of the draft agreement set out the conversion right but left blank the value of the loan which could be converted, the period during which and the price at which the conversion could be effected.

31. On March 17, 1978, the company wrote to the UTI and confirmed acceptance of the terms contained in UTI's letters dated June 17, 1978, April 24, 1978, and March 13, 1978. The letter stated that the company would be grateful if UTI placed with them the deposit of Rs. 50 lakhs. This was done.

32. On May 19, 1978, a meeting was held of the special executives of the institutions. The summary record of its proceedings is on record. The terms of option for the conversion of the loan into equity in respect of the aggregate loan of Rs. 108 lakhs for the nylon tyre cord project, phase II, was discussed in relation to the settlement of the terms of an option for the conversion of the loan into shares and it was decided that 20% of the loan would be subject to conversion at a premium of Rs. 60 per share of the face value of Rs. 100, the period of conversion being July 1, 1978, to June 30, 1980, subject to confirmation at an Inter-Institutional Meeting.

33. On May 17, 1978, the company wrote to UTI a letter regarding the loan for the nylon project, phase II. It stated that in the course of discussion UTI had agreed that the Bank of Baroda would be a appointed the debenture trustee in respect of the debentures of Rs. 50 lakhs to be issued to UTI. It asked UTI to confirm this so that the Bank of Baroda could be suitably advised. The letter went on to say this :

'.... Incidentally, we may add that the consortium of banks comprising of Bank of Baroda, Dena Bank, Punjab National Bank and Canara Bank are providing additional term loan of Rs. 1 crore to meet company's working capital requirement, and this amount will be secured by a pari passu charge on the security mentioned above .....'

34. On May 19,1978, UTI wrote a confidential letter to the chairman of the company. It said that UTI found that the company was approaching a consortium of banks for a term loan of Rs. 1 crore to meet its working capital requirements. UTI felt that this means of financing would be costly for the company. UTI was prepared to take up, subject to its board's approval, privately placed debentures of Rs. 1 crore which may be issued by the company upon the terms and conditions mentioned in the letter. Term 4 stated :

'There would be conversion option into equity up to 20% of the face value of the said privately placed debentures. The option would be exercisable by the trust immediately after the company accepts terms and conditions of the issue of the said debentures, subject to the approval of the Controller of Capital Issues.'

35. The UTI were prepared to place an advance deposit of Rs. 1 crore with the company.

36. On May 29, 1978, the company wrote to UTI that it was grateful for the offer of the term loan assistance of Rs. 1 crore contained in the letter dated May 19, 1978, for meeting the company's working capital requirements. The matter had been discussed by the company's board on May 24, 1978, and the board felt that '.... the offer may be accepted as an additional assistance instead of as an alternative to the consortium term loan ....' The letter went on to say :

'.... The committee of directors and the board of directors have earlier felt that a programme of modernisation/expansion/diversification should be drawn up and implemented to improve the long-term profit profile of the company. We would, therefore, seek your help for the first phase of the programme of modernisation in regard to the following :

Rs. lakhsRayon Plant - 8 spinning machines 120Bleaching machine 80Evaporation systems 25Miscellaneous 30--- 255ANHYDROUS SODIUM SULPHATE PLANT 100100 T. SULPHURIC ACID PLANT 100RECTIFIER SYSTEM CHANGES 25------MODERNISATION PROGRAMME COST 480-----(Brief note on each item is attached) The above figures are very tentative and detailed estimates are being worked out for placing before our board at its next meeting to be held on June 29, 1978. We may mention that out of the above items, we propose to take capital expenditure programme of approximately Rs. 3 crores in the first phase and would be grateful to have your concurrence that you would be able to give us the term loan through privately placed debentures on usual terms and conditions.'

37. On May 31, 1978, a note was prepared by UTI in respect of the letter dated May 29, 1978, received by it from the company for consideration at the Inter-Institutional Meeting (IIM) to be held on May 31, 1978. The note summarised the assistance required by the company as being Rs. 480 lakhs of which Rs. 300 lakhs were to be the capital expenses in the first phase for the proposed modernisation programme; the company had approached UTI for a term loan of Rs. 300 lakhs by way of privately placed debentures. UTI was prepared to provide Rs. 200 lakhs to the company for its modernisation programme by way of privately placed debentures on its normal terms and conditions for such assistance. In the meanwhile, it was suggested that ICICI as the lead institution would process the request of the company further. UTI proposed to exercise its right to convert Rs. 40 lakhs (20 per cent. of the proposed assistance) into shares with immediate effect, subject to the approval of the Government, at a premium of Rs. 60 per share of Rs. 100, paid up. If the other institutions wished to participate with UTI in sharing the assistance of Rs. 200 lakhs, the UTI would reduce its assistance to that extent. The note was accompanied by a flash report. The note and the flash report set out the 'very tentative' figures and brief facts mentioned in the company's letter dated May 29, 1978, and the note accompanying it.

38. On record in this suit is the informal summary record of the proceedings of the IIM held on May 31, 1978, in so far as it related to the company. It is stated therein that the proposal of UTI to sanction to the company an assistance of Rs. 200 lakhs contained in its note was discussed. It was observed that the company was yet to furnish firm figures regarding the proposed modernisation programme. The company was expected to show better results from 1978 onwards, and the modernisation scheme was a step in the right direction to improve the long-term profitability of the company, in which UTI had already a substantial stake. It was felt that UTI should extend assistance to the project and ICICI as the lead institution would take up the proposal for further processing for a sanction of the balance assistance required from the other institution. The consensus was that UTI should sanction the increased assistance of Rs. 300 lakhs and should exercise its conversion option to the extent of 20 per cent. during the period January 15, 1978, to June 14, 1980.

39. On June 1, 1978, UTI prepared a note for circulation to its executive committee. It recorded that UTI had circulated the note for consideration at IIM on May 31, 1978. It reproduced the figures contained in the company's letter dated May 19, 1978, and stated that the figures were tentative and detailed estimates were being worked out by the company. The institutions would carry out an appraisal of the modernisation programme and examine it further. The company had not furnished firm figures regarding the proposed modernisation scheme, its financial requirements, profitability estimates after the modernisation scheme, its financial requirements, profitability estimates after the modernisation scheme was implemented, etc. However, even on the basis of profitability estimates worked out by ICICI in December, 1977, without taking into account the modernisation scheme, the company's operations were likely to show an operating profit of Rs. 56 lakhs in 1978, rising to Rs. 224 lakhs by 1981, and the company was likely to pay dividends from 1979 onwards. It was agreed at the IIM that UTI should sanction assistance of Rs. 300 lakhs and other institutions would indicate their participation, if any, to UTI. It was also agreed that 'instead of telescoping conversion option', the period of conversion would be from June 15, 1978, to June 14, 1980, at the option of UTI. UTI would exercise its right to convert 20% of the proposed debenture loan into shares at a premium of Rs. 60 per share of Rs. 100 paid up, subject to government approval, during the period June 15, 1978, to June 14, 1980. In the meantime, ICICI as the lead institution would process the matter further. The members of UTI's executive committee were requested to approve the proposal for subscribing to the privately placed debentures up to Rs. 300 lakhs of the company and for placing an advance deposit of the equivalent amount with the company against UTI's commitment to subscribing to the privately placed debentures. The evidence of Atmaramani shows that 3 members of UTI's executive committee signed the circular resolution approving the proposal on June 1, 1978.

40. On June 1, 1978, UTI wrote to the company that it was agreeable in principle to provide the financial assistance, along with other institutions, of Rs. 300 lakhs for financing a part of the cost of the company's modernisation programme. The assistance would be in the form of subscription to the privately placed debentures and the amount of Rs. 300 lakhs would be reduced to the extent that other institutions indicated their willingness to participate. UTI's commitment to subscribe would be on the understanding and subject to the conditions set out in the letter. Clause (7) which related to the condition regarding conversion, reads thus :

'The company should agree to vest in Unit Trust of India and other financial institutions the option to acquire in lieu of conversion equity shares of Rs. 60 lakhs - the amount of Rs. 60 lakhs is 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 the Controller of Capital Issues. The period for conversion would be June 15, 1978, to June 14,1980. The company should approach the controller of Capital Issues/Government of India for necessary approval.'

41. In respect of what transpired between May 29, 1978, and June 1, 1978, there is some evidence on record, of Atmaramani, an officer of UTI, and of Shingal, an officer of ICICI. It does not contain much by way of facts. Some reference will be made to it when dealing with the contentions. I do not consider it necessary to set it out here.

42. On June 2, 1978, the company wrote to UTI in relation to the term loan assistance of Rs. 300 lakhs and the discussions with UTI's Chairman whereat it had learnt that its request had been favourably considered at the IIM of May 31, 1978. The letter recorded that UTI's Chairman had mentioned that the term loan would carry a right to subscribe shares of the company equivalent to 20% of the term loan at the rate of Rs. 160 per share during the period June 15, 1978, to June 14, 1980. The letter recorded that the proposal had been put up before the company's committee of directors and had been accepted by them, except for the share premium amount, and that the proposal would be put up before the board of directors on June 7, 1978. The letter, after mentioning several considerations, stated that it was felt that the share premium of Rs. 10 per share should be considered reasonable and asked UTI to agree. On June 6, 1978, the company wrote in reply to UTI's letter of intent of June 1, 1978. The letter stated that it required, inter alia, modifications of the clause dealing with the premium and reiterated that the premium should be Rs. 80 per share. The other modifications were trivial.

43. On June 6, 1978, UTI wrote to the company in respect of the assistance of Rs. 50 lakhs for the nylon tyre cord project. The letter advised that, in terms of cl. 8 of the letter of intent dated June 17, 1978, UTI will have the option to acquire, in lieu of the conversion, equity shares of Rs. 10 lakhs at the premium of Rs. 60 per share. The period for 'conversion/acquiring shares' would be June 15, 1978, to June 14, 1980. The letter went on to say :

'... In pursuance of the above, we hereby give notice of our intention to acquire with effect from June 15, 1978, in lieu of conversion, fully paid up equity shares of your company of a total amount of Rs. 10 lakhs ....'

44. Such equity shares were required to be registered in the name of UTI 'immediately on allotment, i.e., from June 15, 1978'. Since UTI had already advanced Rs. 50 lakhs as a deposit, the amount of Rs. 10 lakhs there out should be adjusted as application money for allotment to UTI of the shares in lieu of the conversion with effect from June 15, 1978. It was clearly understood that, after acquiring shares for Rs. 10 lakhs, UTI's commitment to subscribe to the debentures would stand reduced to Rs. 40 lakhs and the company should get the debenture trust deed executed for the amount of Rs. 40 lakhs and should allot debentures of the face value of Rs. 40 lakhs to UTI. The company was asked to confirm that it would be allotting to UTI the shares in lieu of the conversion as stipulated by UTI.

45. On June 8, 1978, ICICI wrote to the company saying that it was prepared to subscribe to the debentures of the value of Rs. 50 lakhs out of the total amount of Rs. 300 lakhs. The terms and conditions stated, inter alia, that ICICI would have the option to convert debentures of Rs. 10 lakhs into shares during the period June 15, 1978, to June 14, 1980.

46. On June 8, 1978, UTI wrote a letter to the company. It is necessary to reproduce it in extenso.

'Dear Sir,

Financial assistance for the company's modernisation programme.

Please refer to our letter No. UT-14973/RS (N-14) 78 dated June 1, 1978, agreeing in principle to provide to your company financial assistance of Rs. 300 lakhs jointly with other financial institutions in connection, with the company's modernisation programme. In terms of clause (7) of the above letter, the Trust has the right to acquire, in lieu of conversion, fully paid-up equity shares of the company of Rs. 60 lakhs (which is equivalent to 20 per cent. of the debentures agreed to be subscribed by the Trust) at any time during the period June 15,1978, to June 14,1980. The amount of 60 lakhs is inclusive of a premium amount of Rs. 22.50 lakhs (i.e., premium of Rs. 60 per share of Rs. 100) or such premium as may be approved by the Controller of Capital Issues.

In pursuance of the said clause, we hereby give notice of our intention to acquire with effect from June 15,1978, fully paid up equity shares of your company of a total amount of Rs. 60 lakhs (including premium amount of Rs. 22.50 lakhs, i.e., Rs. 60 per share of Rs. 100 or such premium as may be approved by CCI) against payment by us of an amount of Rs. 60 lakhs.

We agree to accept the above equity shares to be issued by the company pursuant hereto subject to the provision of the memorandum and articles of association of the company.

We advise that such equity shares are required to be registered in the name of the Unit Trust of India immediately on allotment, i.e., from June 15,1978, and you are hereby authorised to enter our name in the register of members in respect thereof. These shares will rank pari passu in all respects with the existing equity shares of the company except that for the year in which these are issued, these will be entitled for pro rata dividend from the date of allotment.

Please take steps to complete the necessary formalities in this regard and arrange to issue and allot the equity shares to the Trust at the earlist.

It is clearly understood that, after acquiring equity shares of the company of a total amount Rs. 60 lakhs, our commitment to subscribe to the privately placed debentures will stand reduced to Rs. 240 lakhs. This commitment of Rs. 240 lakhs will stand reduced further to the extent of participation in the assistance to the company to be indicated by other financial institutions. Out of the equity shares to be acquired by the trust in lieu of conversion, the trust would transfer part to other financial institutions, pro rata to their shares of assistance to the company.

Please acknowledge receipt and confirm that the company would be allotting to the Trust equity shares in lieu of conversion as stipulated above.

Yours faithfully,'

On June 15, 1978, ICICI wrote to the company a letter relating to the rupee loan of Rs. 58 lakhs. The letter stipulated that ICICI would have the option to convert Rs. 11.60 lakhs out of the loan of Rs. 58 lakhs into shares of the company during the period June 15,1978, to June 14,1980, at the rate of Rs. 160 per share. On 20th June, 1978, GIC wrote to the UTI that its board had approved the subscription by it and its subsidiaries to the debentures of the extent of Rs. 50 lakhs; since UTI had agreed to subscribe to debentures of the value of Rs. 300 lakhs, to be reduced to the extent subscribed for by ICICI and GIC and its subsidiaries, GIC enclosed a letter addressed by it on June 19,1978, to the company agreeing in principle to so subscribe and authorised UTI to release the said letter to the company at an appropriate time. On June 2,1978, UTI wrote to GIC to state that GIC's letter addressed to the company had been delivered and necessary action regarding conversion of shares would be taken up shortly.

On June 20, 1978, the Controller of Capital Issue wrote to the company consenting to the issue of '51,000 equity shares of Rs. 100 each at the premium of Rs. 60 per share, credited as fully paid up, to ICICI and UTI in conversion of a part of their loan/debentures to the extent of Rs. 81,60,000 (including the premium) out of the loan/debentures sanctioned to the company'.

