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Juggi Lal Kamlapat Jute Mills Co. Ltd. Vs. the Registrar of Companies - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtAllahabad High Court
Decided On
Case NumberCompany Petn. No. 29 of 1964
Judge
Reported inAIR1966All417
ActsCompanies Act, 1956 - Sections 17 and 17(1)
AppellantJuggi Lal Kamlapat Jute Mills Co. Ltd.
RespondentThe Registrar of Companies
Appellant AdvocateS.K. Kapoor, ;Jagdish Swaroop and ;Vinod Swarup, Advs.
Respondent AdvocateMukerji, Solicitor-General
DispositionPetition allowed
Excerpt:
.....association - section 17(1)(d) of companies act, 1956 - new business of company not connected with existing business and not destroying the existing business - held, court cannot refuse to alter memorandum of association. (ii) decision of share holders - section 17 of companies act, 1956 - memorandum of association can be altered before taking steps for obtaining industrial licence. - - for example, if the existing business is not being run efficiently or is running at a loss, and it is possible to run it efficiently or at a profit, by making improvements or by expanding the plant, and even then no attempt is made to efficiently run the existing business, the opening of a new business shall invariably be detrimental to the existing business and it cannot be said that the new business..........the manufacture of rubber goods shall not, under the existing circumstances, be detrimental to, nor shall be destructive of, or inconsistent with the existing business, and can be advantageously combined with the existing business of the company. considering that the company has the business experience and can instal and run the rubber factory, it can be held that this business can also be conveniently combined with me existingbusiness.the proposed alteration to the memorandum of association is not general and vague and can be confirmed as a whole.30. it is not necessary that the alteration be confirmed only after the company obtains an industrial licence for opening the new factory: in fact, it is desirable to have the memorandum of association altered before taking steps.....
Judgment:

Mathur, J.

1. This is a petition under Section 17 of the Companies Act, 1956, of Juggilal Kamlapat Jute Mills Company, Limited, (to be referred hereinafter as the Company) for confirmation of the alteration to the Memorandum of Association of the Company.

2. The Company was registered on the 7th of February 1931, under the provisions of the Indian Companies Act, 1913, as a Company limited by shares with its registered office at Kanpur. The objects for which the Company was formed are set out in Clause 3 of the Memorandum of Association. Even though the Company was named Jute Mills Company and is running the business of jute, it can under the Memorandum of Association carry on many businesses not connected with jute.

3. It was recently that the Directors of the Company desired to manufacture goods of Natural Rubber, Synthetic Rubber and Reclaim Rubber, after a sister concern, J. and K. Commercial Corporation, Limited, obtained a Letter of Intent for industrial licence from the Government of India to establish a factory for Reclaim Rubber and also obtained an import licence (which if may be noted is not transferable for importing plant and machinery for producing Reclaim Rubber under Belgium credit.

4. The Company held an Extraordinary General Meeting on September 30, 1964, and in accordance with the Companies Act, 1956, unanimously passed the following by a special resolution:

'Resolved that the Memorandum of Association of the Company be altered by adding a new Clause 4 (A) as specified below after Clause 4:-- '4 (A) To undertake and carry on business as Manufacturers of Natural Rubber, Synthetic Rubber and Reclaim Rubber and all kinds of rubber goods and rubber by-products and allied materials and to take all steps incidental to such business including acquisition of the requisite raw materials either by cultivation, purchase, processing or otherwise.'

As provided in Section 17 of the Companies Act, 1956, alteration to the Memorandum of Association with respect to the objects of the Company does not take effect until, and except in so far as, it is confirmed by the Court on petition. The present petition was, therefore, made for the confirmation of the alteration to the Memorandum of Association.

