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Mohan Lal Chandumall and ors. Vs. Punjab Company Ltd., Bhatinda and ors. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtPunjab and Haryana High Court
Decided On
Case NumberCivil Original No. 49 of 1959
Judge
Reported inAIR1961P& H485; [1962]32CompCas937(P& H)
ActsForward Contracts (Regulation) Act, 1952 - Sections 6(3) and 9A; Forward Contracts (Regulation) (Amendment) Act, 1957; Companies Act, 1956 - Sections 181, 182, 397, 398 and 402; Evidence Act, 1872 - Sections 115
AppellantMohan Lal Chandumall and ors.
RespondentPunjab Company Ltd., Bhatinda and ors.
Appellant Advocate B.R. Tuli, Adv.
Respondent Advocate S.M. Sikri, Adv. General and; D.S. Nehra, Adv.
DispositionPetition allowed
Excerpt:
.....footing, it has become essential to alter, add and amend the articles of association of the company. ' the commission also recommended that futures markets should also be established when representative associations come to be established. futures trading in rapeseed and mustardseed oils should continue to be banned as at present in the whole of india, these recommendations bad been accepted by the government of india. in respect of such rights, failure to object is not fatal. the voting rights have been effectively entrenched by the statute and cannot be taken away by any alteration in the memorandum of association or by passing of any resolution in that behalf. i cannot conceive of a worse oppression than the denial of voting right to a shareholder, especially in a case like the..........the non-trading shareholders cannot participate in the meetings.11. article 107 provides that voting rights shall be restricted to the trading members only.12. article 115 provides that every member shall be classified within two months into panels of members approved by the board in consultation with the forward markets commission. it is then said that non-trading shareholder is deprived from being put in one of the panels. article 121 provides the constitution of directors, the total number of which shall not exceed 19. there shall be elected by the members not more than 13 directors. brokers association shall elect one director. there is also a provision for co-opting one director from the surrounding moffussil areas.lastly four directors are to be nominated by the government of.....
Judgment:
ORDER

Tek Chand, J.

1. This is a petition under Sections 397, 393, 402 and 403 of the Companies Act, 1956 on behalf of 29 petitioners against the Punjab Company Limited Bhatinda.

2. Besides the Company, 11 other respondents have also been impleaded. The Punjab Company Limited Bhatinda which will hereinafter be refer-red to as the company was incorporated in the year 1941 under the Patiala Companies Act 1996 Kk. as a public company limited by shares and it is; therefore, a company within the meaning of Section 3 of the Companies Act 1956 with its registered office at Bhatinda.

3. The nominal capital of the company is five lacs divided into five thousand shares of Rs. 100/-each. Its subscribed capital consists of 963 shares of Rs. 100/- each fully paid up; 659 shares on which Rs. 50/- per share have been paid. The amount of the paid-up capital therefore comes to Rs. 129,250/-. The Company when floated had a large number of businesses but it has been in the main engaged in doing forward contract business in grains, in particular in rapeseeds and mustard seeds.

The petitioners feel aggrieved with the mannet in which tbe affairs of the company have been conducted which according to them, is oppressive in relation to the non-trading members. They feel that the directors of the company are behaving in a manner prejudicial to the interests of the company.

4. At the meeting of the Board of Directors held on 14th of December, 1957, it was resolved that the following notice and resolution be circulated along with the following explanatory statement as required by Section 173 of the Companies Act, 1956 :

'Notice is hereby given that an extra-ordinary General meeting of the share-holders of the Company will be held on Thursday, the 9th January, 1958, at 2 p.m. at the registered office of the Com-pany to pass the following resolution with or without modification :

SPECIAL RESOLUTION :

Resolved that instead of the existing Articles of Association of the Company and the Articles us amended vide Resolution No. 2 of 19-4-57 the following Articles of Association be substituted. EXPLANATORY STATEMENT under Section 173 of the Companies Act, 1956.