47. On June 23, 1978, the CLB wrote to the company in respect of the application made by the company under s. 81(3) of the Companies Act for the approval of the raising of convertible debentures. The letter stated that it was observed from UTI's letter of June 6, 1978, that UTI had already given notice for exercising its option to convert an amount of Rs. 10 lakhs out of the total advance deposit of Rs. 50 lakhs against UTI's commitment to subscribe to the proposed privately placed debentures issue and that UTI's commitment to subscribe to the debentures would thereafter stand reduced to Rs. 40 lakhs. The CLB requested the company to clarify whether the company had already issued the debentures to UTI for Rs. 10 lakhs. In case the debentures had not been issued, it was not clear to the CLB how UTI could exercise its option for the conversion of the debentures into equity shares. The company was also required to indicate whether the company had issued any shares to UTI in conversion. On July 6, 1978, the company replied to the CLB. It stated that the company had negotiated for a term loan of Rs. 58 lakhs from ICICI and Rs. 50 lakhs from UTI by privately placed debentures to meet a part of the scheme to complete the nylon tyre cord project, for completing essential maintenance, etc. The company had received Rs. 40 lakhs from out of Rs. 48 lakhs term loan as bridging finance from ICICI and Rs. 50 lakhs from UTI as advance deposit. The company had not acquire with effect from June 15, 1978, in lieu of the conversion, fully placed debentures for a total amount of Rs. 10 lakhs. The company had not issued any shares to UTI in conversion of the debentures.

48. On August 17, 1978, the CLB informed the company that it approved the raising of a convertible loan of Rs. 11.60 lakhs out of the total loan of Rs. 58 lakhs from ICICI. The loan would be convertible into equity shares at the rate Rs. 160 per share during the period June 15, 1978, to June 14, 1980. On the same day, i.e., August 17, 1978, the CLB informed the company that it approved the issue of convertible debentures of the value of Rs. 70 lakhs out of the total debentures of the value of Rs. 350 lakhs to be issued to UTI. The debentures would be convertible into equity shares at the rate of Rs. 160 per share during the period June 15, 1978, to June 14, 1980. On September 4, 1978, the company wrote to the CLB stating that other institutions had agreed to participate in the financial assistance agreed to be provided by UTI thus : ICICI in the sum of Rs. 50 lakhs, GIC and its subsidiaries in the sum of Rs. 50 lakhs and the balance would be provided by UTI. The letter requested that the CLB's letter of approval of August 17, 1978, be amended to include ICICI, GIC and its subsidiaries.

49. On October 5, 1978, the Controller of Capital Issues wrote to the company that the words 'ICICI and UTI' in the consent order of June 20, 1978, should be substituted by the words, 'ICICI, UTI, GIC and its subsidiaries'. On October 5, 1978, the Controller of Capital Issues wrote to the company regarding the company's request to increase the amount of premium from Rs. 60 to Rs. 80 per share. The letter stated that the Government had considered the matter in the light of the company's representation but regretted its inability to accede to it.

50. On October 16, 1978, GIC wrote to the company stating its intention to subscribe, along with its subsidiaries, to debentures worth Rs. 50 lakhs out of the total debentures issue of Rs. 300 lakhs. The letter stated the terms and conditions upon which the sanction would be subject to. Cl. 4 required the company to agree to vest in GIC and its subsidiaries the option to acquire, in lieu of conversion, shares of Rs. 10 lakhs, the period of conversion being June 15, 1978, to June 14, 1980. The subsidiaries also sent such letters of intent.

51. On October 18, 1978, the company sent to an officer in the projects dept. of ICICI a copy of the modernisation programme. It is the evidence of Singhal, chief of the projects dept. of the ICICI, that in making the detailed appraisal or assessment of the company's modernisation programme, his department proceeded upon the basis of this document.

52. On December 1, 1978, the CLB wrote to the company conveying its approval to the issue of convertible debentures of the value od Rs. 50 lakhs to GIC and its subsidiaries, the conversion to be at the rate of Rs. 160 per share during the period June 15, 1978, to June 14, 1980. On December 6, 1978, the company wrote to the CLB and asked for an amendement of the letter of approval so as to include the name of ICICI for the issue of convertible debentures of the value of Rs. 10 lakhs out of the total debentures of the value of Rs. 50 lakhs to be issued to it. On January 5, 1979, the CLB wrote to the company and stated that all the 51,000 shares by the conversion of debentures had already been covered by the approvals of the CLB issued in respect of loan/debentures of ICICI and UTI. On January 9, 1979, the company wrote to the CLB a long letter clarifying the entire position and asked the CLB to suitably amend the letter of approval to approve the issue of convertible debentures of the value of Rs. 70 lakhs out of the total debentures of the value of Rs. 300 lakhs in respect of UTI, ICICI, GIC and its subsidiaries for the amounts mentioned therein.

53. On January 24, 1979, the Controller of Capital Issues intimated to the company that the entry in the consent order of June 20, 1978, should be substituted to read as follows :

'51,000 equity shares of Rs. 100 each at a premium of Rs. 60 per share credited as fully paid up to the financial institutions in conversion of a part of their loan/debentures into equity shares of the company to the extent of Rs. 81,60,000 (inclusive of the premium out of the loans/debentures aggregating Rs. 408 lakhs sanctioned, in the following manner :

-----------------------------------------------------------------------Loans/debentures No. of shares Value of sharesanctioned to be alloted including premiumof Rs. 60 per share-----------------------------------------------------------------------Rs. Rs.CICI 108,00,000 13,500 21,60,000UTI 250,00,000 31,250 50,00,000GIC andits subsidiaries 50,00,000 6,250 10,00,000-----------------------------------------------------------------------408,00,000 51,000 81,60,000'----------------------------------------------------------------------- On February 6, 1979, the CLB wrote to the company a letter approving the issue of convertible debentures of Rs. 50 lakhs out of total debentures of the value of Rs. 250 lakhs to be issued to UTI, convertible at Rs. 160 per share during the period June 15, 1978, to June 14, 1980. A similar letter approved the issue of convertible debentures of the value of Rs. 50 lakhs to be issued to the ICICI.

On April 7, 1979, M/s. Amarchand & Mangaldas & Hiralal Shroff & Co., the common attorneys for the institutions and the company, wrote to the institutions, the company and the debenture trustee with reference to the previous correspondence and a joint meeting and enclosed therewith a note of the discussion thereat. One of the items discussed was that the sanction granted under s. 81 so as to clearly specify that the convertible debentures would be to the extent of Rs. 350 lakhs in the aggregate and not only Rs. 70 lakhs. Another item discussed was that the company would take expeditions steps for the creation of securities to secure the debentures and the ICICI terms loan as the institutions' were anxious to complete the transaction latest by May 30, 1979'.

54. On April 25, 1979, ICICI wrote to the CLB with reference to the orders issued regarding the conversion of debentures. The letter stated that since the company would be actually issuing to ICICI convertible debentures of the value of Rs. 50 lakhs out of which debentures of the value not exceeding Rs. 10 lakhs would be convertible at ICICI's option, ICICI presumed that the order dated February 6, 1979, enabled the company to do so. Similar letters were written by UTI and GIC. On May 14, 1979, the CLB wrote to ICICI to say that in the approval letter of February 6, 1979 '.... it has been clearly stated that the debentures of the value of Rs. 10 lakhs will be convertible into equity shares at a rate of Rs. 160 per share ... during the period June 15, 1978, to June 14, 1980'. Similar letters were also written to the other institutions.

55. On April 26, 1979, the company issued notice of the AGM to be held on June 28, 1979.

56. Around April, 1979, the company's nylon tyre cord project, phase II, was completed.

57. It appears that on May 7, 1979, the permission of the competent authority under the provision of the Urban Land (Ceiling & Regulation) Act, 1976, was obtained to mortgage the company's lands to create a security for the debentures.

58. On May 18, 1979, ICICI wrote to the company enclosing a draft of the resolutions required to be passed in connection with the execution of the debenture trust deed, allotment of debentures, etc. On May 24, 1979, a meeting of the board of directors of the company passed the appropriate resolutions. One of the resolutions passed, it is common ground, authorised four directors to finalise, settled and incorporate necessary modifications and changes in the draft debenture trust deed and other documents.

59. On May 29, 1979, the common attorneys wrote to the institutions, the company, the debenture trustee and its attorneys stating that the transaction relating to the privately placed debentures of the company for Rs. 350 lakhs and the term loan of Rs. 58 lakhs sanctioned by ICICI was scheduled for completion at the office of ICICI at 2.45 p.m. on May 31, 1979. For ready reference, the attorneys, enclosed a short note on the points for completion of the transaction. Item 1 of the note stated that the company had to furnish to each of the debentureholders, the debenture trustee and attorneys, certified copies of the board resolutions passed by the directors in connection with, inter alia, the acceptance of notices of conversions, entering into of contracts under s. 75 of the Companies Act, issue of equity shares upon conversion and other related matters. Item 3 refered to the execution of the debenture trust deed and the affixing thereon of the company's seal. Item 8 stated that UTI and ICICI would issue letter of adjustment in respect of the advances made by them towards the debentures subscription and also issue cheques for the balance amount and apply for subscription of the debentures. Item 9 stated that GIC and its subsidiaries would also apply for subscription and issue requisite cheques for the value of debentures to be subscribed for by them. Item 10 stated that the company would issue letters of allotment of debentures to the debentureholders. Item 11 stated that after the letters of allotment were received the debentureholders would issue notices of conversion to the company would issue letter of allotment of shares and also execute contracts in respect of the shares to be allotted under s. 75 of the Companies Act. Item 13 stated that the company would issue shares certificates for the converted amount to the debentureholders. In respect of ICICI's term loan of Rs. 58 lakhs a similar programme was chalked out.

60. On May 30, 1979, the common attorneys wrote to the company enclosing a draft of the letter of allotment of the convertible debentures to be issued to ICICI and a draft of the letter of allotment for shares to be issued to ICICI upon conversion. The company was requested to finalise the drafts with ICICI and arrange to issue similar letters of allotment to UTI, GIC and its subsidiaries. The letter asked that the company do ensure that the letters of allotment were duly stamped before issue thereof.

61. What transpired at the meeting of May 31, 1979, has not been made the subject-matter of any evidence, oral or documentary, tendered by the defendants. Some of the documents executed and/or exchanged at that meeting are on record and some are not.

62. The debenture trust deed executed at the meeting of May, 31, 1979, is on record. It is made between the company and the Bank of Baroda as debenture trusteed. It recites that the company was installing equipment to convert nylon tyre yarn into fabric and that it had taken up a scheme to modernise its rayon textile and caustic soda plants and to increase the capacity in its anhydrous sodium sulphate plant. With a view to finance the cost of this project UTI, ICICI, GIC and its 4 subsidiaries had agreed to subscribe for privately placed debentures of the nominal value of Rs. 250 lakhs, Rs. 50 lakhs and Rs. 50 lakhs respectively. (It will be seen that UTI's agreement to provide the loan of Rs. 50 lakhs for the nylon tyre cord project, phase II, is included in the sum of Rs. 250 lakhs mentioned in respect of UTI). By letters dated January 17, 1978, and June 1, 1978, issued by the UTI and accepted by the company, referred to as the 'UTI loan agreements', UTI had agreed to subscribe for privately placed debentures of the nominal value of Rs. 250 lakhs upon the terms and conditions therein mentioned. The loan agreements with the other institutions are also recited. The requisite resolutions passed by the company's board are recited. Reference is also made to the consents or permissions received from the various authorities. The last recital states that the debentures trustee had, at the request of the company, 'consented to act as trustees of these presents and for the benefit of the debentureholders on the terms and conditions hereinafter appearing'.

63. Clause 1 of the debenture trust deed defines the 'debentures' to mean 'the debentures of the company issued under these presents ... in accordance with forms set out in Part I to VII respectively of the Fifth Schedule hereunder written under the provisions of and secured by these presents ...' The 'debenture holders' are defined to mean 'the holders for the time being of the debentures so issued ... on the conditions endorsed on the debentures ...' Under cl. 2, the debentures 'issued hereunder and which are entitled to the benefit of these presents' are 35,000 11% convertible debentures of the nominal amount of Rs. 1,000 each and comprised of 25,000 series 'A' debentures, 5,000 series 'B' debentures, 1,000 debentures each of series C, D, E, F and G, all carrying interest at the rate of 11% per annum and in the forms set out in Pts. I to VII of the Fifth Schedule therein written. Clause 2 contains the covenant to repay and sets out the redemption instalments. It provides that if for any reason the amount of subscription to the debentures of any series was less than the total amount, the relative redemption instalments would send reduced pro rata.

64. Clause 4 contains the right of conversion. Sub-clause (a) deals with the right of conversion of UTI. The subsequent sub-clauses deal with the rights of conversion of the other institutions and are in identical terms. Sub-clause (a) 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. 60 per share of a face value of Rs. 100 each 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 prorate 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'.

65. Under cl. 5, the principal moneys secured under the debentures trust deed is limited to the sum of Rs. 3,50,00,000.

66. Under sub-cl. (h) of cl. 15 if the company failed to observer or perform any covenants, conditions of provisions therein contained or in the loan agreements the debentures would be deemed to have forthwith become due and payable and the security to have become unenforceable.

67. Clause 23 reads as follows :

'In the event of any of the debentures being converted into equity shares pursuant to the option in that behalf reserved to the debentureholders as provided in these presents, the debenture-holders shall surrender such debentures to be so converted to the company within thirty days from the date of notice exercising such option for the purpose of necessary memorandum to be made by the company thereon indicating the cancellation or extinguishment of each of such debentures and the conversion into fully paid up equity shares as aforesaid.'

68. Under cl. 34, the company is required to maintain at its registered office a register of the debentureholders showing, inter alia, the name and address of each holders, the nominal amounts of the debentures held by him, the date on which he ceased to be a debentureholder and subsequent transfers and changes of ownership. Under sub-cl. (B)of cl. 34, the company was required to issue in the first instance, within a period of three months from the date of allotment, to each debentureholders, free of charge, a debenture certificate in respect of his holding showing on the face thereof the denomination, number and the amount of debentures. Under sub-cl. (C) of cl. 36, the company was obliged to duly observe and perform all the terms and conditions contained in the loan agreements and not to commit any breach or default thereof.

69. The Fifth Schedule of the debentures trust deed sets out the form of debentures to be issued to the institutions. Part I relates to the series A debentures to be issued to UTI. Clause 5 thereof sets out the mode and form in which the debentureholders are required to exercise their right of conversion. Sub-clause (i) of cl. 5 is reproduced :

'UTI as the registered holder of the series 'A' debentures of the aggregate nominal value of Rs. 250,00,000 (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 months given either before or during the said period of conversion and delivered at the registered office of the company accompanied by the relative debentures 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 the 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 shares and to require the company to apply the nominal value of such converted series 'A' debentures in fully 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 said up and ranking for dividend from the date of allotment of such equity shares and pay to UTI interest in respect of such converted series 'A' debentures up to the date of allotment aforesaid.'

70. In respect of each series of the debentures the provisions of mode and form of conversion is identical.

71. The letter of subscription for the debentures issued by UTI to the company is on record. It is date May 31, 1979, and it is signed by the witness, Atmaramani. It stated that UTI thereby subscribed to debentures of the aggregate nominal value of Rs. 2.5 crores by adjustment of the advance deposit of Rs. 75 lakhs placed with the company and subscription of Rs. 175 lakhs by cheque. (Rs. 50 lakhs were deposited by UTI with the company in respect of the loan of Rs. 50 lakhs for the nylon project, phase II, and Rs. 25 lakhs were advanced earlier in 1979 out of the proposed loan by UTI of Rs. 200 lakhs for the modernisation programme). The letter requested the issue of the letter of allotment of debentures and stated that UTI would be entering into a separate contract with the company for the allotment of equity shares on exercise of UTI's option for conversion. The cheque is on record and has been deposed to by Atmaramani.