5. When the notice of the Extraordinary General Meeting was given to the share-holders for the consideration of the proposed alteration to the Memorandum of Association, it was merely indicated that the Board of Directors of me Company, after giving its most careful consideration to the aspect of installing a Rubber Factory, was of the opinion that the Company could conveniently and advantageously combine with the existing business the business of installing and running a Reclaim Rubber Factory at Kanpur, as one of its Units; and that the Company had the resources, business experience and facilities at its disposal to work a business of the type proposed. This opinion of the Board of Directors is contained In the Explanatory Statement accompanying the notice of the Extraordinary General Meeting. From the minutes of the General Meeting it appears that after a free and frank discussion the above resolution was put to the Meeting and was declared carried unanimously. The share-holders of the (Company who attended the meeting or sent their proxy were generally members of the Singhania family. Outsiders consisted of Sri Stanley D. Noronha and Sri P.D. Chandrana and two Agarwals representing the deities of the Singhania family. In one way, every one is connected with the Singhania family or the Singhania group of Companies.

6. A few details have, however, been given in Para. 8 of the petition to suggest why the proposed alteration can be conveniently or advantageously combined with the existing business of the Company. These grounds are as below:

'(a) The existing resources and administrative set up of the Company are adequate and competent for installing and running the rubber reclamation plant.

(b) The Company already holds an industrial Licence granted by the Government of India. In the meantime, the Company has already received an import licence for importing the plant and machinery under Belgium credit.

(c) The Company will be able to get scrap rubber at competitive and cheaper rates at Kanpur, where the plant is proposed to start.

(d) There is no other Rubber Reclamation Plant in Northern India and it will be advantageous if the Company carries on its new business. There is great, demand of rubber and the rubber so produced by the Company will immediately attract market to the advantage of the Company.'

It is further mentioned that the Company is in a sound financial position and has adequate arrangements for Working Capital (Para. 10 of the petition); and that the Company has taken a loan of Rs. 27 lacs from the National Industrial Development Corporation, New Delhi, for modernisation and expansion of the plant of the Company and the Corporation has accorded its approval to the proposed alteration to the Memorandum of Association (Para 9 of the petition).

7. The Company, at no time, issued debentures; and the big creditors of the Company, namely, J. K, Charitable Trust, J. K.Synthetics, Ltd., and J. K. Commercial Corporation, gave their consent in writing to the proposed alteration. In the circumstances, it was not considered necessary to issue notice of the petition to the creditors of the Company.

8. The petition is opposed by the Registrar of Companies, U. P., Kanpur, on the ground that the business now sought to be undertaken by the petitioner Company is entirely new, and alien to the existing business of the Company, and it cannot be said that this business can profitably, or conveniently and advantageously be combined with the business of the Company. It was further mentioned that the Company had not yet obtained an industrial licence for opening a Rubber factory and hence the petition for confirmation of alteration to the Memorandum of Association was premature. The Registrar did not admit the material facts detailed above, and merely put the Company to proof. However, there exists no ground to doubt their correctness, and hence for purposes of the present proceeding such facts can be accepted.

9. The petition is apparently governed by Clause (d) of Section 17(1) of the Companies Act, 1956, whereunder a company can, by special resolution, alter the provisions of its Memorandum of Association with respect to the objects of the Company

'to enable it to carry on some business which under existing circumstances may conveniently or advantageously be combined with the business of the company.'

Alteration to the Memorandum of Association is to enable the company to carry on 'some business,' which can include a new business. Consequently, the Court cannot refuse to confirm the alteration to the Memorandum of Association simply because the change is desired to carry on a new business, not connected with, nor having any relation to, the existing business or businesses of the Company.

10. The restriction imposed by Clause (d) of Section 17(1) of the Companies Act, 1956, is that the business must be one which can, under existing circumstances, be conveniently or advantageously combined with the business of the Company. The new business desired to be undertaken by the Company must, therefore, be one which can be combined with the business of the Company, which would ordinarily mean the existing business, and not a business not undertaken but could be undertaken under the existing Memorandum of Association. To lay down an inflexible rule as to the nature of a new business which can be conveniently or advantageously combined with the business of the company is difficult, if not impossible. Consequently, whatever the Courts may lay down shall be by way of illustration and not to completely exhaust the scope of the above provision. Further, it is possible that what can be conveniently or advantageously combined with the business at one time cannot be so combined at another occasion. They are the existing circumstances which shall be the basis of determination whether the new business can be combined with convenience and advantage with the existing one.

