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Pradip Lamp Works Vs. Pratap Chandra Basu - Court Judgment

LegalCrystal Citation
SubjectCompany;Civil
CourtKolkata High Court
Decided On
Case NumberF.M.A. No. 78 of 1965 with C.R. Nos. 3566 (M) of 1964 and 998 of 1965
Judge
Reported inAIR1972Cal361,77CWN738
ActsIndustries (Development and Regulation) Act, 1951 - Section 18A and 18C
AppellantPradip Lamp Works
RespondentPratap Chandra Basu
Appellant AdvocateP.N. Mitter, ;P.P. Ghose, ;K. Banerjee and ;Alok Banerjee, Advs.
Respondent AdvocateS.C. Mitter, ;S.P. Roy Chowdhary and ;P.N. Chunder, Advs.
Cases ReferredD. P. Kelkar v. Ambadas Keshav Bajaj
Excerpt:
- .....of the suit. the delhi court passed an order of interim injunction. the written statement in the delhi suit was filed on april 6, 1962. the delhi court made this order of injunction absolute on may 7, 1962. on april 30, the issues were settled. on june 5, 1962 an additional issue being issue no. 1-a was framed.2. in may, 1963 the india electrict works limited filed a petition for amendment of the written statement. the amendments were allowed and the amended written statement was filed on may 20, 1963.3. on june 25, 1963 the authorised controller filed a petition under section 18-c of the industries (development and regulation) act, 1951 in the court of the subordinate judge at alipore. section 18-c runs thus: 'without prejudice to the provisions contained in section 18-b, the person.....
Judgment:

Sankar Prasad Mitra, J.

1. This is an appeal against an Order of the Seventh Court of the Subordinate Judge at Alipore made on July 28, 1964 restraining [he respondent by an injunction from proceeding with a Suit for specific performance of a contract instituted in a Court at Delhi. Briefly, the facts are that on February 16, 1959 the Board of Directors of the India Electric Works Limited passed a resolution agreeing to sell a piece of land in Delhi to a partnership firm called Pradip Lamp Works. Some of the Directors of the Limited Company were the partners of the firm. On February 17, 1959, the limited Company informed the firm in writing that the resolution aforesaid had been passed. On November 17, 1960, the Central Government in the exercise of its powers under the Industries (Development & Regulation) Act, 1951 ap-pointed an authorised Controller of the India Electric Works Limited. We shall set out the relevant provisions of this Act at a subsequent stage. Let us now proceed with the bare facts. On February 1, 1903, Pradip Lamp Works filed a Suit in the Court of the Subordinate Judge of Delhi for specific performance of an agreement between India Electric Works Limited and Pradip Lamp Works in respect of the land in Delhi. We incidentally mention that it has been urged before us that there was no concluded agreement between the parties but we do not purpose to express any opinion on this contention in this appeal. On the same day namely February 1, 1972, Pradip Lamp Works made an application to the Delhi Court for an interim injunction restraining the limited company from dealing with or disposing of the Suit Land during the pendency of the Suit. The Delhi Court passed an order of interim injunction. The Written Statement in the Delhi Suit was filed on April 6, 1962. The Delhi Court made this order of injunction absolute on May 7, 1962. On April 30, the issues were settled. On June 5, 1962 an additional issue being Issue No. 1-A was framed.

2. In May, 1963 the India Electrict Works Limited filed a petition for amendment of the Written Statement. The amendments were allowed and the amended Written Statement was filed on May 20, 1963.

3. On June 25, 1963 the authorised Controller filed a petition under Section 18-C of the Industries (Development and Regulation) Act, 1951 in the Court of the Subordinate Judge at Alipore. Section 18-C runs thus: 'Without prejudice to the provisions contained in Section 18-B, the person or body of persons authorised under Section 18-A to take over the management of an industrial undertaking may, with the previous approval of the Central Government, make an application to any Court having jurisdiction in this behalf for the purpose of cancelling or varying any contract or agreement entered into, at any time before the issue of the notified order under Section 18-A, between the industrial undertaking and any other person and the Court may, if satisfied after due inquiry that such contract or agreement had been entered in bad faith and is detrimental to the interests of the industrial undertaking make an order cancelling or varying (either unconditionally or subject to such conditions as it may think fit to impose) that contract or agreement, and the contract or agreement shall have effect accordingly.'