72. The letters of allotment of debentures are not on record.

73. The notices of conversion given by the institutions to the company are on record. The notice of conversion issued by UTI may be reproduced in full :

'Dear sirs,

Re : Subscription to convertible debentures of Rs. 2.50crores option of conversion-exercise of. Pursuant to our application for subscription in respect of 25,000 convertible debentures of Rs. 1,000 each of the aggregate face value of Rs. 2,50,00,000 (Rupees two crores fifty lakhs only) on the 31st day of May, 1979, accompanied by the remittances of the unsubscribed portion being Rs. 175 lakhs and by way of an adjustment against the advance deposit being Rs. 75 lakhs your company has agreed to issue a letter of allotment whereby you would be allotting to us 25,000 convertible debentures of Rs. 1,000 each of your company.

Pursuant to the letter of intent No. UT/9578/RS (N-14) 77-78, dated 17the January, 1978, and further letter No. UT/14973/RS (N-14) 78, dated 1st June, 1978, and accepted by the company all of which represent the loan agreement, and in terms of cl. 4(a) of the debentures trust deed dated the 31st day of May, 1979, made between the company and Bank of Baroda as Trustees, the Unit Trust of India as debenture holders of series 'A' debentures is entitled to call for allotment 31,250 fully paid up equity shares of Rs. 100 each of the company of the aggregate nominal face value of Rs. 31,25,000 (Rupees thirty one lakhs twenty five thousand only) at a premium of Rs. 60 per share on conversion of 5,000 convertible debentures of the aggregate nominal value of Rs. 50,00,000 (Rupees fifty lakhs only) and to require your company to apply the aggregate nominal value of the said 5,000 debentures in full payment of the said equity shares.

We hereby give notice to convert with immediate effect the said 5,000 convertible debentures in series 'A' of the aggregate nominal value of Rs. 50,00,000 (Rupees fifty lakhs only) into 31,250 fully paid up equity shares of Rs. 100 each of the company at a premium of Rs. 60 per share as per the aforesaid loan agreement and the provisions of the said debenture trust deed.

We have also agreed to waive the notice period and have confirmed that against the surrender of the said letter of allotment to the extent of 5,000 debentures you will issue 31,250 fully paid up equity shares to us and issue a letter of allotment for the balance of 20,000 debentures of the nominal value of Rs. 100 each and of the aggregate nominal value of Rs. 2,00,00,000 (Rupees two crores only). We accept the said 31,250 fully paid up equity shares of the company being issued pursuant and subject to the memorandum and articles of association of the company. We desire that the said 31,250 fully paid up equity shares be registered in our name and hereby authorise the entry of our name in the register of members in respect thereof. We would also request you to issue a modified letter of allotment for the remaining 20,000 debentures or have the necessary surrender to the extent of 5,000 debentures endorsed on the original letter of allotment.

Yours faithfully,

Sd.

(K. N. Atmaramani)

Joint Director

Investment Division.'

74. Atmaramani deposed that at the end of May, 1979, he was instructed by UTI's legal dept. to keep an amount of Rs. 175 lakhs ready for subscription towards the debentures of the company, for, he was told that it was likely that on 31st May, 1979, or 1st June, 1979, the company would execute the debenture trust deed and other documents. In cross-examination he stated that he had been instructed by Shankar, of UTI's legal dept., to keep this money ready for subscription towards the debentures three or four days before 31st May, 1979, and that this was the first time he had been so told. On 30th May, 1979, he had send a note instruction UTI's accounts dept. to keep the moneys ready on 1st June, 1979, for, he had been told that that was the day on which the company would execute the document. The note is on record. It required that he should be sent the cheque by 4-00 p.m. on 31st May, 1979, but he deposed that he called for it after lunch on 31st May, 1979. He was not present at the meeting of 31st May, 1979, but had handed over the letter of subscription to the debentures, the cheque and the notice of conversion, all signed by him, to Poojara, one of UTI's officers.

75. On 5th June, 1979, shares pursuant to the conversions were allotted to the institutions.

76. Plaintiff's Counsel's statement

77. Before I proceed to discuss the contentions that were pressed, I must record a statement made by Mr. Cooper, learned counsel for the plaintiffs. Mr. Cooper stated that 'for the purpose of this suit only -

(a) the plaintiffs will not contest that the debenture trust deed dated 31st May, 1979, was void.

(b) the plaintiffs will not rely on any allegation regarding the conduct of the adjourned 33rd annual general meeting or any contention based thereon, as the 1st plaintiff and another have filed a separate suit in respect thereof.

(c) the plaintiffs are not making or relying on any allegation against the Controller of Capital Issues or the Company Law Board.

(d) the plaintiffs will not rely on the grounds alleged in paras. 73(a), 73(b) and 73(c) of the plaint, save and except the submissions, viz :

(1) The issue in reality was an issue of shares by allotment and of debentures, but was deliberately termed as an issue of debentures.

(2) The alleged option was such as to be exercisable simultaneously with the issue of debentures and was a mere cloak to obviate falling within the clutches of ss. 81(1)(a) and 81(1A) of the Companies Act, and

(3) The directors could not by such means defeat and set at nought the provisions of s. 81(1)(a) or s. 81(1A) of the Companies Act.

(e) the plaintiffs will not rely on the submission made in para. 73(e) to the extent that the whole issue of the debentures was ultra vires the company and ultra vires the powers of the board of directors.

(f) the plaintiffs will not contend that the whole issue of debentures is null and void on the ground alleged in para. 73(f) of the plaint.'

78. The rule in Fose v. Harbottle [1843]2 Hare 461 :

The rule in Foss v. Harbottle [1843] 2 Hare 461 was invoked by the defendants. It was first enunciated in the case of Foss v. Harbottle but was explained more lucidly in later cases.

79. In MacDougall v. Gardiner [1875] 1 Ch.D. 13 , Mellish L.J. explained the rule in terms which have become a classic (p. 25) :

'In my opinion, if the thing complained of is a thing which in substance the majority of the company are entitled to do, or if something has been done irregularly which the majority of the company are entitled to do regularly, or if something has been done illegally which the majority of the company are entitled to do regularly, or if something has been done illegally which the majority of the company are entitled to do legally, there can be no use in having a litigation about it, the ultimate end of which is only that a meeting has to be called, and then ultimately the majority gets its wishes. Is it not better that the rule should be adhered to that if it is a thing which the majority are the masters of, the majority in substance shall be entitled to have their will followed If it is a matter of that nature, it only comes to this, that the majority are the only persons who can complain that a thing which they are entitled to do has been done irregularly; and that, as I understand it, is what has been decided by the cases of Mozley v. Alston [1847] 1 Ph 790 and Foss v. Harbottle [1843] 2 Hare 461.'

80. In Burland v. Earle [1902] AC 83, the Privy Council said that it was an elementary principle of the law relating to joint stock companies that the court would not interfere with the internal management of companies acting within their powers, and in fact had no jurisdiction to do so. Again, it was clear law that in order to redress a wrong done to the company or to recover moneys or damages alleged to be due to the company, the action should prima facie be brought by the company itself.

81. In Edwards v. Halliwell [1950] 2 ALL ER 1064, Jenkins L.J. said (at p. 1066) :

'The rule in Foss v. Harbottle [1843] 2 Hare 461, as I understand it, comes to no more than this. First, the proper plaintiff in an action in respect of a wrong alleged to be done to a company or association of persons is prima facie the company or the association of persons itself. Secondly, where the alleged wrong is a transaction which might be made binding on the company or association and on all its members by a simple majority of the members, no individual member of the company is allowed to maintain an action in respect of that matter for the simple reason that, if a mere majority of the members of the company association is in favour of what has been done, then cadit quaestio. No wrong had been done to the company or association and there is nothing in respect of which anyone can sue. If, on the other hand, a simple majority of members of the company or association is against what has been done, then there is no valid reason why the company or association itself should not sue. In my judgment, it is implicit in the rule that the matter relied on an constituting the cause of action should be a cause of action properly belonging to the general body of corporators or members of the company or association as opposed to a cause of action which some individual member can assert in his own right.'

82. Halsbury's Laws of England, Fourth Edn., Vol. 7, para. 713, puts it thus :

'The court has no jurisdiction to interfere with the internal management of a company acting within its powers. To redress a wrong done to the company or to recover money or damages due to it the action must prima facie be brought by the company itself, if the matter constituting the cause of action is a cause of action properly belonging to the company or the general body of members.'

83. Counsel for the defendants urged that since upon rectification the plaintiffs' names were not sought to be substituted in the company's register of shares for the names of the institutions in respect of the shares in suit, the suit was not for the redress of a wrong done to the plaintiffs in an individual capacity but for the redress of a wrong done to the company. In their submission, this was a case to which the rule in Foss v. Harbottle [1843] 2 Hare 461 applied and the suit, having been filed by the plaintiffs in an individual capacity, was not maintainable or, at any rate, the plaintiffs were not entitled to relief therein.

84. It was contended by Mr. Cooper, learned counsel for the plaintiffs, that the right to rectify the shares register of a company was the individual right of each of its shareholders. Each shareholder was entitled to have the register reflect the true position and to take action to ensure that it did. In Mr. Cooper's submission, the shareholder's right to vote, his right to a share in the company's profits and his right to acquire new shares in the company depended upon the entries in the company's share register. In this submission, the individual shareholder's right to rectify the company's share register was recognised by s. 155 of the Companies Act. Reference was made in this context to an unreported judgement of a Division Bench of this court in Appeal No. 344 of 1981 in Company Application No. 196 of 1981, in Company Petition No. 196 of 1981, delivered on 9th September, 1981 - since reported as Killick Nixon Ltd. v. Dhanraj Mills Pvt. Ltd. . It was there contended that only a person aggrieved by an incorrect or wrong entry in the share register was entitled to file a petition under s. 155 for a rectification of the register. It was contended that the expression 'any member' in that section meant only a member who was aggrieved or who was in a position to show that some prejudice or wrong was caused to him. The court declined to accept the submission and held that any member was entitled to apply for a rectification under s. 155 without being compelled to show that he was aggrieved or any prejudice had been caused to him.

85. Counsel for the defendants submitted that this judgment, though of a Division Bench of this court, was not binding because it was delivered in an appeal from an interlocutory application. I decline to go into the question; assuming it to be only persuasive value, I am entirely in agreement with the reasoning.

86. Reference was made by counsel for the defendants to the judgment of this court in Rao Saheb Manilal Gangaram Sindore v. Western India Theatres Ltd. : AIR1963Bom40 . That was a suit for rectification of the share register of a company. The value of the shares which were the subject-matter of the suit was stated in the plaint to be Rs. 1,200 and the interim relief sought was valued at Rs. 100. A preliminary objection was taken that the court had no pecuniary jurisdiction to entertain the suit. It was held that for the relief contemplated by s. 155 a suit was the primary remedy under the general law. The relief contemplated by that section was one which was available at common law. Section 155 merely provided a summary remedy. Its object was not to whittle down or abrogate the procedure by way of a suit for getting the relief contemplated by section. A long line of judicial decisions recognised that the court was not bound to give relief under s. 155 if it was found that complicated questions of fact were involved but had the power to direct the party concerned to file a proper action in a civil court. When this court entertained a petition under s. 155 it was exercising jurisdiction under the Companies Act but in the case of a suit, the jurisdiction that was exercised was the ordinary original civil jurisdiction, which was entirely different. In exercising the latter jurisdiction, the court was bound to see whether the suit was filed within the scope of its pecuniary jurisdiction. The suit, which was valued at Rs. 1,300, was, therefore, dismissed.

87. Counsel for the defendants relied upon this judgment to submit that different considerations applied to a petition under s. 155 and to a suit for the same relief. Mr. Cooper relied upon the judgment to submit that the relief of rectification was a relief available at common law.

88. Reference was also made to the judgment in T. A. K. Mohideen Pichai Taraganar v. Tinnevelly Millys Co. Ltd. : AIR1928Mad571 . The court held that the true and correct view to take would be that the Companies Act merely legislated for or regulated rights recognised under the common law; this observation was made in the context of s. 38 of the Indian Companies Act, 1913, which provided for a rectification of the share register.

89. In my view, every shareholder of a company has an individual right and interest in seeing that the share register of the company reflects the true position. Upon the share register rests each shareholder's right to receive his due share of the company's profits by way of dividend, his right to exercise his vote and to have it correctly assessed as against the votes of other rightful shareholders, and his right to acquire new shares in the company pro rata with other rightful shareholders. An entry in the register which is bad or illegal affects these rights of the individual shareholder. He is thereby prejudiced and aggrieved.

90. The right to rectify was recognised at common law and was translated into the statutes, English and Indian. (The provisions of s. 116 of the English Companies Act, 1948, provide to any member of the company the right to apply for a rectification of the company's share register). The statutes do not create any new right in the member.

91. In England, as in most High Courts in India, it is recognised that the procedure of rectification made available by the Companies Act is a summary procedure and that the petitioner may, in the court's discretion, if the matter be a complex one, be referred to a suit. It would be anomalous if a shareholder, who can maintain a petition under s. 155 of the Indian Companies Act or s. 116 of the English Act, is directed to file a suit because the matter is complex, and is then told that he is not entitled to maintain the suit because he is not a person aggrieved.

92. In the view that I take, this suit is maintainable.

93. It is needless to add that where the suit is filed by the shareholder in an individual capacity it need not be in the representative form, but it may be. (See Gower's Principles of Modern Company Law, fourth edn., p. 655 and Gore-Browne on Companies, 43rd edn., para. 28.8).

94. Reduction of capital

95. It was urged by counsel for the defendants as a point of maintainability that the suit involved a reduction of the company's capital and that the reduction of company's capital could only be achieved by following the procedure laid down in ss. 100 to 105 of the Companies Act. This argument need not detain me long. If the court holds that the issue of the shares in suit is invalid, it is as if the shares were never issued and no question arises of reduction of the share capital or of following the provisions of the Companies Act to reduce it. That must necessarily be consequential upon the order in the suit.

96. Rectification of debenture register

97. Counsel for the defendants contended that the relief sought involved the rectification of the company's debenture register; this had not been expressly sought, nor could it be sought, for, the debenture trustee, a necessary party, was not impleaded. If the court comes to the finding that issue of the shares in suit is bad and restores the institutions to the position of being debenture holders, rectification of the debenture register will be a necessary consequence of the order. It need not be prayed for nor is it requisite that the debenture trustee be heard in that regard.

98. Debenture trustee a necessary party

99. It was urged, first, that the debenture trustee was a necessary party upon the averments in the plaint, notwithstanding the fact that the plaintiffs had given up the contentions that made the debenture trustee a necessary party. I cannot agree, that, though no contention is urged regarding which it is requisite to hear the debenture trustee, by reason of the frame of the suit, it must be held to be bad for non-joinder.