11. The word 'combine' used in Section 17(1)(d) of the Companies Act, 1956, strongly suggests that the new business should not be detrimental to the existing business of the company, nor is the new business meant to replace the existing business which would, immediately or in stages, be discontinued. This has often been expressed by saying that the additional business must not be destructive of, or inconsistent with, the existing business. [See In re Parent Tyre Co. Ltd., (.1923) 2 Ch 222, In re Modi Spinning and Weaving Mills Co. Ltd., (1963) 33 Com Cas 901 (All), In re Motilal Padampat Sugar Mills Co, (Private) Ltd., (1964) 34 Com Cas 86 (All), and In re Ambala Electric Supply Co. Ltd., (1963) 33 Com Cas 585 (Punj)]. It is immaterial whether the new business is or is not akin to or connected with the existing business. For example, a person dealing in the purchase and sale of foodgrains can do insurance business, and thus combine a business which has nothing to do even remotely with the existing business. Further, at occasions combination of a similar business without detriment to the existing business may not be possible.

12. Whether the new business is or is not detrimental to the existing business shall depend upon the facts and circumstances of the case. For example, if the existing business is not being run efficiently or is running at a loss, and it is possible to run it efficiently or at a profit, by making improvements or by expanding the plant, and even then no attempt is made to efficiently run the existing business, the opening of a new business shall invariably be detrimental to the existing business and it cannot be said that the new business can be combined with the existing one. But where there is no scope for expansion or for making improvements in the existing plant, or under the existing circumstances it is advisable to reduce the existing business, the opening of a new business can amount to combination thereof with the existing one. Further, the opening of the new business shall be to the advantage of the members of the Company and its creditors, and that would be an instance of a now business being advantageously combined with the existing business of the company under the existing circumstances.

13. A contrary view was, however, expressed in Punjab Distilling Industries Ltd. v. Registrar of Companies, (1963) 33 Com Cas 811 (Punj), where an alteration to the Memorandum of Association to carry on a new business was not confirmed because it had nothing to do even remotely with the existing business and it could not be said that the new business would be conducive to and economical or efficient in doing the existing business. This is clearly in conflict with the earlier decision of fee same High Court in (1963) 33 Com Cas 585 (Punj) (supra).

14. In, In re Bhutoria Brothers (Private) Ltd., (1957) 28 Com Cas 122: (AIR 1957 Cal 593), alteration to the Memorandum of Association to carry on a new business was not confirmed on the ground that it could not, by any stretch of language or imagination or business principles or commercial possibilities, be regard-ed as a business which could conveniently or advantageously be combined with the business of the company in the existing circumstances. However, certain observations made therein can suggest that a company cannot be permitted to earn on an unrelated new business. It was observed:

'For instance, business in clocks, musical instruments and in surgical goods would be a very strange new-comer into a business in agricultural mineral and animal products and livestocks.'

This case is thus distinguishable on facts; and as laid down therein also, the Company can be permitted to carry on a new business provided that such business can, under existing circumstances, be conveniently or advantageously combined with the existing business of the Company and such business is not detrimental to the existing business.

15. The other question which often arises, and has been raised in the instant case also, pertains to the power of the Court while confirming or refusing to confirm the alteration to the Memorandum of Association. The Court's power can easily be deduced from the provisions of Section 17 of the Companies Act, 1956.

16. Sub-section (1) of Section 17 details the nature of alterations which can be made in the Memorandum of Association and Sub-section (2) thereof provides that the alteration shall not take effect until, and except in so far as, it is confirmed by the Court on petition. Consequently, any alteration to the Memorandum of Association not covered by Sub-section (1) cannot be confirmed by the Court. An order confirming the alteration, either wholly or in part, is passed under Sub-section (5) and before confirming the alteration the Court must satisfy itself on the points covered by Sub-section (3), namely, that sufficient notice has been given to debenture holders and persons interested and that the debt or claim of objecting creditors has been discharged or determined, or has been secured. Sub-section (4) also requires that notice of the petition for confirmation of the alteration to the Memorandum of Association shall be served on the Registrar of Companies to enable him to file objections and to make suggestions, if any, with respect to the confirmation of the alteration.

