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Suessen Textile Bearings Ltd. and ors. Vs. Union of India and ors. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtDelhi High Court
Decided On
Case NumberCivil Writ Appeal No. 77 of 1972
Judge
Reported in[1984]55CompCas492(Delhi); 1987(12)DRJ29; 1984RLR262
ActsCompanies Act, 1956 - Sections 309
AppellantSuessen Textile Bearings Ltd. and ors.
RespondentUnion of India and ors.
Advocates: A.B. Divan,; Shiavax,; B.J. Vazefdar,;
Excerpt:
.....cent p.a. on the amounts so guaranteed by them. the company law board took the stand that section 309 was attracted to the payment of the commission and the company was advised to prefer necessary application for the same. the company applied without prejudice to its contention that no such approval was required. the application of the company was rejected. upon this the company filed this writ petition in the high court.;that guarantee commission was not payment for services rendered to the company within the meaning of section 309. this payment was not remuneration and approval of the central government was not required for its payment. - - where a creditor obtains a decree against the principal debtor as well as the surety by the same can be executed against the surety without..........dalal and shantilal jivraj mehta, respondents 3 and 4 herein. (2) on february 24. 1965 the board of directors of the company adopted a resolution authorising the payment of guarantee commission to the persons who had stood surety for the loans and credit facilities advanced to the company by the financial institutions (but excluding managing directors) at the rate of 0.6 per cent in all per annum on the amounts so guaranteed for a period of one year. another resolution was passed on 1/11/1966 authorising the payment at the rate of one per cent per annum on the amounts guaranteed by the guarantors other than the joint managing directors for the period 1/10/1965 onwards. the payment of the guarantee commission was approved by the company at its eleventh annual general meeting held.....
Judgment:

G.C. Jain, J.

(1) Petitioner No. 1, Suessen Textile Bearings Limited (for short 'the Company') is a public company incorporated under the Companies Act 1956 (for short 'the Act'). Manherlal Dwarkadas Mehta, Suresh Manherlal Mehta and Chempaklal Jivraj Mehta, petitioners 2 to 4, are some of its present directors. The Company manufactures textile equipment. For its business it took loans and arranged credit facilities, which were provided, inter alia, by the Gujarat State Financial Corporation, Bank of India and Central Bank of India to the tune of Rs. 42.5 lakhs to Rs. 95.85 lakhs during the relevant years, i.e. year ending 30/9/1965 up to 30/9/1971. While allowing these loan and credit facilities these financial institutions insisted on personal guarantees and the personal guarantees were furnished by petitioners 2 to 4 and Hansmukhlal Gordhandas Dalal and Shantilal Jivraj Mehta, respondents 3 and 4 herein.

(2) On February 24. 1965 the Board of Directors of the Company adopted a resolution authorising the payment of guarantee commission to the persons who had stood surety for the loans and credit facilities advanced to the Company by the financial institutions (but excluding Managing Directors) at the rate of 0.6 per cent in all per annum on the amounts so guaranteed for a period of one year. Another resolution was passed on 1/11/1966 authorising the payment at the rate of one per cent per annum on the amounts guaranteed by the guarantors other than the Joint Managing Directors for the period 1/10/1965 onwards. The payment of the guarantee commission was approved by the Company at its eleventh annual general meeting held on April 27, l 969. In pursuance of the resolution dated 24/2/1965 the Company paid a sum of Rs. 21,269.41 as guarantee commission for the financial year ending 30/9/1965 to petitioners 3 & 4 and respondents 3 & 4 who had furnished their personal guarantees to the financial institutions. For the year ending 30/9/1966 a sum of Rs. 44,662.27 was paid to petitioners 2, 3, and 4 and respondents 3 and 4. For a certain period during this year petitioners 2 and 3 were joint-Managing Directors and consequently no commission was paid to them for that period. The amounts of guarantee commissions paid and the balance payable to the guarantors for the financial year ending 30/9/1965 to 30/9/1971 have been shown in Annexure '1' to the petition.