100. Secondly, it was urged that if the institutions were restored to the position of being debenture holders the debenture trustee would hold the same security for a larger number of debenture holders than heretofore and that, therefore, the debenture trustee is a necessary party. That does not, in my view, make the debenture trustee a party that ought to have been impleaded.

101. Article 18 of the articles of association

102. Mr. Cooper argued that no option could be given to any person to call for share unless the company in general meeting had so resolved and he relied for this purposes upon art. 18 of the company's articles of association; the general body having passed no such resolution before the shares were allotted to the institutions, the allotment of the shares was bad.

103. Article 18 reads thus :

'In addition to and without derogating from the powers under article 15, the company in general meeting may determine that any shares (whether forming part of the original capital or of any increased capital of the company) shall be offered to such persons (whether members or not) in such proportion and on such terms and conditions and either at a premium or at par or (subject to compliance with the provisions of section 79 of the Act) at a discount as such general meeting shall determine and with full power to give any person the option to call for or be allotted shares of any class of the company either at premium or at par or (subject to compliance with the provisions of section 79 of the Act) at a discount such option being exercisable at such times and for such consideration as may be directed by such general meeting; or the company in general meeting may make any other provision whatsoever for the issue, allotment or disposal of any such shares.'

104. As I analyse the material portion of the article, it provides this :

The company in general meeting may determine that any shares shall be offered to such persons (whether members of not)

in such proportion and on such terms and conditions and either at a premium or at par or at a discount as such general meeting shall determine.

and with full power to give any person the option to call for and be allotted shares ...

So analysed, it is clear that the article is applicable only to the issue of shares and to an option contained in the share issued to call for further shares. It has no application to an option to call for shares contained in debentures.

Option not exercised in respect of convertible debentures

Mr. Cooper relied upon cls. 4 and 23 of the debenture trust deed and cl. 5 of the form of debentures in the Fifth Schedule to the debenture trust deed and submitted that the debenture certificates in respect of which the option of conversion was exercised had to be sent to the company along with the notice of conversion. It was submitted that it was imperative that such debentures as were being converted should be identified, for, all debentures were called convertible but what really made them convertible was the fact of their being sent to the company. This being, in his submission, a matter of substance not of form, there could be no waiver of that which made the debentures convertible.

Clauses 4 and 23 of the debenture trust deed and cl. 5 of the form of debentures have already been quoted in extenso. Clause 4 states that the debenture holder would be entitled to call for the allotment of shares in respect of such debentures 'for which the right is so exercised' by the debenture holder 'in the manner set out in the form of debentures in the 5th Schedule hereunder written'. The form of debentures requires the delivery to the registered office of the company of a notice of conversion of not less than one month 'accompanied by the relative debenture certificate' and states that the debenture holder shall be entitled to call for allotment 'in respect of such ... debentures so intended to be converted ...'. Clause 23 of the debenture trust deed requires the debenture holder 'to surrender such debentures to be so converted to the company within thirty days from the date of conversion notice ... for the purpose of necessary memorandum to be made by the company thereon indicating the cancellation or extinguishment of each of such debentures and the conversion into fully paid up equity shares ...'

105. It must be noted that the option to convert is vested only in the first holders of the debentures, that is to say, only in the institutions; transferees of the debentures would not be entitled to call for a conversion thereof into shares. It must also be noted, as cl. 23 of the debenture trust deed makes clear, that the debentures that are converted are required to be surrendered to the company to enable the company to endorse thereon their cancellation or extinguishment. Where the institution converts only a portion of its conversion quota it would be necessary to earmark and cancel the debentures of the particular series which are converted but, as I see it, where the institution converts its full quota - and that before the debenture certificates have been issued - the requirement of earmarking and cancellation would not be absolutely necessary and could be dispensed with or waived. The company would then issue debenture certificated only for the remaining debentures of the series and even could endorse thereon that no debentures of the series were convertible. In the instant case, all the institutions have at one time, and that before the issue of the debenture certificates, exercised their rights of conversion to the fullest extent. I am unable to go so far as to hold that the fact that a debenture was sent to the company with a notice that it was to be converted alone made that debenture convertible. The requirement of sending debentures to converted to the registered office of the company could, therefore, be waived.

106. Option not exercised by registered debenture holders

107. Mr. Cooper argued that only a debenture holder whose name had been entered in the company's register of debenture holders could exercise the option to convert, by reason of the words used in cl. 4 of the debenture trust deed and cl. 5 of the form of debentures. He argued that there was nothing on record to show that the institutions had been registered as debenture holders at the point of time at which they had exercised the option. He relied upon s. 106 of the Evidence Act and urged that, since the point of time at which the names of the institutions were entered in the company's register of debenture holders was within the company's knowledge, the onus lay on the company to prove when this was done; but the company had led no such evidence.

108. It does not appear to be the argument of the defendants that the institutions' names were entered on the register of debenture holders before they exercised the option to convert. The case of the defendants is that the company waived its right to insist that the option could be exercised only after the institutions' names were entered upon the register.

109. In find it difficult to agree with Mr. Cooper's submission that the right or option to convert came to exist only upon registration. Basically, the requirement is set out for the company's benefit, as describing a debenture holder who has been recognised by the company by virtue of the fact that his name has been entered by the company in its register of debenture holders in respect of his debenture certificates. The company would be entitled to refuse to recognise an exercise of the option by a debenture holder whose name is not entered on the register, but there is nothing to prevent the company from recognising and giving effect to the exercise of the option by such a debenture holder. The company is entitled to waive the requirement imposed for its benefits; and it may do so by express waiver or by conduct.

110. Option not exercised in due form

111. Mr. Cooper contended that since the institutions had not given to the company's registered office one month's advance notice of the exercise of the option to convert, the institutions had not exercised the option in the manner and form requisite and, consequently, the issue of the shares upon such conversion was bad. It is cl. 5 of the form of debentures that requires the giving of one month's advance notice to the company's registered office of the exercise of the option. It is a requirement imposed, obviously, for the company's administrative convenience and the company would certainly be entitled to waive the manner and form if it wanted to do so.

112. Option exercised by party to whom letters of allotment were yet to be issued

113. Mr. Cooper submitted that the option to convert had been exercised by parties to whom letters of allotment of debentures were yet to be issued. He made the submission based upon a sentence in para. 73(d) of the plaint which reads thus : 'The plaintiffs say that the option could have been exercised only by a registered debentureholder and not by a person to whom allotment letter was yet to be issued.'

114. Just before the sentence quoted above the plaint says, 'The plaintiffs submit that having regard to the chronology of events which is narrated hereinbelow, it is apparent that the option has not been exercised modo et forma or in strict compliance with the conditions laid down in the 3rd Debenture Trust Deed'. A little after the sentence quoted above the plaint reads thus :

(i) 3rd debenture trust deed was executed on May 31, 1979.

(ii) Letters for allotment of debentures were merely issued.

(iii) No debenture certificate was issued to any of the defendants on May 31, 1979.

(iv) On May 31, 1979, itself the defendants Nos. 1 to 7 as alleged debenture holder purported to exercise the option .....'

115. The plaint, therefore, proceeds upon the factual basis that on May 31, 1979, the debenture trust deed was first executed, letters of allotment of debentures were then issued and thereafter the institutions exercised their options. In view of these averments in the plaint, I must uphold the objection on behalf of the defendants that it is not open to the plaintiffs to urge that letters of allotment of debentures were not issued before the institutions exercised the options.

116. Purchase of shares

117. Mr. Cooper urged that the transaction that took place at the meeting of May 31, 1979, was not the issue of debentures for the whole amount of Rs. 350 lakhs and the exercise of the option to convert, but was, to the extent of 80 %, the giving of a loan and the issue of debentures and, as regards the balance 20%, it was the payment of application monies and the purchase of shares. He urged that the transaction of May 31, 1979, had to be seen as one and indivisible and in its reality.

118. Reference was made by Mr. Cooper to the judgment of the Court of Appeal in Manks v. Whiteley [1012] 1 Ch. 735. What was relied upon comes from the judgement of Fletcher Moulton L.J. It runs :

'...... But I say it to emphasize the principle that where several deeds form part of one transaction and are contemporaneously executed they have the same effect for all purpose 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. It is not open to third parties to treat each one of them as a deed representing a separate and independent transaction for the purpose of claiming rights which would only accrue to them if the transaction represented by the selected deed was operative separately .......'

119. This decision was followed by the Supreme Court in S. Chattanatha Karayalar v. Central Bank of India Ltd. [1965] 35 Comp Cas 610. This Supreme Court quoted with approval a part of what I have just recited and it observed that the 'The principle is well established that if the transaction is contained in more than one document between the same parties they must be read and interpreted together and they have the same legal effect for all purposes as if they are one document.'

120. Mr. Cooper made the argument on two footings. First, he urged that what had been exercised by the institutions was the right to purchase shares in lieu of the right of conversion mentioned in cl. 7 of UTI's letter of June 1, 1978, a letter which was referred to in the debenture trust deed as a loan agreement. Mr. Cooper submitted, and I reproduce the submission virtually in the words used by him.

121. The agreement between the institutions and the company was in the loan agreement which contained a clause (cl. 7) giving the institutions the right to purchase shares in lieu of the right of conversion.

122. On June 8, 1978, an attempt was made to exercise the right of purchase. No right of conversion then existed. The right to purchase could only come into effect if there was a right of conversion, being in lieu of that right. The attempt failed. Before the loan agreement became operative - including the right to purchase - the condition precedent was the signing of the debenture trust deed by the company and the debenture trustee in terms settled by the institutions. This was obligatory upon the company under the loan agreement. On May 31, 1979, the debenture trust deed was signed. It contained cl. 4, conferring the right of conversion, and cl. 36(c), which required the company to duly observe and perform all the terms and conditions, covenants and stipulations contained in the loan agreements. By reason of cl. 36(c) the right to acquire shares in lieu of conversion was incorporated into the debenture trust deed. On subscription the debentures and their allotment the institutions acquired the right of conversion and, simultaneously, the right to purchase shares in lieu of the right of conversion became effective. The institutions purported to exercise the right of conversion or, at least, claimed they were doing so. This was not correct because a true exercise of the right meant the giving of a real loan intended to be used by the borrower. Really, it was the exercise of a right to purchase.

123. The real transaction between the institutions and the company was not the giving of a loan of Rs. lakhs and the conversion thereof into share but was the giving of a loan plus the purchase of shares. This transaction was contemplated by the debenture trust deed and would have been a valid transaction if there had been a special resolution in that behalf.

124. There was nothing which could have prevented the institutions from exercising the right of purchase in a legal manner or of giving up that right and effecting a real conversion of the loan. The debenture trust deed recorded both rights and the fact that parties had agreed to the exercise of the right of purchase did not invalidate the right of conversion. In fact, the whole transaction was on the footing that the right of conversion and was it corollary (sic).

125. Mr. Cooper's submission has its foundation in this : that the debenture trust deed recorded and conferred upon the institutions the right to acquire shares in lieu of conversion. As I read UTI's letter of June 1, 1978, the right to acquire shares in lieu of the right of conversion mentioned therein was to operate in advance of and in lieu of the conferment of the right of conversion, which would be conferred only under the debenture trust deed. This is clear from the time-limit imposed in the letter written by UTI to the company on June 8, 1978, namely, June 15, 1978. It is difficult to hold that the debenture trust deed conferred the right to acquire shares in lieu of the right of conversion. As I read it, it conferred only the right of conversion. If the right to acquire shares in lieu of the right of conversion was intended to be conferred under the debenture trust deed that would have found place in the debenture trust deed immediately after cl. 4 thereof, and not by oblique implication. Besides, not all the loan agreements stipulate the right to acquire shares in lieu of conversion. Further, the conversion notices themselves state that it was the right of conversion which was being exercised. Mr. Cooper relied on the statements in the agreements to allot shares entered into between the company and the institutions on May 31, 1979, that the shares were to be 'in lieu of and in full satisfaction of the conversion rights.' The agreements elsewhere clearly state that it was the right of conversion which was being exercised. The argument on the first footing cannot, therefore, be accepted.

126. The second footing upon which Mr. Cooper argued is this : Assuming cl. 4 of the debenture trust deed constituted the agreement between the institutions and the company, the institutions only purported to carry it out but did not in fact do so; what they did was to buy shares, not convert debentures.

127. The emphasis of the argument is on the fact that the options were exercised immediately they came into existence. There was Mr. Cooper submitted, no loan in respect of Rs. 70 lakhs (20% of the total of Rs. 350 lakhs) for the essence of a loan was that the borrower was given the use of it, but it was paid as application monies for shares.

128. To uphold the argument would mean to read into cl. 4 of the debenture trust deed - and, indeed, into s. 81 - a term that the conversion could not be effected or the option could not be exercised until after a reasonable period of time. This would, in my view, be unjustified. I see no bar under the law to the exercise of an option immediately after it comes into existence, and the allotment of shares pursuant to such conversion cannot on that account be voided.

129. It may also be pointed out that the agreements to allot shares mention that interest would be payable upon the debentures until the shares in conversion thereof where issued. This also goes to establish that Rs. 70 lakhs were not paid, to begin with, application monies but were intended to be a loan on which interest at the debenture rate was payable until shares in conversion were allotted.

130. Coming as I do to this conclusion, I do not rely upon the documents on record which prima facie establish that it was the right of conversion which was exercised and that conversion took place.

131. It was urged by counsel for defendants that it was not open to the plaintiffs to contend that the shares had really been purchased, in view of their counsel's statement that the plaintiffs would not contend that the debenture trust deed was void, and that this would be the inevitable result of the contention being accepted. As I see it, the manner in which the contention has been put by Mr. Cooper does not constitute a challenge to the validity of the statement, which I have earlier set out, expressly reserves this contention (sic).

132. Mala fides of waiver

133. Mr. Cooper urged that the waiver by the company of the notice of conversion to be delivered to the company's registered office, accompanied by the relative debenture certificates, one month in advance, as required by cl. 5 of the form of debentures in the debenture trust deed, was vitiated by reason of mala fides and breach of fiduciary duty on the part of the company's directors.

134. It was submitted by counsel on behalf of the defendants that there was no such plea in the plaint. The plea upon which the submission was based is contained in para. 73(d) of the plaint and it reads thus :

'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. The plaintiffs submit that the directors had no power to waive or accept any waiver and they are guilty of deliberate fraud upon the equity shareholders as a class.'

135. In para. 55 of the written statement of the company, which deals with para 75(d) of the plaint, the denial is in these terms :

'These defendants deny that the waiver by defendants Nos. 1 to 7 or these defendants is mala fide or is an abuse of the fiduciary position or is illegal or invalid.'

136. In the written statements of the institutions the denial is identically worded. The defendants, therefore, understood that the plaint ascribed mala fides and breach of fiduciary duty to the company and the denied the allegation. They cannot, then, be heard to say that there is no such plea in the plaint.

137. It was contended by counsel on behalf of the defendants that, assuming that there was such a plea, there were no particulars of the mala fides alleged therein, let me look through the plaint. The relevant portion begins with para 71. The opening sentence of para. 71 reads :

'The plaintiffs say that it is thus apparent from the aforesaid facts and those stated hereinafter and in the other suits that there has been consistent and persistent attempt on the part of the Government directors while they were acting as the financial institution directors to prevent the lawful exercise of voting by ordinary citizens and to capture more and more voting powers for themselves and prevent the voting power being acquired by any other individual except those who were wiling to support them and thus exercise control over the company.'