4. The authorised Controller's case, inter alia, was that the agreement, if any, between India Electric Works Limited and the Pradip Lamp Works for sale of the Delhi land had been entered in bad faith and was detrimental to the interests of the India Electric Works Limited.

5. On June 25, 1963 the authorised Controller filed a petition in connection with his application under Section 18-G praying for temporary injunction restraining the Pradip Lamp Works from proceeding with the Delhi Suit till the disposal of the 18-C 'Suit' or proceeding at Alipore. When this application was ready for hearing the Alipore Court passed an order of injunction as prayed for on the 28th July, 1964. The propriety of this order is the subject-matter of the present appeal. It was admitted on the 28th September, 1964 when a Rule was issued.

6. On October 1, 1964 Pradip Lamp Works filed an application in the Alipore Court under Sections 10 and 151 of the Code of Civil Procedure praying for slay of the Alipore 'Suit' (that is to say the proceeding under Section 18-C) till the disposal of the Delhi Suit.

7. On February 8, 1965 the Seventh Subordinate Judge at Alipore rejected the application of Pradip Lamp Works. The partnership firm moved this Court against the said order on the 29th March, 1965 under Section 115 of the Code and a Rule was issued.

8. Thereafter an interesting event took place. On November 6, 1967 there was a petition to the Company Court on the Original Side for winding up of the India Electric Works Limited. The winding up order was made on August 27, 1968 but its operation was stayed from time to time till December 9, 1968. The Official Liquidator ultimately took possession of the India Electric Works Limited on the 9th December, 1968. There was an appeal also against the winding up order but the appeal was dismissed.

9. On these facts counsel for the petitioner has made before us the following points:

(1) The Alipore Court has no jurisdiction to entertain the proceedings under Section 18-C of the Industries (Development and Regulation) Act, 1951 in view of the provisions of Section 16(d) of the Code of Civil Procedure. Learned counsel contends that the proceedings under Section 18-C in the instant case involved determination of a right to or interest in immoveable property and should have been instituted only in the Court within the local limits of whose jurisdiction the property was situate. In other words, it could be filed in the Delhi Court but not in the Alipore Court.

(2) Assuming that the proceedings under Section 18-C have been properly instituted in the Alipore Court that Court is bound to stay these proceedings in view of Section 10 of the Code of Civil Procedure. The matters in issue in the 18-C proceedings are directly and substantially the same as those in the previously instituted Suit in the Delhi Court. The parties were litigating substantially on the same title and the same relief was available in the Delhi Court.

(3) Assuming that the order for stay could not be granted under Section 10 the order of injunction restraining the plaintiff in the Delhi Court from proceeding with the Delhi Suit which the Alipore Court made under Section 151 of the Code was made without jurisdiction.

(4) Assuming that an order under Section 151 could be made the Alipore Court should not have exercised its powers under that section as the order for injunction was not necessary for the ends of justice. In other words, the Court's discretion under Section 151 has been improperly exercised and

(5) The proceedings under Section 18C have now abated by reason of the order for winding up and the liquidator's taking over of the assets of the India Electric Works Limited.

10. In our opinion, the last point urged by the petitioner's counsel is enough for disposal of tin's appeal. And we do not intend to express any opinion on the four other points we have set out above.

11. Mr. S. C. Mitter appearing forthe respondent has urged that the proceedings under Section 18-C by the authorisedController were proceedings launched onbehalf of the Company. In support of thisproposition, Mr. Mitter has drawn our attention to Section 18-C and Section 18-B,particularly to Clause (e) of Section 18-B(1). This clause provides as follows:--

(2.) On the issue of a notified order under Section 18-A authorizing the taking over of the management of an industrial undertaking--

xxxxx

XXXXX

(e) the persons, if any, authorized under Section 18-A to take over the management of an industrial undertaking which is a company shall be for all purposes the directors of the industrial undertaking duly constituted under the Indian Companies. Act, 1913 and shall alone be entitled to exercise all the powers of the directors of the industrial undertaking, whether such powers are derived from the said Act or from the memorandum or articles of association of the industrial undertaking or from any other source.'