(3) The Company by its letter dated 13/3/1968 requested the Company Law Board (for short 'the Board') for increasing the minimum remuneration payable to petitioner No. 3 as Joint-Managing Director. The Board vide its letter dated 1/3/1968 raised certain queries and asked the Company to intimate the Board about the circumstances in which the approval of the Board was not obtained for payment of the guarantee commission to certain directors of the Company. The Company by its letter dated 15/6/1968 explained that the guarantee commission could not be regarded as remuneration within the meaning of Section 309 of the Act. The Board, however, by its letter dated 2/8/1968 took the stand that the provisions contained in Section 309 were attracted to the payment of guarantee commission and advised the Company to seek its approval. The Company's attorney by their letter dated 21/8/1968 informed the Board that without admitting the correctness of the contention of the Board they had asked the Company to prefer the necessary application for its approval. Ultimately the Company by its letter dated 28/1/1971 approached the Board for the approval of the payment of the guarantee commission to its Directors. This was without prejudice to its contention that no such approval was required. The request of the Company was rejected by the Board vide letter dated 5/5/1971 (Annexure 'K') on the ground of the present policy being followed by the Board in this behalf. The Company by its letter dated 21/5/1971 requested the Board to reconsider its decision.. The Board, however, did not give any reply.

(4) Ultimately on 24/1/1972 the petitioner filed the present petition under article 226 of the Constitution of India seeking declaration that the approval of the Central Government or the Board was not required for the payment of the guarantee commission by the Company to its Directors who had guaranteed the loans and credit facilities and for issuing appropriate writ quashing the impugned order dated 5/5/1971 (Annexure 'K') and restraining respondents I and 2 from taking any action against the Company for not obtaining the approval of the Central Government or the Board for the payment of the guarantee commission.

(5) It was averred that the guarantee commission paid to the directors who had stood surety for the Company prior to the coming into force of the Amending Act XXXI of 1965 was outside the purview and ambit of Section 309(l) or Section. 310. The guarantee commission paid or payable to the guarantor-directors was not remuneration payable to directors, for services rendered by them within the meaning of the amended Section 309,. It was not covered by the term 'remuneration of any director' within the meaning of Section 310 and, consequently, the Company was entitled to .pay the guarantee commission to the guarantor-directors without the approval of the Central Government or the Board. It was also averred that the impugned order dated 5/5/1971 had been passed without affording any opportunity of hearing to petitioners 2, 3 and 4 and respondents 3 and 4, who were vitally affected by the order. It was based on the policy of the Government which was never disclosed and was not a speaking order.

(6) The petition was opposed and an affidavit in opposition was filed by Shri C.R.D. Menon, Under Secretary to the Government of India and the Board. It was averred that when a director guarantees a loan granted by the Bank to the Company he renders some service to the Company. Any commission paid or payable to him for the purpose was, thereforee, remuneration payable for services rendered by him in any other capacity within the meaning of Section 309(1) of the Act. The position was the same even prior to the amendment of Section 309. It was also averred that the order dated 5/5/1971 was not required to be a speaking order as the Board was performing administrative duties and quasi-judicial functions and the order was valid in law and had been passed after keeping the provisions of the Act in view and after taking into consideration the facts and circumstances of the case. Petitioners 2 to 4 and respondents 3 and 4 were not entitled to be heard.

(7) The main question which requires determination is whether the guarantee commission paid or payable to the directors of the Company was a remuneration for services rendered by them in any other capacity within the meaning of Section 309 of the Act.

(8) A 'contract of guarantee', as defined in Section 126 of the Indian Contract Act, is a contract to perform the promise, or discharge the liability, of a third person in case of his default. It is in essence a contract whereby the guarantor/surety agrees to be answerable for some liability of the principal debtor to the creditor. The assumption of personal liability is a necessary element in a contract of guarantee. The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract. (Section 128 of the Indian Contract Act). In the absence of some special equity the surety has no right to restrain an action against him on the ground that the principal debtor is solvent or that the creditor may have relief against the principal debtor in 'some other proceedings. Where a creditor obtains a decree against the principal debtor as well as the surety by the same can be executed against the surety without exhausting the remedies against the principal creditor.