138. The paragraph goes on :

'...... With this very motive on 31-5-1979 the debentures were privately placed and issued to the financial institutions and loans raised from them both of which gave an option to the financial institutions to obtain and acquire shares by exercising such option to the extent of 51,000 shares ......

On the same day, that is to say, May 31, 1979, options were exercised by the financial institutions (though not in accordance with the terms of the option) and shares are shown to have been registered in the names of the financial institutions on June 6, 1979.'

139. Sub-paragraph (i) of para. 72F of the plaint avers that the company's directors procured execution of the debenture trust deed on May 31, 1979. Some of its provisions are set out. The manner in which the option had to be exercised, i.e. cl. 5 of the form of debentures, is also set out. In sub-para. (ii) the notice of conversion is extracted. In sub-para. (v) it is averred that the institutions thus acquired for themselves voting power. Paragraph 73 opens with the submission that the allotment of shares was wholly null and void, irregular, illegal and fraudulent and had been made by abusing fiduciary duties and by colourable exercise of powers. In sub-para. (d) of para. 73 the plaintiffs submits that the option to convert the debentures into shares had to be exercised strictly in accordance with the conditions laid down. Sub-para. (d) submilts that it was not open to the defendants to waive the notice and alleges that the waiver was wholly mala fide and an abuse of fiduciary position.

140. As I read the plaint, than (sic) the particulars of mala fides stated in it clearly intended to apply to all the aspects of the issue of the shares, including the act of waiver. It was not necessary for the plaint to repeat the same particulars of mala fides in respect of each aspect.

141. Mr. Cooper relied upon several circumstances on record and submitted that, by reason thereof, the plaintiffs had established the prima facie case that the directors of the company had waived the requirements of cl. 5 of the form of debentures with the intention of favouring one group of the company's shareholders, namely, the institutions, against another, namely, the Berlias, and this was a mala fide exercise of powers and was in breach of the directors' fiduciary duties. He submitted that as the defendants had failed to lead evidence to establish that the intentions of the company's directors had not been such, the prima facie case was established.

142. Counsel for the defendants submitted that the presumption in law was that the directors of a company act bona fide and that, therefore, the plaintiffs had to rebut that presumption. Only if this was done and the circumstances led to the irresistible inference of mala fides and breach of fiduciary duty would the onus shift to establish the contrary.

143. A presumption of fact determines where the burden of proof lies. Quite apart from the presumption that the directors act bona fide and that, therefore, the burden of proof lies on the plaintiffs, the burden of proving mala fides must rest on the party alleging it. The presumption here would stand rebutted and the evidentiary burden would be satisfied if the plaintiffs made out a prima facie case, a case upon which, in the absence of evidence from the other side, a finding in their favour could reasonably be given upon a balance of the probabilities. The absence of evidence from the other side entitles the court to infer that 'the absence of that evidence is to be accounted for by the fact that even if it were adduced it would not displace the prima facie case. But that always presupposes that a prima facie case has been established ...' Cockburn C.J. in McQueen v. Great Western Rail Co. [1875]LR 10 QB 569 . It must also be remembered that animus can only rarely be proved by direct evidence. Generally, the party alleging animus proves the circumstances which make the animus probable and the evidentiary burden then shifts to the party against whom the allegation is made to establish that he acted bona fide.

144. Upon this basis in law, I proceed to examine Mr. Cooper's submission. The circumstances that he relied on are :

That after July, 1977, the Berlias had to file suits in the Bombay City Civil Court and petitions for rectification of the company's share register in this court before the company consented to transfer shares to the names of the Berlias. That even after the agreement and consent terms of December 8, 1977, the company refused to transfer shares to the Berlias.

That in April, 1978, the Berlias demonstrated that the majority of the company's shareholders supported them by lodging about 1,74,000 proxies for an extraordinary general meeting while the institutions had proxies and voting strength to the extent of about 1,04,000.

That the company and the institutions had applied to the Central Govt. for the issuance of orders under s. 108D and the Government was told by them that the Berlias would capture the company and control it if the orders were not issued.

That the Central Govt. owned the institutions and, by virtue of the appointment of 8 directors on the company's board, in July, 1977, controlled it.

That the freezing order was issued on June 17, 1978. The company having received it on June 19, 1978, kept it back from the Berlias till they were compelled to lodge a writ petition challenging the order, without annexing its copy, two days before the company's AGM of June 29, 1978.

That on May 31, 1979, the writ petition and two petitions for rectification of the company's share register by placing thereon the names of the Berlias in respect of further shares of the company were pending.

That on May 31, 1979, as a result of the interim order passed in the writ petition the Berlias were by and large free to exercise the voting rights on their shares.

That on May 31, 1979, it was known to the company's directors that the Berlias had secured a majority of votes at the 1978 AGM in connection with the election of a director.

That the company and the institutions could not, on May 31, 1979, know how the Berlias would vote at the AGM on June 28, 1979, whether they would put up candidates for the board, or oppose the passing of the accounts, and so on; but they knew that they could not expect support from the Berlias.

That there was one nominee of the institutions and one employees of LIC on the company's board; seven other directors were government nominees.

That the AGM having been called for June 28, 1979, by notice dated April 26, 1979, it was not possible to obtain additional voting strength except by waiving the one month's notice period and the other requirements for conversion.

That the company had been in terms informed orally as well as by the letter written by the common attorneys that the institutions wanted the shares upon conversion by the end of May, 1979.

That the debentures could not have been issued till the debenture trust deed was registered with the Sub-Registrar of Assurances and the certificate of registration of the charge was obtained from the Registrar of companies and incorporated in the debentures as provided by the form of debentures.

That in para. 73(2) of the plaint, it was alleged that the Government nominated directors stood to gain by lending support to the institutions and to submit to their demands, for, there was a quid pro quo, inasmuch as the institutions were anxious to have a continuation of the order under s. 408 so that they would have the full control and were requiring the appointment on the board of the same persons as government directors. The paragraphs of the written statements which deal with para. 73(e) of the plaint do not contain a denial of the allegation.

It was pointed out by counsel for the defendants that it was not put to UTI's witness Atmaramani whether there was any apprehension about the conduct of the Berlias at the 1979 AGM. It is not the apprehension of UTI or of Atmaramani that I am really concerned with, but that of the company and its directors; no director or officer of the company was examined to whom such case could have been put. The letter written by the Chairman of UTI and GIC to the Chairman of the Company Law Board on June 6, 1978, is relevant in this connection. After setting out their apprehensions about the Berlias' intentions the writers asked that the voting rights of the shares lodged with the company for transfer should be frozen so as to debar the registered holders thereof, whoever they may be, from exercising the voting rights thereon; this would prevent the Berlias from gaining control of the company and from having any nominees or agent on the company's board 'either at the forthcoming AGM of the share holders on June 29, 1978, or at any other general meeting'.

145. That the company was involved in the preparation of this letter is patent by reason of its annexure listing the shares lodged for transfer with the company, their folio numbers and their holders' names. There is little doubt, in the circumstances, that the apprehension expressed in the letter was also the apprehension of the company and it extended not only to the 1978 AGM but to all subsequent general meetings.

146. Reliance was put upon the case put to Atmaramani, namely, that the only urgency was the desire of the institutions to see that they acquired more shares and increased their voting strength before the 1978 AGM and that this urgency ceased when the freezing order was obtained. It was commented by counsel for the defendants that no case was put to Atmaramani of any urgency felt by the institutions and the company in 1979. Atmaramani deposed that the urgency of obtaining the loan for working capital and the modernisation programme commenced in 1976 and continued in 1977 and 1978; in 1979 it continued but had abated to some extent. It is not as if it was Atmaramani's evidence that the urgency has ceased in 1979 so that it was necessary to put to him such an express case. In any event, the submission would have acquired substance if the company had examined a director or officer and the express case had not been put to him.

147. Counsel for the defendants made reference to the period after April 7, 1979, and submitted that the conduct of the defendants belied the inference that the waiver was premeditated or was the result of any apprehension about the Berlias' intentions. Reliance was placed on the letter of April 7, 1979, written by the common attorneys to the institutions and the company wherein it was stated that the institutions were anxious to complete the transaction at the latest by May 30, 1979. It was pointed out that on that day the 1979 AGM had not been notified and the sanctions of the various authorities to the issue of the debentures were still to come. On April 26, 1979, the company notified the AGM for June 29, 1979. It was submitted that this could have been delayed. The sanctions were yet to come .. If any apprehension or animus had existed, it was submitted, the 1979 AGM would have been scheduled for much later. On May 9, 1979, or thereabouts all the sanctions had come in but the debenture trust deed was not immediately executed. It was suggested that it would have been, if an apprehension or animus had existed, so that there would have been a one month's period before the AGM during which the conversion notice could have been given and the shares issued without waiver. On May 24, 1979, the company's board approved the draft debenture trust deed. It was submitted that on that day there was every intention of operating upon the clause of the form of debenture that required one month's notice of conversion, and that the fact that the board had approved the draft with the clause showed that there was no animus or apprehension. On that day, the board gave powers to four directors to demand or alter the draft. It was submitted that it was nobody's case that the document differed from the draft. That the draft was not amended or altered to delete clause 5, it was submitted, showed that there was no animus or apprehension. Nothing, it was urged, had been brought on record which suggested a reason for any animus or apprehension arising between April 26, 1979, and May 30, 1979. According to counsel for the defendants it was, thus, shown that up to May 31, 1979, there was no apprehension or animus.

148. What the argument ignores, in my judgment, is that on May 29, 1979, their attorneys sent to the institutions, the company and the debenture trustee a note setting down the programme to be followed at the meeting of May 31, 1979. Clause (1), sub-ss. (i) and (j) of that note referred to the acceptance of notices of conversion, the entering into of contracts under s. 75 of the Companies Act and the issue of equity shares upon conversion. Clause 11 stated that, after the letters of allotment were received, the debenture holders would issue notices of conversion to the company, upon receipt whereof the company would issue letters of allotment of shares and enter into contracts for the shares. Clause 13 stated that the company would issue share certificates for the converted amount to the debenture holders. Patently, before the note was sent on May 29, 1979, it had been agreed between the institutions and the company that the requirements of cl. 5 would not be enforced. Why, then, was the draft debenture trust deed not amended by deleting cl. 5 Why was the debentures trust deed executed making compliance with clause 5 a pre-requisite for conversion and why, immediately upon its execution, was the pre-requisite waived ?

149. Most important to notice in this regard is that it was agreed that all the institutions were to exercise on May 31, 1979, their rights of conversion to the fullest extent so that cl. 5 was not being retained to be operative in the event of a future exercise of the option.

150. Counsel for the defendants submitted as part of the earlier argument that, that the company had called the AGM for June 28, 1979, was a fact, which militated against its alleged intention to ensure that the institutions were issued the shares upon conversion before it. Counsel relied upon s. 166 of the Companies Act and said, the AGM could have been delayed till September, 1979, by which time the institutions could have got the shares without recourse to waiver. It seems to me that Mr. Cooper was right when he submitted that, having regard to s. 210 the AGM had to be called by June 30, 1979, to adopt the company's profit and loss account prepared up to December 31, 1978.

151. It was submitted by counsel for the defendants that the directors could well have acted innocently in waiving the requirements of cl. 5. The circumstances on record do not suggest an inference consonant with innocence. Innocence could, however, have been established, and it is not.

152. It was said that cl. (5) could have been deleted and nobody would have been any the wiser; instead cl. (5) was waived. This is not an inference that may be drawn, but is something which the directors could have deposed to. What could have then been deleted, was incorporated in a document and, no sooner was the document signed, waived.

153. It was submitted that since under the document dealing with ICICI's loan and the conversion thereof into shares no advance notice of conversion was required, the directors merely wanted to put the debentures and the loans on a par and they, therefore, waived the requirement of cl. 5. If so, the first course that would suggest itself would be to deleted cl. 5 from the draft debenture trust deed. No such inference can, therefore, be raised.

154. It was submitted that the directors were not put into the witness-box because the judgment in the company petition for rectification filed by the Berlias said that the court had not been impressed by the arguments advanced by counsel for the Berlias upon the alleged mala fides of the company in harassing the Berlias. The submission does not take into account the fact that that judgement holds that the conduct of the company's board could justly be said to be inconsistent, arbitrary and capricious. It was patently in connection with the argument of harassment that the observation was made that the court was not impressed. This certainly can, in any case, have been no ground for not putting the directors into the witness-box in this suit.

155. It was even submitted that the directors did what they did because they considered the Berlias undersirable people. Emphasis was placed upon the circular sent by the Berlia concerns to the company's shareholders recommending the Berlias, and upon the evidence of Goculdas, one of the purported signatories of the circular, that he had neither signed it nor authorised its issuance. It was also emphasised that a specific case of having given authority was put to Goculdas by plaintiffs' counsel but the plaintiffs did not give evidence to support that case. First, if the directors did what they did because they considered the Berlias undersirable persons, they did what they did with the intention that the Berlias should be outvoted. In para. 73(e) of the plaint it is alleged that it was obvious that continuous efforts were made by the company's directors for the time being to deprive the Berlias and other shareholders of voting power and to prevent the Berlias and others from acquiring voting power, and that the directors acted, in the manner they did, so as to acquire voting power for the institutions which they represented or were interested in. In para. 69 of the written statement of the company it is denied that an effort was made by the directors to deprive the Berlias or other shareholders of their voting power or to prevent the Berlias or other shareholders from acquiring voting power or that the directors acted so as to acquire voting power for the financial institutions. In view of this denial, the argument, that the directors did what they did because they considered the Berlias undesirable people, cannot be put forward to justify what the directors did. Secondly as will be evident from the authorities to which I shall presently refer, the directors of a company may not disfavour one group of the shareholders and favour another, it is a breach of their fiduciary duty to do so.

156. I now proceed to examine the record subsequent to May, 1978, to see what light it throws on the conduct of the company and the institutions. It is necessary to do the latter, in view of the plea that was raised in the course of arguments that, in any event, the institutions were innocent parties who had paid large sums of money by way of loans to the company on condition that they would be entitled to convert a part thereof into shares; against the institutions, therefore, the discretionary relief of rectification should not be granted.

157. It will be recalled that on March 15, 1978 the company had been informed that it had not submitted adequate grounds to the Central Govt, for the issuance] of directions under s. 108D and that on April 28, 1978 the company had notified the date of the AGM to be June 29, 1978.

158. On May 17, 1978, the company wrote to UTI in respect of the term loan of Rs. 50 lakhs for the nylon tyre cord project, phase II asking for confirmation that the Bank of Baroda would be appointed the debenture trustee. Incidentally, the company added, a consortium of banks was providing it with an additional term loan of Rs. 1 crore to meet its working capital requirements and this loan would be secured by a pari passu charge on the same security as that provided for the debentures. On May 17, 1978, UTI wrote to the company with reference to its letter dated May 17, 1978, and expressed the view that financing by the consortium of banks would be costly. UTI said that it was prepared to take up, subject to its board's approval, privately placed debentures of Rs. 1 crore which may be issued by the company, inter alia, on the term that there would be a conversion option into equity up to 20 per cent. of the value of the debentures, which option would be exercisable by UTI immediately after the company accepted its terms and conditions.