17. Sub-section (6) of Section 17 lays down whose rights must be kept in mind while confirming the alteration. The sub-section provides that:

'The Court shall, in exercising its powers under this section, have regard to the rights and interests of the members of the company and of every class of them, as well as to the rights and interests of the creditors of the company and of every class of them.'

Consequently, the Court can refuse to confirm the alteration if it is of opinion that the alteration is not in the interest of the members of the Company or any of its creditors.

18. Sub-section (7) of Section 17 can also be of help in the determination of the above question. It provides that:

'The Court may, if it thinks fit, adjourn the proceedings in order that an arrangement may be made to the satisfaction of the Court for the purchase of the interests of dissentient members; and may give such ejections and make such orders as it thinks fit for facilitating or carrying into effect any such arrangement: Provided that no part of the capital of the company may be expended in any such purchase.'

In other words, the Court can, if considered necessary, confirm the alteration to the Memorandum of Association even though not passed unanimously but is a mere majority decision.

19. On reading the various sub-sections of Section 17 together it can be laid down as a safe rule that the Court can refuse to confirm the alteration to the Memorandum of Association to the extent it is not in the interest of the members of the Company or of its creditors and is not covered by Sub-section (1) thereof; and that the Court can confirm the alteration; either wholly or in part, or subject to such terms and conditions as ft may deem fit, on being satisfied that the alteration being confirmed is not beyond the scope of Sub-section (1) and does not adversely affect the rights and interests of the members of the Company and or of its creditors. No hard and fast rule can be laid down as to the quantum of evidence necessary for the satisfaction of the Court: this shall invariably depend upon the facts and circumstances of the case. For example, where the Company is in a sound financial position and the alteration is not objected to by its share-holders and creditors, the Court may take a lenient view and act like a Court of Revision; and in others, like a Court of Appeal.

20. In view of Section 17 (5) of the Companies Act, 1956, the learned Advocate for the petitioner Company conceded the above legal position; but urged that confirmation of the alteration should be a rule and the Court may refuse to confirm, or confirm in part, in exceptional circumstances only. Reliance was placed upon the English case of (1923) 2 Ch 222 (supra) wherein it was observed that:

'The question whether any given additional business is one which may conveniently or advantageously be combined with the business of the Company carried on at the time when the special resolution is passed must, in my judgment, be determined by the persons engaged in the business of the Company. It is essentially a business proposition whether an additional business can or cannot be conveniently or advantageously carried on under existing circumstances with the business of the Company.'

21. The High Courts in India have often quoted with approval this case, but never followed it in entirety. For example, in (1963) 33 Com Cas 901 (All) (supra) the proposed alteration to the Memorandum of Association was not wholly confirmed, though the Company was permitted to manufacture industrial alcohol and power alcohol, necessary for the production of acetate yarn, a material necessary tor the manufacture of cloth, the existing business of the Company. It was made clear that if by any chance the Company failed to start the production of acetate yarn within a period of two years it shall be open to the Registrar of Companies to seek modification of the order, i.e., to apply for deletion of the alteration confirmed by the Court. Similarly, in (1964) 34 Com Cas 86 (All) (supra) alteration to the Memorandum of Association was confirmed in part, and the confirmation was made subject to the maintenance of separate profit and loss account in respect of the new business for a period of five years only.

22. The above English case was followed in (1963) 33 Com Cas 585 (Punj) (supra), where the proposed alteration to the Memorandum of Association was confirmed, as a whole on finding that no one other than the Registrar of Companies had opposed the petition and the Company was in a sound financial position.

23. The English rule appears to have been followed in entirety by the Madras High Court in in the matter of Dalmia Cement (Bharat) Ltd., (1964) 34 Com Cas 729: (AIR 1965 Mad 76), though therein no reference was made to the case of (1923) 2 Ch 222 (supra). It was observed:

'But whether the business can conveniently or advantageously be combined with the business of the Company will depend a great deal upon the opinion of the directors. If the directors consider that under the existing circumstances, it will be convenient and advantageous to combine the new objects with the existing objects, and if it appears that that conclusion may be fairly arrived at, this Court will not go behind it and hold an enquiry as to whether the opinion of the directors is well founded or is justified. In the very nature of things such an enquiry will not be possible by this Court to undertake.'