In Order to bring the Articles of Association in conformity with the amended memorandum of Association of the Company and Forward Contracts (Regulation) Act, 1952 and suggestions of the Forward Markets Commission and to make the Articles more comprehensive for the benefit of the Trade and to run the company's business more efficiently and on firm and sound footing, it has become essential to alter, add and amend the Articles of Association of the Company.'

5. On 9th of January, 1958, a resolution was passed by the shareholders of the company in an extraordinary general meeting at which 28 shareholders out of the total of 237 were present. This resolution runs as under:

'Resolved unanimously that the Articles of Association of the company circulated among the shareholders, for substitution instead of the existing Articles and the Articles as amended vide Resolution No. 2 of 18-4-57, with modificatioas and amendments moved by the Chairman, and passed in this meeting are hereby approved and adopted and be substituted instead of the existing Articles of Association of the Company and the Articles as amended vide Resolution No. 2 of 19-4-57.

6. It was also resolved to send a copy of the resolution to the Forward Markets Commission, Bombay for their approval and to the Registrar of Companies, Jullundur for registration.

7. The petitioners consist of non-trading and also trading members of the company. The contention on behalf of the non-trading members is that the substituted Articles of Association have deprived them of their elementary right as shareholders ot the company under the Act. I may now consider the amendments brought by some of the impugned articles.

8. In Article 2 which gives definitions, 'member' means 'a shareholder and a trading member' and 'a shareholder' means 'a person who is registered with the company as a shareholder.' The effect of this change is that a shareholder who is not a trading member is excluded from the definition of 'member' and the result is that a number of non-trading share-holders are excluded from the definition of 'member'. According to article 11 new shares of the company shall be allotted only to the trading members of the company.

The qualitiestions of a trading member under Article 47 are the holding of shares of the company of the face value of at least Rs. 2000/- besides payment of security deposit of Rs. 1000/- building deposit of Rs. 1000/-, admission fee of Rs. 500/-> annual subscription of Rs. 151/- etc.

9. Under Article 59, the right of entering into contracts with other persons, whether trading members or not, in commodities for which the company is recognised by the Central Government, shall belong to trading members of the company. Under Article 62 the Board is required to keep separate registers of shareholders and of trading members.

10. Articles 85 to 106 deal with the holding of meetings, statutory, annual, general, ordinary ami extraordinary general meetings etc. The other matters dealt with relate to giving of notices of the meetings, quorum adjournment of meetings, the manner of taking votes and of demanding of poll etc. One of the grievances is that in consequence of the change in the definition of 'member', the non-trading shareholders cannot participate in the meetings.

11. Article 107 provides that voting rights shall be restricted to the trading members only.

12. Article 115 provides that every member shall be classified within two months into panels of members approved by the Board in consultation with the Forward Markets Commission. It is then said that non-trading shareholder is deprived from being put in one of the panels. Article 121 provides the constitution of directors, the total number of which shall not exceed 19. There shall be elected by the members not more than 13 directors. Brokers Association shall elect one director. There is also a provision for co-opting one director from the surrounding moffussil areas.

Lastly four directors are to be nominated by the Government of India in accordance with Section 6(2)(b) of the Forward Contracts (Regulation) Act of 1952. Thus the non-trading shareholders have no representation at all On the Board and they have no right to participate in the election of a director. Article 159 which is very, extraordinary provides for declaration of a dividend to be paid to the members of the company. As the word 'member' does not include non-trading shareholder, he is excluded from participation in the dividend.

It has already been noticed that the non-trading members have contributed more than fifty per cent of the paid-up capital of the company. To sum up, the oppression complaint consists of the non-trading shareholders having no right of vote, calling of a meeting, of passing or objecting to the passing of the balance-sheet, of electing directors or controlling their activities or becoming directors themselves, electing auditors or even declaring or receiving dividend.