159. On May 23, 1978, the Chairman of UTI wrote to the Director (Investment,), Dept. of Economic Affairs, Ministry of Finance, that he felt that the Berlia group was trying to take control of the company and it was, therefore, of vital importance to protect the interests of the institutions and those, of small shareholders. It was necessary that the Berlias and their supporters should be prevented from gaining control of the company and action should be taken fast under various provisions of the Companies Act to that end.

160. On May 29, 1978, the company replied to UTI's letter of May 19, 1978, and stated that while it was grateful for UTI's offer of Rs. 1 crore it could be accepted only as an additional assistance instead of as an alternative to the consortium term loan. The company said that it would be greatful if UTI gave its assistance in the sum of Rs. 3 crores because it wanted to take up a modernisation programme. What was said about that modernisation programme was said to be very tentative and detailed estimated were being worked out. The note annexed to the letter upon the modernisation programme is patently, as tentative.

161. On May 17, 1978, no plea had been made by the company to UTI for assistance in the sum of Rs. 1 crore. The company, in fact said that it was securing such assistance from a consortium of banks. On May 19, 1978, with rather remarkable solicitude and expedition, UTI offered the company, the same amount for the same purpose. No doubt an institution with a large stake in the company might do so with the best interests of the company at heart. What renders this somewhat suspect here is the term that the conversion option would be exercisable immediately after UTI's terms and conditions were accepted by the company, read in the light of the company's desire to get an order under s. 108, a similar desire stated by UTI, and the immediate prospect of the company's AGM.

162. It is clear from the evidence of (sic) that such details as were mentioned in the company's letter of May 29, 1978, in respect of the modernisation programme were of little value. He said, for example, that nobody replaced spinning machines, although this was what the note attached to the company's letter dated May 29, 1978, said would be done, but only modified them to operate at high speed by adding certain attachments. He also said that though the company's letter of May 29, 1978, estimated the expenditure on this item to be Rs. 120 lakhs, the detailed appraisal estimated this expenditure of Rs. 12 lakhs.

163. One would reasonably have expected UTI's response to the company's letter of May 29, 1978, to be something like this : 'we were offering you Rs. 1 Crore on better terms than you got from the consortium of banks, but we will not press you. So far as your modernisation programmer is concerned, when you have worked out the details and estimates and placed them before your board your may apply to us and certainly we will consider your proposal'.

164. That is not the response. It is the evidence of Atmaramani that the response of UTI was to expedite the preparation of a note to be placed before the IIM to be held two days later in respect of UTI's intention to advance the company Rs. 200 lakhs for the modernisation programme. Atmaramani was cross-examined at great length on what happened at UTI's office in respect of the company's letter dated 17the day of May, 1978, and its sequel. I accept the at the correspondence of that period was exchanged, between the company and UTI, but I find Atmaramani's explanation, as to what gave rise to such urgency, strained. He said that a proposal received by an institution had to be placed before the very next IIM. Nothing on record supports this unlikely explanation. He said also that the company was in a hurry to obtain approval for the proposal so that it could have passed the requisite resolution under s. 293 at the June, 1978, AGM. It is strain on one's credulity to be asked to believe that to oblige the company in this, a public financial institution agreed in principle to advance first Rs. 200 lakhs and then Rs. 300 lakhs within two days, without on appraisal of the project, of which only the sketchiest details and figures were provided by the applicant. Atmaramani even claimed to read urgency in the company's letters which plainly was not there. The company had not asked for any moneys for the modernisation programme until after UTI's letter of May 19, 1978, there plainly, was no urgency for the moneys and no properly evolved proposal upon which they could have immediately been spent.

165. It is on record that at the IIM of May 31, 1978, the proposal of UTI to advance to the company Rs. 200 lakhs was considered and was modified so that UTI would now advance to the company Rs. 300 lakhs. Shingal deposed that the general procedure of the institutions was that a detailed appraisal of the proposal for financial assistance was carried out by the institutions before acceptance of the proposal, even in principle. He insisted in cross-examination that in the present case that procedure had been followed, but it had been followed in reverse; the company's proposal was accepted in principle first, in May, 1978, and the detailed appraisal was carried out thereafter, after November, 1978.

166. It was suggested by counsel for the defendants that UTI and IIM could so act because of earlier appraisal carried out by ICICI. The appraisal is required to be made of the project for which the loan is sought, here the modernisation programme. No earlier appraisal had been made of the modernisation programme. UTI and the IIM acted without the benefit of such appraisal.

167. After the IIM had sanctioned the proposal in principle in the sanction of the executive committee of UTI was obtained.

168. On June, 1, 1978, UTI wrote to the company with reference to the letter of May 29, 1978, stating that it was agreeable in principle to provide financial assistance along with other institutions of Rs. 300 lakhs for financing a part of the company's modernisation programmer upon the terms and conditions set out therein. Clause 7 required the company to agree to vest in UTI the option acquire in lieu of conversion shares of Rs. 60 lakhs, the period for conversion being Junen 15, 1978, to June 14, 1980. The underline of the pharse 'to acquire in lieu of conversion' is in the letter and it speaks of the urgency left in respect of the acquisition of shares.

169. I have already referred to the letter written on June 6, 1978, by the Chairman of UTI and GIC to the CLB and to the involvement of the company in its preparation. The letter expressed the apprehension that the Berlias would gain control of the company 'either at the forthcoming AGM of the shareholders on June 29, 1978, or at any other general meeting'.

170. On June 6, 1978, UTI wrote to the company with reference to the term loan of Rs. 60 lakhs and to the letter of January 7, 1978, whereby UTI agreed in principle to provide that assistance. It will be recalled that that letter stipulated that the company should agree to vest in UTI the option to convert a portion of the debentures amount into shares on terms and conditions to be decided thereafter. By the letter dated June 6, 1978, UTI advised the company, in terms of that clause, that UTI would have the option to acquire in lieu of conversion equity shares of Rs. 10 lakhs. The words 'acquire in lieu of conversion' are again underlined. The letter went on to give notice of UTI's intention to acquire with effect from June 15, 1978, in lieu of conversion' shares of the value of Rs. 10 lakhs. The letter said that such equity shares were to be 'registered in the name of UTI immediately on allotment, i.e., from June 15, 1978'. Once again, the urgent desire to acquire as many shares as possible is writ large upon the letter.

171. On June 8, 1978, UTI wrote to the company in respect of the letter of intent dated June 1, 1978, and stated that, in terms of cl. (7) thereof, it had to the right to acquire, in lieu of conversion, shares of the value of Rs. 60 lakhs. The letter advised that such shares were required to be registered in the name of UTI immediately on allotment, i.e., from June 15, 1978. This letter is on the same lines as those that succeeded the company's letter of May 29, 1978, UTI wanted the company's shares as fast as it could get them and was quite willing in the bargain to advance Rs. 300 lakhs for a project the company had not finalised and which the institutions could not, and had not investigated.

172. On June 17, 1979, the freezing order was passed. A copy was received by the company on June 19, 1978. It is in evidence that the company did not disclose to the Berlias or their attorneys a copy of the freezing order or its contents, even when demanded, and that it was disclosed to them only two days before the 1978 AGM, when the company was called upon the produce it in court at the time of the interim application in the writ petition filed to challenge it. This conduct speaks of animus. On June 23, 1978, the CLB asked the company to clarify, how UTI could exercise its option for conversion of debentures into equity shares when no debentures had been issued to it. A reply was sent by the company; it is, I think, a fair reading of it to say that it contains no such clarification.

173. It appears from the record that, whatever UTI's earlier intentions might have been to acquire share in lieu of conversion, they ceased after this letter of the CLB.

174. At the 1978 AGM, by reason of the undertaking given and recorded in the interim order passed in the writ petition, the Berlias voted in favour of the resolution under s. 293 to create a security for the debentures. They were free to exercise their votes in respect of all other items on the agenda, and as the results which were subsequently disclosed showed, the second plaintiff was there elected as director.

175. There was then a lull till April, 1979, when the prospect of yet another AGM loomed. On April 7, 1979, the attorneys for the institutions and the company sent to them and the debenture trustee a note of discussions that had taken place between their officers. The note stated that the institutions were anxious to complete the transaction at the latest by May 30, 1979. On April 28, 1979, the company issued the notice convening the AGM on June 28, 1979. By May 9, 1979, or thereabouts all the sanction required prior to these execution of the debenture trust deed had been received. On May 24, 1979, a meeting of the company's board passed the appropriate resolutions. They approved the draft of the debenture trust deed in the form in which the document was executed and they gave to four directors the power, inter alia, to amend the draft.

176. On May 29, 1979, the attorneys wrote to the institutions, the company and the debenture trustee setting out the programme for completion. I have already referred to the note in some detail. Suffice it to say here that it contemplated the delivery of notices of conversion by the institutions to the company immediately upon the debenture trust deed being executed and letter of allotment of debentures being issued. It also contemplated that letters of allotment of shares in conversion and contracts under s. 75 in respect of those shares would be executed and issued. In fact, in contemplated the issue of the shares themselves.

177. It is obvious that prior to May 29, 1979, it had been agreed between the institutions and the company that, immediately upon the debenture trust deed being executed, cl. 5 of the form of debentures incorporated therein would be waived. There is nothing upon the record which indicates when such agreement was reached or why.

178. On May 31, 1979, the transaction was completed. No evidence has been led of what happened then.

179. Upon a consideration of the circumstance relied upon by Mr. Cooper, by counsel for the defendants and of the record, I cannot but see that the company had sought to prevent the Berlias from adding to their shareholding in the company and from exercising their votes on their votes on their existing shares and on proxies secured by them, that the Berlias had the capacity to muster a sufficiently large number of proxies to worry the company's directors and the institutions, and that, moments after the execution of the debenture trust deed that made a month's notice a pre-requisite for requisite. Without such waiver shares upon conversion could not have been issued to the institutions at the time they were, they could not have been issued before June 28, 1979, the date of the company's AGM.

180. Having regard to this, I have no doubt that the plaintiffs have established the prima facie case that the waiver was actuated by the desire to increase the voting strength of the institutions at the AGM of June 28, 1979, and thus counter the votes and proxies of the Berlias. No director of the defendants has examined to refute the prima facie case. In fact, none of the defendants has examined a witness, who could depose as to what transpired in those last days of May, 1979, or at the meeting of May 31, 1979. I am reluctantly but inevitably impelled to the conclusion that no witness upon this aspect has been examined because his evidence would not have dispelled the prima facie case.

181. I now turn to the authorities. There are two judgments of the Supreme Court on the point. I need refer to only one English judgment thereafter. The first case is the of Nanalal Zaver v. Bombay Life Assurance Co. : [1950]1SCR391 . The company issued shares and it was contended that the shares had been issued not because the company was in need of funds but with the object of retaining to the directors the control of the company. The true approach to a question of this nature was stated by Mahajan J. (p. 195) thus :

'It is well settled that in exercising their powers, whether general or special, the directors must always bear in mind that they hold a fiduciary position and must exercise there powers for the benefit of the company and for that alone and that the court can intervene to prevent the abuse of a power whenever such abuse is held proved, but it is equally settled that where directors have a discretion and are bona fide acting in the exercise of it, it is not the habit of the court to interfere with them. When the company is in no need of further capital, directors are not entitled to use their power of issuing shares merely for the purpose of maintaining themselves and their friends in management over the affairs of the company, or merely for the purpose of defeating the wishes of the existing majority of shareholders.'

182. Mahajan J. held that the controlling factor working in the mind of the directors was the necessity of further funds for the company at the moment the passed the resolution. That being so, the existence of the other motive did not make the action of the directors in respect of the issue of further shares mala fide. Upon the evidence he found that there was no dolus malus in their mind as director of company, as affecting the company or its shareholders. Das J. put it this way (p. 207) : 'If the directors exercise the power for the benefit of the company and at the same time they have a subsidiary motive which in no way affects the company or its interests or the existing shareholders then the very basis of interference of the court is absent, for ...... the court of equity only intervenes in order to prevent a breach of trust on the part of the directors and to protect the cestui que trust, namely, the company and the possibly the existing shareholders.' He held that the directors' motive of keeping out the Singhania group, who were not yet shareholders but were strangers, did not prejudicially affect the company or the existing shareholders and the presence of such motive could not vitiate the good motive of finding the necessary funds for the company.

183. In the instant suit, a prima facie case of dolus malus and breach of fiduciary duty is establish. No evidence is led by the company of its motives, whether mixed or otherwise. Upon the reasoning in Nanalal Zaver : [1950]1SCR391 , the court must interfere.

184. In the case of Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743 (SC), directors forming the requisite quorum resolved to increase the share capital of the company with the intention of complying with the provisions of the FERA as to foreign holdings. The issue of the shares was challenged on the ground that it constituted an abuse of fiduciary power. A substantial portion of the judgment is devoted to the consideration of what constitutes a breach of fiduciary duty by a company's directors. Several judgments of the English and Commonwealth Court are referred to. The Supreme Court approved the dictum Byrnes J. in Punt v. Symons & Co. [1903] 2 Ch 506, that it would be unconstitutional for directors to use their fiduciary powers over the shares in the company purely for the purposes of destroying the existing majority or creating a new majority which did not previously exist, and to do so was to interfere with that element of the company's constitution which is separate from and set against their powers. The Supreme Court laid emphasis on the fact that the sole, single and simple purpose of the directors must be to destroy the existing majority or create a new majority which did not previously exist. The Supreme Court recall (p. 813) what was laid down by the Privy Council in Hirsche v. Sims [1894] AC 654 :

'If the true effect of the whole evidence is, that the defendants truly and reasonably believed at the time that what they did was for the interest of the company, they are not chargeable with dolus malus or breach of trust merely because in prompting the interest of the company they were also promoting their own ...'

185. The Supreme Court also approved the decision in Howard Smith Ltd. v. Ampol Petroleum Ltd. [1974] AC 821 (PC) to which I shall presently refer. The Supreme Court held that if the shares were issued in the larger interest of the company the decision to issue shares could not be struck down on the ground that it had incidentally benefited the directors in their capacity as shareholders.

186. It is true that, it was the case of the plaintiffs here that the shares had been issued though there was no need for the finance, and that, that case was not urged in the course of Mr. Cooper's final argument. I am, therefore, concerned not with whether the directors issued shares mala fide or in breach of fiduciary duty, but with whether they acted mala fide in breach of the fiduciary duty in waiving the requirement of cl. 5 of the form of debentures, thus enabling the shares to be allotted to the institutions earlier that the prescribed one months's period. There is, to repeat, no evidence which refutes the prima facie case of mala fide and breach of fiduciary duty made out. There is no evidence before me upon which I can conclude, in the words of the Privy Council, that the directors truly and reasonably believed that what they did was for the interest of the company. If they had given such evidence it would not have been possible for the plaintiffs' counsel to argue or for the court to hold that such belief was unjustified, the only question would have been : did they really so believe ?