In this case the proposed alteration to the Memorandum of Association was confirmed because the view of the Company was not unfair or unreasonable,

24. In (1957) 28 Com Cas 122: (AIR 1957 Cal 593) (supra) it was held that for so long as the two requirements of Clause (d) of Section 17(1) or the Companies Act, 1956, were observed, namely, that the new business was one which could conveniently or advantageously be combined with the existing business of the Company and this was possible under the existing circumstances and not under hypothetical circumstances, the share-holders and the management of the Company should be left free to add to or reduce their business by suitable alterations to their Memorandum.

25. Indian Iron and Steel Co. Ltd, (1957) 27 Com Cas 361: ((S) AIR 1957 Cal 234) is a case under Clause (a) of Section 17(1) of the Companies Act, 1956. However, with regard to the circumstances in which the Court can refuse to confirm the proposed alteration to the Memorandum of Association it was observed:

'If the share-holders were the only Judges of their own interest then I do not see why there should be such a legislative provision to insist that such an alteration even though passed by a special resolution of the share-holders should have to be confirmed by the Court on petition.'

26. To sum up, the unanimous or majority decision of the share-holders of a company toalter the Memorandum of Association is a factor in favour of the confirmation thereof; but the Court has the discretion, a discretion to be exercised judicially, in the interest of the members of the Company and its creditors, not to confirm the alteration or to confirm the same in whole or in part, or subject to such terms and conditions as it deems fit, provided that the proposed alteration falls within the scope of Section 17(1) of the Companies Act, 1956, in the instant case, being one under Clause (d) thereof, the new business can be conveniently or advantageously combined with the existing business of the Company, under the existing circumstances and not under hypothetical circumstances. Naturally, the new business must be one which is not detrimental to, and, as observed in 1923-2 Ch 222 (supra), is not destructive of, or inconsistent with, the existing business.

27. Coining to the facts of the instant case, the special resolution for the proposed alteration to the Memorandum of Association was passed unanimously in an Extraordinary General Meeting convened for the purpose; and no share-holder had appeared in Court to oppose the confirmation of the alteration. The three big creditors of the Company and also the National Industrial Development Corporation, New Delhi, have no objection to the proposed alteration to the Memorandum of the Association. It is thus evident that the alteration is not adverse to the rights and interests of the members of the Company and of its creditors. Hence the proposed alteration to the Memorandum of Association can be confirmed provided it falls within the scope of Clause (d) of Section 17(1) of the Companies Act, 1956.

28. There is nothing to show that there is scope for expansion of or making improvements in the existing plant. The Company being in a sound financial position can expand its business, and this can be done by starting a new business permissible under the Memorandum of Association or one which can be undertaken after alteration to the Memorandum of Association. As already mentioned above, the objects for which the Company was formed are so wide and general that the Company can carry on many businesses not connected with jute, and hence confirmation of the alteration shall not be contrary to the spirit of the objects of the Company. Further, the new business to be started by the Company must be one for which there is a demand and which will prove advantageous to the members and creditors thereof. Nothing has come to my notice which may show that there is a greater demand for goods which can be manufactured under the existing Memorandum of Association than for Rubber goods desired to be manufactured by the Company.

29. To put it differently, the manufacture of Rubber goods shall not, under the existing circumstances, be detrimental to, nor shall be destructive of, or inconsistent with the existing business, and can be advantageously combined with the existing business of the Company. Considering that the Company has the business experience and can instal and run the Rubber factory, it can be held that this business can also be conveniently combined with me existingbusiness.

The proposed alteration to the Memorandum of Association is not general and vague and can be confirmed as a whole.

30. It is not necessary that the alteration be confirmed only after the Company obtains an industrial licence for opening the new factory: in fact, it is desirable to have the Memorandum of Association altered before taking steps for obtaining an industrial licence. Consequently, the present petition cannot be said to be premature.

31. The petition is hereby allowed and theproposed alteration to the Memorandum ofAssociation is confirmed.


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