13. Before dealing with the question whether the impugned amendments in the Articles of Association call for the exercise of powers of this Court under Sections 397 and 398 of the Companies Act the position taken up by the respondents may be examined. On their behalf it is, inter alia, contended that the petition does not disclose any mismanagement of the affairs of the company or oppression on any member or members of the company or such conduct which may be prejudicial to the interests of the company.

It is conceded that prior to 9th of January, 1958, the Articles of Association of the company gave the right of vote to every shareholder and aow that right has been restricted to trading members only. The amendments in the Articles ot Association have been necessitated in pursuance of the provisions of the Forward Contracts (Regulation) Act of 1952 as amended by Act II of 1957. It is said that the Government of India by its notification dated 25th January, 1955 (R/1) applied Section 15 of the Forward Contracts (Regulation) Act 1952, to rapeseeds and mustardseeds in the whole of India except Greater Bombay with the result that the contracts in these two commodities could be contracted only through a recognised association.

The Government of India by another notification of the same date applied Section 17 of the Forward Contracts (Regulation) Act 1952 to rapeseed and mustardseed oil in the whole of India, the effect of which was to continue the ban on transferable specific delivery contracts for the purchase or sale of these oils.

14. One of the recommendations made by the Forward Markets Commission was that the grant of recognition to the associations dealing in these commodities be conditional 'on their previously carrying out such modifications in their Articles of Association, trading bye-laws and working procedure as may be suggested to them by the Commission.' The Commission also recommended that futures markets should also be established when representative associations come to be established.

Futures trading in rapeseed and mustardseed oils should continue to be banned as at present in the whole of India, These recommendations bad been accepted by the Government of India. It is alleged that the amendments in the Articles of Association were accepted with a view to comply with the wishes of the Government ot India.

15. An affidavit sworn by Shri E. K. Vasu-devan, Deputy Director, Forward Markets Commission, Bombay has been placed on record. Thus affidavit is discursive and gives the background resulting in the amendment of the Articles of Association. It is stated that on the suggestion of the Forward Markets Commission, the trading members were given exclusive representation On the governing body of the Association and the respondent-company was therefore required to carry out several modifications in the Articles of Association with a view to achieve objects laid down by the commission.

He stated that every amendment had been suggested by the Commission including an amendment to Article 107 and after the amended article had been adopted, that article along with other articles were approved by the Commission. It was submitted in the affidavit that the impugned Articles of Association of the company, though apparently in conflict with the provisions of the Companies Act 1956, are expressly saved and declared legal under the provisions of Section 9A of the Forward Contracts (Regulation) Act, 1952.

The said Section 9A was incorporated in the Act by the Amending Act 32 of 1957 with the object of making it legal for companies granted recognition under Section 6 of the Act to restrict the voting right to persons interested in the trade and keeping out persons interested only in profits or dividends. This portion of the affidavit is argumentative and is indicative of the policy and does not contain matters which are factual.

It has also been urged that in February 1957, the respondent-company made an application under Section 5 of the Forward Contracts (Regulation) Act for recognition and after the Articles of Association had been amended, the recognition was granted by the Central Government under Section 6 of the Act on 28th April, 1958. He said that the resolution of 9th of January, 1958 was passed unanimously by 28 shareholders present, out of whom 20 were non-trading. The petitioners, however, are not among those 20 non-trading shareholders.

It was also said that no objection was raised by any non-trading members that the notice of the meeting was not sufficient or the modifications or the proposed amendments were not understood. It was also said that the first elections according to the amended Articles of Association were held in August, 1958 and the non-trading share-holders never protested that they were not allowed to vote and this right of theirs had been erroneously taken away. It was urged that the working capital of the company runs into over eight lacs and contributed in the main by the trading members as against Rs. 67,100/- contributed by the non-trading shareholders.

The undeniable fact, however, is that out of the paid up capital of Rs. 1,29,250/-, the non-trading shareholders have contributed Rs. 67,100/- and trading shareholders have contributed Rs. 62,150/-. The sum of eight lacs referred to above, consists of cover money deposits, margin money deposits, security deposits of trading members.