(9) Normally a guarantee is entered into at the request of the principal debtor. The principal debtor would furnish guarantee only when forced or insisted upon by the creditor. Why a creditor insists on getting a guarantee The answer is obvious. Sometimes the creditor feels that the principal debtor may not be able to perform his part of the agreement and fail to return the amount advanced. In that situation for the due performance of the contract he insists on getting a guarantee. In the circumstances only a person of sufficient substance would be accepted as a guarantor. Otherwise the entire exercise would be a futility. A surety thus pledges his credit or his trustworthiness while assuming the liability of the principal debtor. The guarantee commission is the consideration agreed to be paid by the principal debtor to the guarantor for pledging his credit by agreeing to be answerable for his (principal debtor's) liability to the creditor:

(10) Having examined the nature of the contract of guarantee it requires to be determined whether the guarantee commission payable to a director for his having stood as a surety for the company, the principal debtor, is remuneration for services rendered by him for the Company within the meaning of Section 309 of the Act. According to Stroud's Judicial Dictionary, Fourth Edition, 'director', inter alia, means : 'the directors of a company are the persons having the direction, conduct, management, or superintendence' of its affairs. Under Section 291 of the Act, subject to the provisions of the Act, the board of directors of 'a company shall be entitled to exercise all such powers and to do all such acts and things as the company is authorised to do so. It is thus apparent that the management and superintendence of the affairs of the Company vests in the board of directors. A director thus acting with other directors manages and supervises the affairs of the company. This is the service he ordinarily 'renders. In other words, a director renders supervisory or administrative service for which he is entitled and is generally paid remuneration.

(11) Section 309 of the Act imposes restrictions on remuneration payable to the directors. The restriction was some time sought to be evaded by directors holding technical or other appointments in addition to their directorship. Section 309 was amended by Act 31 of 1965 to plug these loop-holes. The amended section made the remuneration payable to a director inclusive of the remuneration payable to him for services rendered by him in any other capacity. The word 'service' according to New Webster's Dictionary, Delux Encyclopedia Edition, inter alia, means : 'an act of helpful activity'. Any act which is helpful to the company can be service. But widest interpretation so as to include each and every acts helpful to the company cannot be given, keeping in view the purport of Section 309. The meaning of the word 'service' would have to be limited to manual, clerical, technical and supervisory/ administrative service only. In any case, any act done by a director, though helpful to the company, but involving his financial liability would not amount to service rendered within the meaning of Section 309. A company is in great need of finances to meet its immediate obligations. The directors supply the necessary funds on the company's agreeing to pay normal interest. In a way the directors supplying the funds render assistance to the company but the payment of interest cannot be said to be remuneration paid for services rendered by him. The Board has itself taken a decision that payment of interest to directors for the amounts advanced by them would not be attracted by Section 309(1). The payment of guarantee commission, in my view, stands on the same footing. Here the Company is in need of the finances. The financial institutions are not prepared to advance money on the credit of the Company. It agrees to advance the amount on the condition that the director/directors stand surety for the amount. In other words, it is prepared to advance the money and advances the money on the credit of the company plus the credit of the director/ directors. The directors thus assume the liability of the principal debtor which liability, as observed earlier, is co-extensive. He pledges his credit. The payment in consideration of the pledging of the credit or assuming the financial liability would not be remuneration paid for services rendered within the meaning of Section 309. A director by entering into a contract of guarantee does. not do any manual, clerical, technical, supervisory or administrative work. He gets the commission for the pledge of his credit and not for any services' rendered. The guarantee commission payable to a director, thereforee, is not remuneration for the services rendered and, consequently, no approval of the Board was required.

(12) Because of my finding that the guarantee commission was not remuneration for service rendered, I need not go into the other pleas raised by the petitioners.

(13) In conclusion, I accept the writ petition, quash the impugned order dated 5/5/1971(Annexure'K'). It is declared that the approval of the Central Government or the Company Law Board was not required for payment of guarantee commission to the directors under resolutions of the Company dated 24/2/1965 and 1/2/1966. The respondents are restrained from taking any action against the petitioner company for not obtaining the. -said approval. No order as to costs.


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