187. It Howard Smith Ltd. v. Ampol Petroleum Ltd. [1974] AC 821, the Privy Council quoted with approval Viscount Finaly in a Scot's case Hindle v. John Cotton Ltd. [1919] 56 LR 625 :

here the question is one of the abuse of powers, the state of mind of those who acted, and the motive on which they acted, are all important, and you may go into the question of what their intention was, collecting from the surrounding circumstance all the materials which genuinely throw light upon that question of the statement of mind of directors so as to show whether they were honestly acting in discharge of their powers in the interest of the company or were acting from some bye-motive, possibly, of personal advantage, or for any other reason'.

188. I conclude that the prima facie case, which is not refuted, is established that the company's directors exercised the power of waiver with the object of adding to the voting strength of the institutions, to the detriment of the voting strength of the Berlias and their supporters. They favoured, by so doing, one group of the company's shareholders against another. They acted mala fide and in breach of their fiduciary duty. I also conclude that the institutions were privy and party thereto and at all stages the company and the institutions marched hand-in-hand to the common goal.

189. The constitutional point :

It is the case of the plaintiffs that the phrase 'or any institution specified by the Central Government in this behalf' in cl. (b) of the proviso to sub-s. (3) of s. 81 is ultra vires the Constitution by reason of excessive delegation of power to the Central Govt.

It was urged by counsel for the defendants that if this case is accepted the consequence would be to invalidate the option term contained in the debenture trust deed. They relied upon the statement made by counsel for the plaintiffs which says that the plaintiffs would not contend that the debenture trust deed was void and submitted that it was not open to the plaintiffs to advance any argument which would lead to an invalidation of any part of the debenture trust deed.

190. I now state the material portion of Mr. Cooper's reply to this in, substantially, his own words :

Section 81, he submitted, applied only when it was 'proposed to increase the subscribed capital of the company by allotment of further shares'. It was only (when) the increase in the subscribed capital, by allotment of further shares, had been decided upon, that sub-section (1) came into play. Sub-section (1A) began with the words 'notwithstanding anything contained in sub-s. (1) the further shares aforesaid may be offered to any persons' if a special resolution was passed. Since the words used in the sub-section were 'the further shares aforesaid', it necessarily followed that the clause, when it was proposed to increase the subscribed capital of the company by the allotment of 'further shares' and 'the further shares aforesaid in the clause meant such further shares'. It could be suggested that, sub-s. (1) only came into play, and could refer only to the point of time, at which the further shares were to be offered, and that the sub-section could only be applicable to shares to be issued as a result of the exercise of an option clause in a convertible debenture, if the sanction by the special resolution was given before the option was inserted as a covenant. In the alternative, if sanction could be given only after the 'proposal to increase the subscribed capital by allotment of further shares' had fructified, that is, by the actual exercise of the option, then the language of sub-s. (1A) could preclude any application of that sub-section to such a situation. This interpretation, however, was completely against the meaning of the section as a whole as could be gathered from a reading of it, including sub-s. (3). The section contemplated that sub-s. (1A) would apply if the conditions laid down in the proviso to sub-s. (3) were not fulfilled, and sub-s. (1A) would apply to 'the increase of subscribed capital of a public company caused by the exercise of the option attached to such debentures'. In other words, sub-s. (3) negatived any suggestion that sub-s. (1A) was not to apply to such increase of subscribed capital caused by the exercise of such option. Again, the wording of sub-s. (3) would have been different, if a special resolution passed before the option was granted (not exercised) could be passed under sub-s. (1A). It was, therefore, submitted that sub-s. (1A) read with sub-s. (3) clearly contemplated that a special resolution in the case of shares to be issued as a result of the exercise of an option clause in a debenture must be passed before the shares are actually allotted after the exercise of the option.

It was further submitted by Mr. Cooper that even if the sanction contemplated by sub-s. (1A) in respect of the issue of shares as a result of the exercise of the option clause in a debenture had to be given by a special resolution passed before the option was given, this would not render the agreement granting such option invalid but would only mean that the agreement would be subject to the sanction of a special resolution. Every agreement was presumed to be entered into on the footing that it would be carried out in a legal manner with due compliance of all statutory requirements.

In the further alternative, Mr. Cooper submitted that, even assuming that the special resolution was required before the issue of the debentures, it did not make the debenture trust deed void in any way. The debenture trust deed remained valid even if the convertibility of the debentures to be issued thereunder was affected. The debenture trust deed was only a supporting document and it was open to the company to pass a special resolution before issuing the debentures themselves and accepting the subscription moneys. The fact that, in the instant case, it was all done on the same day did not alter this position, because the argument proceeded on the footing that everything done had been done bona fide and the transaction was what it had been made out to be.

I proceed to consider Mr. Cooper's reply.

If the phrase impugned is excluded from cl. (b) of the proviso to sub-s. (3) of s. 81, the term providing for the option to convert the debentures into shares had to be (sic) approval meeting. There is no such approval. Does it mean, then, that s. 80 applies As section reads, what would apply is sub-s. (1A), for, the shares were not being offered to all the holders of the company's equity shares. Sub-section (1A) authorises the offer of shares to any person if a special resolution to that effect is passed. It makes the special resolution a precondition to the offer, or the option. Without the special resolution the offer or the option is bad. It would mean, in the instant case, that there being no special resolution, the clause in the debenture trust deed providing the option is bad. This the plaintiffs may not urge having given up the challenge to the debenture trust deed.

But, Mr. Cooper said, 'further shares aforesaid' in sub-s. (1A) must be read in the context of 'where .... it is proposed to increase the subscribed capital of the company by allotment of further shares' in the opening portion of s. 81. This must be done.

Mr. Cooper submitted that in the case of options given to convert debentures (or loans) into shares the proposal to increase the capital of the company by allotment of further shares would come to be only after the option was exercised. He submitted that, therefore, the special resolution was not a precondition to the giving of the option but to the issue of the shares upon the exercise of the option.

Once the company makes an offer under sub-s. (1) or (1A) and the offeree accepts it, the company is bound to allot the shares accepted. Similarly, once the company gives to any person the option to call for shares, and the person exercise the option, the company is bound to allot the shares opted for. It cannot then be said by the company that the shares opted for would be issued provided a special resolution to increase the subscribed capital of the company was passed. Nor, for the same reason, can it be urged that the option to call for shares is not invalid but only subject to the sanction of a special resolution. The special resolution must precede the issue of the debentures containing the option to call for shares, just as much as it must precede the offer of shares, whether sub-s. (3) applies or sub-s. (1A). If the special resolution has not sanctioned the conferment of the option before the issue of the debentures, the conferment is bad.

Let me look at the debenture trust deed to test the argument that the debenture trust deed is unaffected even if the conferment of the option has to be preceded by a special resolution. The argument is that the option would be contained in the debentures that were yet to be issued and the issue thereof could be preceded by a special resolution.

The 22nd recital of the debenture trust deed states that the debenture trustee had at the request of company consented to act as trustees of the deed on the terms and conditions therein after appearing. In cl. 1 debentures are defined to mean the debentures issued under 'these presents and in accordance with the forms set out in the Fifth Schedule'. The debenture holders are defined to mean the holders for the time being of the debentures so issued on the conditions endorsed on the debentures. Under cl. 2 it is stated that the debentures issued under the debenture trust deed and which were entitled to its benefit would be 35,000, 11% convertible debentures comprised in series A to G. Clause 4 of the debenture trust deed provides the right of conversion and cl. 5 of the form of debentures provides the mode in which the right may be exercised. Both these have been quoted above.

It is patent, therefore, first, that the debentures were to be issued under the debenture trust deed and, secondly, that the debenture trustee accepted the assignment on the terms and conditions contained in the debenture trust deed, including the terms of conversion. The option to convert therein is not made subject to the sanction of a special resolution but is unqualified. To read into it this qualification would, in my view, be unjustified, the more so as it would be done without bearing the debenture trustee, who is not a party to the suit.

As it stands, then, the validity of the option clause in the debenture trust deed is impeached by the argument that the impugned phrase in cl. (b) of the proviso to sub-s. (3) of s. 81 is ultra vires the Constitution. By reason of the statement made on their behalf, the plaintiffs cannot be allowed impeach the validity of any part of the debenture trust deed. The constitutional argument cannot, therefore, be permitted.

The position is firmly established, in the field of constitutional adjudication, that the court will decide no more than needs to be decided in any particular case. (See Dr. Vasant Kumar Pandit v. Union of India, : 1982CriLJ340 ). Bearing this mind and having regard to the position that, first, the constitutional argument is not open to the plaintiffs and, secondly, that by virtue of my finding on the aspect of mala fides a decision of the constitutional question would be more than needs to be decided in this case, I refrain from discussing the arguments that were advanced before me on the constitutional question and the conclusion that I have reached.

Approval of Central Government not complied with

Under s. 81(3) a term in a debenture which provides for an option to convert the debenture into shares must be approved by the Central Govt. If, in Mr. Cooper's submission, there were no such approval or the terms of such approval were not complied with, the provisions of sub-s. (1A) would apply; since the provisions of sub-s. (1A) had not been complied with, the issue of the shares upon conversion was bad.

In dealing with the constitutional point, I have concluded that if the special resolution required by sub-s. (1A) had not preceded the option to call for shares the option was bad, but that it is not open to the plaintiffs to so contend in the instant case by reason of their counsel's statement.

In any event, it appears to me that there has been substantial compliance with the Central Govt's approval. On December 1, 1978, the CLB granted approval to the company for the issue of convertible debentures to GIC and its subsidiaries of the value of Rs. 10 lakhs out of total debentures of the value of Rs. 50 lakhs. Approval in respect of the other institutions were given in similar terms. On April 7, 1979, the attorneys of the institutions and the company wrote to them regarding discussions that had been held earlier. It was recorded by the attorneys that the company would take steps to approach the CLB for modification of the approvals so as to clearly specify that the convertible debentures would be to the extent of Rs. 350 lakhs in the aggregate and not only Rs. 70 lakhs as stated therein. The letters to the CLB pursuant to this discussion were written not by the company but by the institutions. On May 19, 1979, the CLB replied to GIC and stated that in the approval it had been clearly stated that debentures of the value of Rs. 10 lakhs would be convertible. Replies in similar terms were sent to the other institutions.

It is true that what the company has done is to issue convertible debentures of the aggregate amount of Rs. 350 lakhs of which only 20% in value are convertible. The effect of doing so is the same, substantially, as of issuing non-convertible debentures of the value of Rs. 280 lakhs and convertible debentures of the value of Rs. 70 lakhs.

Acquiescence, laches and ratification

Counsel for the defendants argued that relief in favour of the plaintiffs should not, in any event, be given by reason of acquiescence, laches and ratification.

It was submitted that, having regard to the knowledge of the plaintiffs as shareholders or their means of knowledge, and the plaintiffs' acts of positive assent, the plaintiffs were not entitled to the equitable relief of rectification. It was submitted that by reason of the plaintiff's acquiescence at the meeting of June 29, 1978, and their unconditional undertaking to vote in favour of the resolution under s. 293, amended to include debentures of the value of Rs. 350 lakhs, they were precluded from urging that any part of the issue of convertible debentures were for any reason void. It was also submitted that the plaintiffs were not entitled to the relief because of their acts at and in connection with the AGM of May 15, 1980. The second plaintiff as a director was a party to the directors' report which acknowledged that 51,000 shares were duly issued upon conversion, and to the balance-sheet whose accuracy must be assumed, which showed an increase in the capital due to the issue of the shares and a decrease in the amount of the loan from Rs. 350 lakhs to Rs. 280 lakhs. It was submitted that the 1st plaintiff, having attended this AGM, was a party to the approval of the directors' report and the adoption of the accounts. It was also submitted that the plaintiffs had received dividend for the years ended December, 1979, and December, 1980, on profits due to the utilisation of the loans and issued on the basis of the increased share capital.

Counsel for the plaintiffs relied on authorities to which I now refer. In Phosphate of Lime Co. Ltd. v. Green [1871] LR 7 CP 43, it was observed that the law with respect to ratification was clear. The principle by which a person on whose behalf an act was done without his authority may ratify and adopt it, is as old as any proposition known to law, but it is subject to one condition; in order to make it binding, it must be either with full knowledge of the character of the act to be adopted, or with intention to adopt it at all events and under whatever circumstances. In regard to the knowledge of the shareholder it was observed by Brett J. that it was sufficient to show that facts were made known to the shareholders, into the effect of which they might and ought to have inquired, and to which they ought to have objected at the time, unless they intended to adopt the transaction.

In re New Zealand Banking Corporation [1868] 3 Ch App 131, it was held that it was impossible not to impute to every shareholder of the company the knowledge of what the memorandum of association contained, for, if they chose to address their minds, the shareholders had all the facts that were necessary and when, in the face of that, and with that knowledge, they passed, resolutions it was to be considered that they had done what was necessary to cure any irregularity that had been committed.

In re Magdalena Steam Navigation Company, 70 English Reports 597, it was held that debentures issued by directors under the seal of their company without due authority could not be enforced by members of the company who accepted them after having been present at the meeting where the issue of the irregular debentures was sanctioned; and bona fide transferees for value from such shareholders were in no better position. Neither could strangers enforce them as valid legal securities. But where the moneys advanced on such irregular securities had been applied by the directors for the benefit of the company, and the shareholders had acquiesced in the transaction, the company and the shareholders were precluded from disputing their liability to repay the advance. They were bound by acquiescence not to recognise the instruments as valid debentures, but to accept their liability for the advance, regarding the debentures as nothing more than evidence of the debt.

In V. N. Bhajekar v. K. M. Shinkar [1934] 4 Comp Cas 434 (Bom); 36 Bom LR 483, it was held that a company cannot confirm or ratify anything which is beyond its powers, express or implied, in the memorandum or conferred by statue. 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 general meeting or even by acquiescence, provided that the shareholders had knowledge of the facts relating to the transaction to be ratified or the means of knowledge are available to them.

Mr. Cooper submitted that acquiescence at the time the impugned action was in progress was different from acquiescence after the act. In the latter case the right to challenge the action had vested and could not be divested except by what amounted to fraud or accord and satisfaction. In such a case delay was irrelevant until the suit was barred by limitation. The doctrine of acquiescence was based on the principle that delay defeated equity and also defeated equity and also defeated a legal right where the plaintiffs stood by for an unconscionably long period, for, in England there was no statutory limitation. In India, by reason of statutory limitation, the principle was much weakened. Acquiescence to bar a relief had to amount to fraud and any action of ratification required the intention to ratify with the knowledge of all the relative facts and the knowledge that the act to be ratified was bad. It had to be a conscious act with knowledge and intent. The onus of proving acquiescence was on the other party. In Mr. Cooper's submission not even a prima facie case of acquiescence had been established against the plaintiffs. Mr. Cooper relied upon authorities which I now set out.

In Thakor Fatesingji Dipsingji v. Bamanji Ardeshir Dalal [1903] 5 Bom LR 274, a Division Bench of this court drew a distinction between estoppel and acquiescence. Acquiescence, in an act while it was still in progress operated as an estoppel if it had induced an action infringing a right. Submission to an action when it had been completed did not change the part, and the right of action once vested could not as a general rule, be divested without accord and satisfaction. Estoppel by acquiescence had no application to an ex post facto submission not amounting to ratification, and inducing no action or omission, and, consequently, insufficient to constitute what in such case would be necessary; accord and satisfaction with full knowledge. Acquiescence after a fait accompli if not prolonged beyond the verge of limitation, was no bar to a right of suit already accrued.