16. The question which now calls for decision is whether on the admitted facts and circumstances of this case, a case has been made out for interference under Sections 397 and 398 of the Companies Act, 1956. My attention has been drawn to Section 9A of the Forward Contracts (Regulation) Act as amended by Act 32 of 1957. It empowers an association to which the Central Government has granted recognition under Section 6 to make rules or amend any rules made by it, to provide for all or any of the matters mentioned therein, namely, to grouping of the members of the association, according to functional or local interests, to reserve seats on its governing body for members belonging to each group etc.

This provision also refers to the restriction ot the voting rights in respect of any matter placed before the Association at any meeting to those members only who by reason of their functional or local interests, are actually interested in such matters. I do not find anything in Section 9A to be violative of the provision contained in the Compa- nies Act. 1956. This provision does not extend immunity to the Articles which have given umbrage. These Articles do not become inviolate by virtue of provisions of Section 9A.

17. In this case, the non-trading shareholders have been deprived of their right to vote, to call meetings, to elect directors and auditors. They cannot exercise the right to declare or receive dividend. It is argued on behalf of the respondents that after due notice had been given to all shareholders of the company, a meeting was called on 9th of January, 1958, when the impugned Articles had been adopted unanimously. The first elections were held in August, 1958, without anybody raising objection to the elections in accordance with the new Articles which prohibited the non-trading shareholders from voting.

From this conduct, I am desired by the respondents to hold, that the petitioners are estopped from raising the plea under Sections 397 and 398. On behalf of the petitioners, it is argued that the meeting of 9th of January, 1958, was not adequately represented because out of 237 shareholders only 28 were present. This argument of Mr. B. R. Tuli, learned counsel for the petitioners, does not carry much weight. If the shareholders concerned, who had received proper notice and to whom the proposed amendments were sent, did not choose to study the modifications or even to attend the meeting, they cannot be helped to say that there was no sanctity attached to the resolution unanimously passed because the meeting was not adequately re-presented. No weight can be attached to such a contention,

18. The only argument which merits consideration is that omission to object is immaterial in respect of matters which deprive a shareholder of certain fundamental statutory rights guaranteed by the Act. There are certain rights which no shareholder of company can be permitted to barter away. In respect of such rights, failure to object is not fatal. Reference in this connection may be made to the following provisions of the Companies Act.

19. Section 9(b) of the Companies Act reads, 'any provision contained in the memorandum, arti-cles, agreement or resolution aforesaid shall, to the extent to which it is repugnant to the provisions oi: this Act, become or be void, as the case may be.' The intention of the above provision is to make the statute law supreme so as to over-ride the memorandum, arhcles etc.

20. Section 87 confers upon every member of a company limited by shares and holding any equity share capital therein, the right to vote in respect of such capital on every resolution placed before the company.

21. Section 181 visualises certain restrictions on exercise of voting right of members. Under this section, notwithstanding anything contained in the Act, the articles of a company may provide that no member shall exercise any voting right in respect of any shares registered in his name on which any calls or other sums presently payable by him had not been paid. Section 182 provides that a public company shall not prohibit any member from exercising his voting right on any ground not being a ground set out in Section 181. This is a basic recognition of a fundamental right that no restriction not specifically saved by the Act, can be placed upon the voting rights of a member.

22. The right to cast one's vote is a proprietary right and the holder of shares may exercise this right in any manner he pleases. The voting rights have been effectively entrenched by the statute and cannot be taken away by any alteration in the memorandum of association or by passing of any resolution in that behalf. Sanctity is attached to the voting rights because it is in this manner that a holder of such a right expresses his will, preference or choice regarding decision on a proposed measure or proceeding or on the selection of an officer.

Giving of vote is a vehicle for communicating to others the choice of the voter. The exercise of voting right is a means for giving expression to one's will, mind or choice. It is recognised as a formal mode for authoritatively expressing a person's opinion. The possession of shares, which is a valuable property, will, as a right, become nugatory by taking away the voting power. Weighty and important matters affecting the affairs of the cons-pany are decided at meetings by votes of members.