12. Mr. Mitter's argument is that that the acts of the authorised Controller were for all purposes acts of Directors, done on behalf of the Company. In other words, the authorized controller was, in fact, a Director of the Company, an agent of the Company, having a fiduciary capacity. He read out to us the following passages from Gower's ''The Principles of Modern Company Law' Third Edition, at pages 526-527:

'By the middle of the last century it had been clearly established that the trustee-like position of directors vitiated any contract which the board entered into on behalf of the company with one of their numbers. This principle receives its clearest expression in Aberdeen Ry. v. Blaikie, (1853-54) 149 RR 32, in which a contract between the company and a partnership of which one of the directors was a partner was avoided at the instance of the company notwithstanding that its terms were perfectly fair.

xxxxxxxxxxLater cases have added little to the general principle thus enunciated. It appliesnot only to contracts directly with thedirectors but also to those in which theyare in any way interested, whether becausethey benefit personally however indirectly,or because they are subject to a conflicting duty in general the contract will be voidable at the instance of the company,and any profits made by the directors personally will be recoverable by the company.

XXXXX....The same applies to a contract withany agent of the company other than adirector. But the directors themselves cannot escape so easily. Disclosure to themselves is ineffective even if the interesteddirectors refrain from attending and votingleaving an independent quorum to decide,for the company has a right to the unbiased voice and advice of every director.Hence, in the absence of express provisionin the company's articles, the only effective step is to make full disclosure to themembers of the company and to have thecontract entered into or ratified by thecompany in general meeting.'

13. Mr. Mitter's point is that on the facts in this case the contract, if any, between Messrs. India Electric Works Ltd. and Pradip Lamp Works is voidable at the instance of the Company. The Company by an appropriate action can enforce the remedy available to it. When, therefore, the authorized Controller institutes an action he does so, according to Mr. Mitter, on behalf of the Company. The only fetter imposed on him by Section 18-C is that he has to obtain the previous approval of the Central Government. A Director of a Company could have instituted a suit or a proceeding to have a contract declared void. When the Director's functions are being discharged by the authorized Controller his action is virtually the action of the Director. The only difference is, says Mr, Mitter, that he has to obtain the Central Government's approval.

14. Mr. Mitter has also relied on another passage in Gower's 'The Principles of Modern Company Law', Third Edition at page 583. It says--

'Normally, therefore, the Company itself is the proper plaintiff, and the only proper plaintiff, in an action arising out of a dispute within the company. And the appropriate agency to start an action on the company's behalf is the board of directors, to whom this power is delegated as an incident of managing the company.'

15. Mr. Mitter's contention is that 'normally' the Company is the proper plaintiff. But when the Central Government has appointed an authorized controller under the Industries (Development and Re-gulation) Act, 1951, it is not the Company but the authorized controller who is the proper plaintiff in an action for and on be-half of the company. There is no difference, submits Mr. Mitter, between this action and an action launched on behalf of the Company by an authorised Director or by its Board of Directors,

16. Counsel for the respondent then proceeded to discuss what would happen when, in a case of this nature, an order for winding up is made. His argument is that when a contract is entered info between a Company and a Director or his firm it is a contract voidable at the option of the company. If any suit or proceeding is to be commenced with a view to cancellation of this contract, the suit or proceeding has to be commenced in the name of the company by its Directors who are its agents. An order for liquidation does not mean that the Company is declared dead. The Company survives this order, says Mr. Mitter, with this difference that the Directors are no longer its agents but the liquidator acts as its agent. An action commenced by the Company before liquidation can, therefore, be continued by the liquidator. The same principle, urges Mr. Mitter, applies to a proceeding under Section 18-C which is commenced by the authorized controller on behalf of the company as its agent. On tie facts of this case, according to Mr. Mitter, the proceedings under Section 18-C have not abated by reason of the order of liquidation and the liquidator is entitled to continue such proceedings on the Company's behalf. The sum, and substance of Mr, Mitter's contention is that a proceeding under Section 18-C is a suit by the Company to have a voidable contract set aside. And such a suit can be instituted either by the Board of Directors or by a single authorised Director or by the authorised controller as agents or an agent of the Company. On the company being wound up the liquidator can continue the proceedings. We are unable to uphold this contention.