In Ghasia v. Thakur Ramsingh , Kinkhede, A.J.C. said that there was a distinction between a case where the acquiescence alleged occurred whole the act acquiesced was in progress, and another where the acquiescence took place after the act had been completed. In the former case, the acquiescence under such circumstances that assent might be reasonably inferred from it. In the latter case, when the act was completed without any knowledge or without any assent on the part of the person whose right was infringed, the matter had to be determined on very different legal considerations. A right of action had then vested in him, and a mere delay to take legal proceedings to redress the injury could not, by itself, constitute a bar to such proceedings, unless the delay on his part, after he had acquired full knowledge had effected or altered the position of his opponent. It followed that delay would count against any person who had shown quiescence under the circumstances from which assent could be reasonably inferred as a matter of a legal inference.

191. In Willmott v. Barber [1880] 15 Ch.D. 96, Fry J. observed (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. A man is not to be deprived of his legal rights unless he has acted in such a way as would make it fraudulent for him to set up those rights. What, the, 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 call 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 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 judgment, nothing short of this will do.'

192. In the Hope Mills Ltd. v. Sir Cowasji J. Readymoney : (1911)13BOMLR162 , Beaman J. quoted and followed the exposition of the principle by Fry J. The principle has also been followed by the Allahabad and Calcutta High Courts.

193. In S. L. Ramaswamy Chetty v. M. S. A. P. L. Palaniappa Chettiar, : AIR1930Mad364 , a Division Bench of the Madras High court observed that (p. 369) :

'The ground for admitting the defence of acquiescence or laches according to the doctrine of the English Courts of equity is that a plaintiff in equity is bound to prosecute his claim without undue delay. Where, however, there is, as in India, a statutory time limit to all conceivable kinds of action, the plaintiff is entitled to the full statutory period before his claim becomes unenforceable. Besides, even if in such cases the defence of laches were admissible the defendants would have to show that they had suffered a change of position by reason of the respondent's laches in which it would not be reasonable to allow him to assert his right.'

194. In Smt. Premila Devi v. Peoples Bank of N. India Ltd. AIR 1938 PC 284, it was held that (p. 13 of 9 Com Cas) :

'There can in truth be no ratification without an intention to ratify, and there can be no intention to ratify an illegal act without knowledge of the illegality.'

195. In Firestone Tyre and Rubber Co. v. Synthetics and Chemicals Ltd. [1971] 41 Comp Cas 377, this court held that there could be no ratification except with full knowledge of the facts and the shareholders were never asked to ratify the resolution in question in that suit after the facts were made known to them. In the context of notice the court approved the observations of a Division Bench of the Calcutta High Court in Shalagram Jhajharia v. National Company Ltd. [1965] 35 Comp Cas 706thus :

'As the legislature has thought it fit to provide that shareholders must approve of the appointment of selling agents the opportunity given to the shareholders must be full and complete and there must be a full and frank disclosure of the salient features of the agency agreement before the shareholders can be asked to give their sanction. The provision for inspection of the agreement at the registered office of the company is not enough. Few shareholders have either the time or the inclination to go to the registered office to fine out what the company is about to do. Moreover, such an opportunity is illusory in the case of shareholders who do not live in Calcutta when the registered office is situate here.'

196. In Tilakdhari Lal v. Khedan Lal AIR 192 PC 112, it was held that notice could not in all cases be imputed from the mere fact that a document was to be found upon the Indian register of deeds. This was followed by this court in Peerka Lalka v. Babu Kashiba Mali AIR 1923 Bom 410.

197. As I look at it, the matter can be treated on a simpler basis if one keeps in mind that the act of illegality here is the act of waiver. The plaintiffs must be shown to be estopped by reason of acquiescence in the act of waiver. Laches must be shown to have occurred in relation to act of waiver. Ratification must be of the act of waiver.

198. A man may be said to have acquiesced in the act of another if, knowing it to be a legal wrong to himself, he stands quiet and lets it happen. He is then estopped by acquiescence from challenging the act. The plaintiffs can be said to have acquiesced in the act of waiver if they had known before May 31, 1979, that the act of waiver was going to take place. Attributing to the plaintiffs the knowledge of the letters of intent mentioned in the notice of the meeting of June 29, 1978, and taking into account their vote at that AGM in favour of the resolution under s. 293 authorising the creation of the security for the debentures, the plaintiffs could still have had no knowledge or means of knowledge that there was going to be the act of waiver of a precondition mentioned in the debenture trust deed immediately after it was executed. I am, therefore, unable to hold that the plaintiffs are estopped by acquiescence.

199. A man may be said to have been guilty of laches if, after finding out that an act, which does a legal wrong to himself, has been done, he stands quiet for some substantial period of time. He may then be disentitled to relief by reason of laches. The plaintiffs can be said to have been guilty of laches if, after finding out about the act of waiver, they had stood quiet for some period of time. It is shown that at the June, 1979, AGM, the chairman stated that the institutions had exercised their options to convert and there was a discussion in this behalf. It is not shown, nor was it the defendants' case, that the fact of the waiver was disclosed or discussed or, for that matter, any disclosure was made which could have suggested that the act of waiver had occurred. At the first board meeting that was attended by the 2nd plaintiff in March, 1980, the balance-sheet for the year endead December, 1979, was signed and the directors' report was approved. They were considered and adopted at the AGM of May 15, 1980, when both the plaintiffs were present. There is nothing in the balance-sheet, the accounts or the directors' report which would suggest the fact of the waiver. It is not shown nor is it the defendants' case that the fact of the waiver was disclosed at the board meeting or that any disclosure was made which could have suggested that the act of waiver had occurred. It was urged further that the plaintiffs should be deemed to have constructive notice that the debentures were issued on May 31, 1978, and the shares on conversion were issued on June 5, 1978, by reason of the annual return filed by the company with the Registrar of Companies. A copy of the annual return is on record. Assuming that, it would not disclose that fact of the waiver to the plaintiffs. That fact they could have inferred only if after inspecting the annual return they had inspected the debenture trust deed at the company's office and ascertained the terms of conversion. This does not appear to be the basis upon which the doctrine of constructive notice can be applied, and that to spell out laches.

200. It was submitted that the plaintiffs had not given any explanation in the witness box why they had instituted the suit so long after the issue of the shares although they had stated the reason in an affidavit filed in support of their motion for interim relief and that, therefore, they were barred from obtaining the relief sought in the suit. Counsel for the defendants relied upon the relevant portion of that affidavit. This was, quite rightly, objected to. No part of that affidavit is tendered on record and, indeed, it could have been tendered only if the defendants intended to use it as admission against the plaintiffs, which they did not. What they really say is, a false reason is stated in the affidavit which the plaintiffs do not dare to advance in the box. That the affidavit may not be relied upon is clear from the judgment in Clemens v. Clemens Bros. Ltd. [1976] 2 All ER 268 . The court had said that (at p. 277) : '.... an affidavit sworn in interlocutory proceedings cannot be relied on by the other party at the trial for its full contents as evidence. The plaintiff can, however, rely on any admission to be found in it, just as reliance can be placed on any other document which contains an admission.'

201. There is nothing upon the record that indicates that the plaintiffs took unduly long to institute the suit after acquiring the requisite knowledge.

202. Ratification may be said to have occurred when the persons concerned approve an act done on their behalf with knowledge of its irregularity or upon the basis that they endorse it, irregular though it may be. There is no evidence that the shareholders of the company ever came to know the fact of the waiver so that they could ratify it, nor is there any evidence that they intended to and did ratify the issue of the shares upon conversion, whether or not it was in order.

203. I am entirely at a loss to understand how, in the circumstances, the acceptance of dividends upon their shares estops the plaintiffs from claiming relief.

204. The Plaintiff's conduct

205. It was submitted by counsel for the defendants that the plaintiffs' conduct disentitled them to relief. The circumstances relied on by counsel for the defendants were these :

That the plaintiffs had issued a false circular to get control of the company.

That to the witness Goculdas, shown on the circular to be its signatory, the case has been put in cross-examination that the issue of the circular had been authorised by him but the plaintiffs had not gone into the witness box to prove that case.

That the undertaking to vote in respect of s. 293 resolution at the 1978 AGM given at the hearing for interim relief on the writ petition challenging the freezing order, is not mentioned in the plaint.

That the issue of debentures is challenged in the plaint but the issues relative thereto had not been pressed.

That, though the plaint stated that the shareholders objected to the conversion option at the 1979 AGM this had not been proved.

That the allegations against the Controller of Capital Issues and the Company Law Board contained in the plaint had not been pressed.

Now, it is true that to the witness Goculdas the case was put in cross-examination that the circular had been authorised by him and that the plaintiffs did not go into the box to substantiate that case. Goculdas' evidence must, consequently, be accepted that the circular, in so far as it was purported to be signed by him, was false. It is also true that many of the issues raised on the basis of the averments made in the plaint have not been pressed.

In exercising discretion, however, the court must consider not only the plaintiffs' conduct but also that of the defendants. I have held that the company's directors acted mala fide and in breach of fiduciary duty in exercising the power of waiver and that the institutions were privy and party to this. Having weighed the conduct of the one against the findings regarding the other, I believe I would be unjustified in exercising discretion in favour of the defendants.

Restitution

Ordinarily, the institutions would have been entitled to restitution to the position of being holders of convertible debentures with the option to convert 20% of the value thereof into shares during a stated period. I have here held them to be privy and party to the mala fide exercise of the power of waiver by the company's directors so that they could secure the shares in time for voting thereon at the 1979 AGM. It does not advance the defendants' case to say that, in fact, the votes upon these shares have not used at the 1979 AGM. The point is that, as it appears to me upon the prima facie case made out-which has not been refuted-the power of waiver was exercised so that these votes would be available to the institutions to try and outvote the Berlias and their supporters, if this became necessary, at the 1979 AGM.

It was suggested that the company should be ordered to register the shares as on July 1, 1979, instead of June 5, 1978, that is to say, after the expiry of the notice period of one month, which had been waived. The exercise of the power of waiver has not been held by me to be bad by reason of some technical lapse which can be so cured.

In the circumstances, the institutions cannot be restored to the position of being holders of convertible debentures with the option to convert 20% of the value thereof into shares during a stated period, and cannot, justly, complain of it. The institutions shall, however, be restored to the position of debentureholders who have already (but, in view of the finding, unfruitfully) exercised their option to convert. Equities will be adjusted in the sense that the institutions will hold in trust for the company such amounts as they have received from the company as and by way of dividends on the shares as are in excess of interest at the debenture rate of 11% and shall adjust them against future interest.

206. I answer the issues thus :

'Issues on behalf of the defendants 1 to 7 : Issue No. 1 In the negative.Issue No. 2 In the negative.Issue No. 3 In the negative.Issue No. 4 In the negative.Issue No. 5 In the affirmative.Issue No. 6 Not necessary.Issue No. 7 In the negative, in the sense that theexact number of equity shares hasnot been established.Issue No. 8 The suit is maintainable.Issue No. 9 The plaintiffs are entitled to urgethe contention.Issue No. 10 Not pressed.Issue No. 11 In the negative.Issue No. 12 Not pressed.Issue No. 13 Does not survice.Issue No. 14 In the negative.Issue No. 15 In the negative.Issue No. 16 In the negative.Issue No. 17 There was power to waive thenotice. The act of waiver is, however,vitiated by mala fides.Issue No. 18 The 1st to 7th defendants wereparty to the abuse of power in relationto the issue of the shares.Issue No. 19 In the affirmative.Issue No. 20 In the negative, this issue was notpressed in final argument.Issue No. 21 In the affirmative, in the sense thatthe conversion of debentures and theallotment of shares pursuant to themala fide exercise of the power towaive is bad.Issue No. 22 In the negative.Issue No. 23 In the negative.Issue No. 24 In the negative.Issue No. 25 In the negative.Issue No. 26 In the negative.Issue No. 27 The institutions were not allotteesin good faith of the shares uponconversion.Issue No. 28 In the negative.Issue No. 29 In the negative.Issue No. 30 Not pressed.Issue No. 31 In the negative, the plaintiffs areentitled to the challenge.Issue No. 32 In the negative, the plaintiffs areentitled to the challenge.Issue No. 33 In the negative.Issue No. 34 In the negative.Issue No. 36 This issue has been deleted.Issue No. 37 In the negative.Issue No. 38 In the affirmative, by reason of themala fides for the waiver.Issue No. 39 In the negative, the suit ismaintainable.Issue No. 40 In the affirmative, the plaintiffs areentitled to the relief.Issue No. 41 In the negative, not argued.Issue No. 42 In the negative.Issue No. 43 In the negative, the plaintiffs arenot precluded or estopped from thechallenge.Issue No. 44 In the negative, the plaintiffs havea cause of action.Issue No. 45 In the negative, the plaintiffs areentitled to the relief.'Additional issues on behalf of defendant No. 8 in additionto those raised by defendants 1 to 7 :Issue No. 1 Not pressed.Issue No. 2 In the affirmative.Issue No. 3 In the negative.'Further issues on behalf of defendants 1 to 7 arising fromthe amendment to the pleadings :Issue No. 1 The approval covers the option term in the debentures.Issue No. 2 In the negative.Issue No. 3 In the negative, the plaintiffs have a cause of action.issue No. 4 In the negative.'Supplemental issues on behalf of defendant No. 8 :Issue No. 1 The approval covers the option termin the debenture.Issue No. 2 In the negative.Issue No. 3 In the negative, the plaintiffs havea cause of action.Issue No. 4 In the negative.

207. In the premises, I pass the following order :-

It is declared that the entry upon the Register of Members of the 8th defendant as and from June 5, 1979, of the names of the 1st, 2nd, 3rd, 4th, 5th, 6th, and 7th defendants in respect of the 43,750 shares, particulars whereof are given in Exhibit S to the plaint, is bad and illegal. The 1st to 7th defendants shall as and from June 5,1979, continue to hold the debentures in conversion of which the said shares were issued. The 1st to 7th defendants shall not have an option to convert any of 11% privately placed debentures into shares.

It is ordered and decreed that the 8th defendant do rectify its Register of Members by deleting therefrom the names of the 1st to 7th defendants as holders of the said shares. The 1st to 7th defendants are permanently restrained from exercising any voting rights in respect of the said shares in any manner whatsoever. The 8th defendant is permanently restrained from paying to the 1st to 7th defendants any dividends in respect of the said shares.

The 8th defendant is ordered and directed to carry out in its books and registers all alterations consequent upon this order within 30 days from today and to give to the Registrar of Companies all notices consequent upon it within the same period.

The 1st to 7th defendants are ordered to hold in trust for the 8th defendant such amounts as they have received from the 8th defendant as and by way of dividend in respect of the said shares as are in excess of the amounts of interest that would have been payable thereon at the debenture rate of 11% per annum and do adjust the same against future interest payable on the said debentures.

Ordinarily, costs should follow the event. However, a great deal of time has been spent upon issues which have either not been pressed at the stage of final argument or which have been decided against the plaintiffs.

The defendants do pay to the plaintiffs one-half of the total amount of costs that would be payable upon the basis of two counsel being briefed.


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