A resolution or a motion is said to be carried when one or more votes are cast in favour of the motion than against it. When this right is taken away, the enjoyment of property is gravely hampered if not altogether denied. I cannot conceive of a worse oppression than the denial of voting right to a shareholder, especially in a case like the present, where the trading members, whose contribution to the paid up capital is less than half, exclusively enjoy the right of voting and nan-trading shareholders, who in this case have contributed more to the paid up capital, cannot exercise this right.

I should not be understood to mean that the voting right of a minority can be taken away. I refer to this fact, in order to emphasise the extent of the oppression, as in this case, the non-trading shareholders who far out number the trading shareholders have no voice in the affairs of the concern. This right which is bestowed by the statute could not be bartered away by the members present at the meeting of 9th January, 1958, either for themselves or for other non-trading shareholders.

23. Mr. Sikri argues that if a right is voluntarily given up with open eyes howsoever valuable that right may be, it cannot be styled as oppression. According to him, oppression is an act proceeding from one against the other to the latter's detriment and against his consent. This argument has failed to impress me. An oppression may be an act of cruelty, severity, unlawful exaction, domination of will or excessive use of authority. The sixth chapter of the Companies Act deals with the prevention of oppression and mismanagement.

Section 397 provides relief inter alia where the Court is of the opinion that the company's affairs are being conducted in a manner oppressive to any member or members. In this case the non-voting members are being subjected to hardship or burden which may truly be called oppressive. They are subjected to an oppressive conduct in so far as they are being dominated and have to submit to excessive use of authority. Such a conduct amounts to unjust hardship. To oppress, ordinarily, means to crush, smother or trample. In this case, their valuable rights are being trampled upon by unjust exer-cise of authority or power. To take away the right or partaking in dividends earned by their contribution is not merely oppressive but even conf is eatery.

24. In my view, therefore, this case calls for an interference by this Court under Section 397 of Companies Act.

25. In this connection my attention has been drawn to Section 6(3) of the Forward Contracts (Regulation) Act 1952, according to which 'No rules of a recognised association shall be amended except with the approval of the Central Government.' The argument is that this Court cannot in the exercise of its powers under Section 397 and the following sections pass an order which may have an effect of causing amendment in the rules of a recognised association without obtaining approval of the Central Government.

The powers of this Court for prevention of corruption and mismanagement under Chapter VI of Part VI, subject to the limitations imposed by the provisions therein, are of plenary character and are not abridged by any thing contained in Section 6(3) ot the Forward Contracts (Regulation) Act, 1952. It is open to the Court to strike out such rules of a recognised Association which may result in oppression. Section 6(3) restricts acts of the Association and cannot be read to mean that it subjects this Court to obtain the approval of the Central Government before passing an order which may have the result of amending rules of an Association which offend against the provisions of Companies Act.

26. Where the shareholders are denied a most valuable right by amending the Articles of Association and in utter disregard of the statutory protection, the making of a. winding-up order, on the ground, that it is just and equitable, would be justified. But in this case to wind up the company would be otherwise unfair. To a case like the present, the provisions of Section 397 are eminently suitable.

27. It is in accord with the principles of the Forward Contracts (Regulation) Act that the Associations which have received recognition from the Central Government should consist of members engaged in the trade. The non-trading members in this case excepting those who desire to quality themselves as trading members, would be anxious to sever their connection and walk out of the company with such capital as they had contributed. In these circumstances, the relief contemplated by Section 402 (b) and (c) is proper.

I direct that within three months of the date of this order, the company should purchase the shares or the interests of non-trading members with the consequent reduction of the company's share capital. 1 allow the petition, but in the circumstances of the case, I leave the parties to bear their own costs.

28. My previous orders in this case restraining the Punjab Company from holding meetingsstand vacated.


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