17. Firstly, Section 18-C confers the right to sue not on the Company but on the authorized controller. The Legislature has given this right to a nominated person or body of persons.

18. In the Third Edition of Halsbury's Laws of England, Vol. 6, Article 863 at page 445 it is stated:

'As regards litigation by an incorporated company, the directors are, as a rule, the persons who have authority to act for the company; but, in the absence of any contract to the contrary in the articles of association, the majority of the members of the company are entitled to decide, even to the extent of overruling the directors, whether an action in the name of the company should be commenced or allowed to proceed. The secretary of a company cannot institute proceedings in the name of the company in the absence of express authority to do so, but proceedings started without proper authority may subsequently be ratified'

If the Legislature's intention was that the rights under Section 18-C were to be enjoyed not by the person or body of persons authorized under Section 18-A but by the company as such more explicit expressions should have been used. It is true that the authorized controller is in a sense a Director of the Company (vide Section 18-B(1)(e)) and, as such, is its agent. This agent created by the Industries (Development and Regulation) Act, 1951 has been given a number of powers by the Act and one of such powers is to institute and continue a proceeding under Section 18-C.

19. We may, incidentally, refer to a decision of the Bombay High Court in D. P. Kelkar v. Ambadas Keshav Bajaj, : AIR1971Bom124 where some of the provisions of the Industries (Development and Regulation) Act, 1951 have been considered. In paragraph 45 of the judgment at page 139, the Bombay High Court analyses the provisions of Section 18-A, Section 18-B and Section 18-E. The Bombay High Court comes to the conclusion that under these provisions-

'The directors cease to function, the share-holders cannot pass effective resolutions unless approved by the Central Government; the share-holders cannot appoint directors under any circumstances; the authorized controller is given the control and management in place of the directors, and no proceeding for winding up can lie even though resolutions are passed to that effect without the consent of the Central Government. What remains of the powers of the Directors of the company after these provisions come into operation, it is difficult to envisage. The authorized controller is not fettered by limitations. On the other hand, he enjoys all the powers under the Companies Act subject to the overriding powers of the Central Government to give powers or to create exceptions, restrictions or limitations upon those powers under the Companies Act. Three conclusions may be drawn from these provisions. Firstly, that, after the notifications and the operation of these sections come into force, what is left of the company is the mere outward shell of incorporation and every vestige of power to manage and control is taken away from the directors and shareholders. Secondly, the authorized controller becomes all powerful and enjoys all the authority under the Companies Act except to the extent that he is controlled by the Central Government. Thirdly, the plenary and overriding power of the Central Government to give directions and to make exceptions, restrictions and limitations to the Indian Companies Act and thereby further to control the authorized controller and the company is absolute and unrestricted. We have no manner of doubt that under this dispensation the establishments of which the management and control were taken away in the cases before us, were carried on under the authority of a department of the Central Government.' Again at p. 137 in paragraph 38 of the judgment, the Bombay High Court has construed the provisions of Section 18-B. Referring to Clause (e) of Section 18-B(1) , which we have quoted above, the Bombay High Court says--

'..... not only is the power of the Manager and Director put an end to, not only are all the contracts which the manager and director entered into put an end to but by the automatic operation of Clause (e) the persons put in management alone are entitled to exercise all the powers of the directors and no exception is made because of the words--

'Whether such powers are derived from the said Act or from the memorandum or articles of association of the Industrial undertaking or from any other source.' '

20. The Bombay High Court proceeds to add:

'..... in whatever form or shape the power of the directors is derived and from whatever source, that power is put an end to..... Clause (a) ..... taken away the substance of the power conferred by the memorandum and articles of association because it puts an end to the powers of the manager and directors and all contracts entered into with them and instead in terms says that the persons authorised to be in management shall be the directors.....'

21. From these observations of the Bombay High Court, it follows that the authorized controller is not the agent of the company in the sense, Mr. Mitter, for the respondent, was describing him as the agent. In fact, he is the agent of the Central Government. In other words, the directors of a company are the agents of its share-holders but the authorized controller is the agent of the Central Government except that his powers are similar to those of the directors. From this point of view, the suit or proceeding under Section 18-C cannot be said to be a proceeding on behalf of the company as the controller does not represent the company in the same manner as the directors do.

22. Secondly, a close examination of the provisions of Section 18-C reveals that it is in no sense a suit Indeed, it is a summary proceeding which can be decided even on affidavits. It is a new provision altogether. And the mode of enforcing this new right conferred on the authorized controller is a new mode prescribed by the section itself.

23. Thirdly, this is a right which can be exercised in spite of the fact that a suit which the company could have instituted either through its share-holders or Board of Directors or an authorized director is barred by limitation. The section itself says that a proceeding under this section can be instituted 'at any time'.

24. Fourthly, Section 18-C gives power to the authorized controller not only to ask for cancellation of the contract but also to ask for variation of the contract either conditionally or unconditionally.

25. Fifthly, the nature of the right which the authorized controller enjoys under this section is greater than what the company can enjoy. A contract between a company and a director or his firm or a company in which he is interested as a director or share-holder even though only a trustee of the shares, is voidable at the option of the company, unless sanctioned by the articles expressly or by necessary implication and made in conformity therewith. (Vide Halsbury's Laws of England, Third Edition, Volume 6, page 302, Article 609). Under Section 18-C whether or not a contract of this nature is sanctioned by the articles expressly or impliedly the authorized controller can launch a proceeding if he is 'satisfied after due enquiry that such contract or agreement had been entered into in bad faith and is detrimental to the interests of the industrial undertaking.' This is again a new right which the company did not possess.

26. Sixthly and lastly, in the absence of any contract to the contrary in the articles (if association, the majority of the members of the Company are entitled to decide, even to the extent of overruling the directors, whether an action in the name of the Company should be commenced or allowed to proceed: (Vide Halsbury's Laws of England, Third Edition, Volume 6, page 445, art. 862). In the case of an action under Section 18-C the majority of the members of the company cannot overrule the authorized controller and direct him to launch the proceeding.

27. For all the reasons aforesaid, we are of opinion that a proceeding under Section 18-C of the Industries (Development and Regulation) Act, 1951 is a proceeding which the person or body of persons authorized under Section 18-A of the Act alone can institute. And when the said person or body of persons becomes or become functus officio the proceedings already launched must abate. That is one of the reasons why in Section 18-E(1)(c) it has been expressly provided that when the management of an industrial undertaking is taken over by the Central Government no proceeding for the winding up of the undertaking or for the appointment of a Receiver in respect thereof shall lie in any Court except with the consent of the Central Government. In other words, when the Central Government gives its consent to an application for winding up the Central Government is expected to take into consideration the fate, inter alia of a proceeding under Section 18-C, if eventually an order for winding up is made and the authorised controller has to make over possession to the liquidator appointed by the Court.

28. As we have come to the conclusion that the proceeding under Section 18-C has abated, we cannot sustain the order of the Seventh Subordinate Judge at Alipore made on the 28th July, 1964.

29. We incidentally observe, however, that our attention has been drawn to the pleadings in the Delhi Court as they now stand. And we find that the issues which could have been raised in the proceeding under Section 18-C can also be raised in the Delhi suit. We also note that under the provision of Sub-section (3) of Section 446 of the Companies Act, 1956 the winding up Court has the power to have the Delhi suit transferred to it for disposal by it. Whether or not the company court will use such power is for that Court to decide, and we have no jurisdiction to express any opinion thereon. We are merely mentioning that such a power exists.

30. In the result, this appeal is allowed; the order made on the 28th July, 1964 by Shri M. M. Haldar, Subordinate Judge, Seventh Court, Alipore, is set aside.

31. There will be no order as to costs.

32. The Rule in connection with this appeal is also disposed of on the above terms. There will be no order as to costs of the Rule.

33. The application under Section 115 of the Code of Civil Procedure is not pressed and C. R. 998 of 19G5 is discharged. There will be no order as to costs.

34. In view of the judgment we have delivered in the appeal today, we do not pass any order on the alternative application under Section 115 of the Code of Civil Procedure.

Janah, J.

35. I agree.


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