Sankar Prasad Mitra, J.
1. The petitioner is a shareholder of the Patrakola Tea Company Limited. On or about the 2nd March, 1966, the petitioner received a letter dated the 21st February, 1968, from the firm of G. M. Pyne, who are brokers in the Calcutta Stock Exchange. The material portions of the letter are as follows :--
'Under an agreement dated the 15th of August 1964 made between Duncan Bros, and Co. Ltd. and Munnalal Bhalotia and Company, the said Munnalal Bhalotia and Co. agreed that they would within a period of not less than six months and not more than 12 month after the 31st of July, 1905, make an offer to purchase shares in the Patrakola Tea Company in the hands of the public at a price which works out at a little less than Rs. 132/- per share and on the basis that the offer should remain open for acceptance for a period of thirty days from the date of despatch thereof. All acceptances to be completed within fifteen days of the receipt thereof.
Your name appears on the Share register as the holder of 35 shares.
We have accordingly been instructed by the said Munnalal Bhalotia and Co. to make an offer to all shareholders of the Company, which we hereby do, to acquire their shares at the price of Rs. 132/- per share on the above terms.
If you wish to accept this offer in respect of the whole or part of your shareholding please arrange to tender to us through your brokers or Bankers the Share Scrip with the relative Transfer Deeds duly executed in blank within the specified time.
This offer is being made in order to corn-ply with the above mentioned agreement.
Business was last done in these shares on the 16th February, 1966 at the price of Rs. 172.75 per share.'
(a) The Circular issued by M/s. Manualal Bhalotia and Company through Messrs. G. M. Pyne is unauthorised, illegal, inoperative and void;
(b) alternatively the price of the sharei to be purchased by Messrs. Munnalal Bhalotia and Co., should be the break up value thereof (which the petitioner fixes at Rs. 870/- per share) including the goodwill of the company;
(c) the Managing Agency agreement of the company with Messrs. Munnalal Bhalolia and Co., is inoperative inasmuch as the resignation of Messrs. Duncan Bros. and Co. Ltd., has not been accepted by the Company and Messrs. Duncan Brothers and Co. Ltd., are still to be deemed to be Managing Agents of the Company;
(d) in the fact and context of the case an enquiry be directed into the affairs of the company; and
(e) the annual general meeting of the company held on the 30th September, 1965, was unauthorised and contrary to law.
2. In the cause title of the petition reference has been made to Section 395 of the Companies Act, 1956. The relevant portions of this Section are as follows :--
'Where a scheme or contract involving the transfer of shares in a company (in this section referred to as the 'transferor company') to another company (in this section referred to at the 'transferee company') has, within four months after the making of the offer in that behalf by the transferee company, been approved by the holders of not less than nine-tenths in value of the shares whose transfer is involved (other than shares already held at the date of the offer by, or by a nominee for, the transferee company or its subsidiary), the transferee company may, at any time within two months after the expiry of the said four months,five notice in the prescribed manner to any dissenting shareholder, that it desires to acquire his shares; and when such a notice is given, the transferee company shall, unless on an application made by the dissenting shareholder within one month from the date on which the notice was given, the Court thinks fit to order otherwise, be entitled and bound to acquire those shares on the terms on which, under the scheme or contract, the shares of the approving shareholders are to be transferred to the transferee company . . . .'
3. Mr. Chakravarti appearing for the petitioner submitted that on receipt of the said letter dated the 21st February, 1966, his client became apprehensive and made this application under Section 395 of the Act to prevent Messrs. Munnalal Bhalotia and Company from acquiring his shares.
4. The first question, therefore, that arises in this application is whether Section 395 applies to this case at all. Learned counsel for all the respondents has stated before me that the said notice of G.M. Pyne dated the 21st Feb. 1966, is not and cannot be a notice under Section 395. Section 395, it is obvious, applies when there is a scheme or contract involving transfer of shares in a company. It is nobody's case that there is any such scheme or contract in the instant case. The offer made in the said letter of the 21st February, 1966, appears to be a private offer which invites the addressee to dispose of, if he thinks fit, the whole or a part of his holding which could not have been in the contemplation of the framers of Section 395. Secondly, Section 395 applies when there is a 'transferor company' and a 'transferee company'. In Sub-section (5) (b), it is said that a 'transferor company' and a 'transferee company' shall have the same meaning as in Section 394. In Section 394(4)(b), it is provided that a 'transferee company' does not include any company other than a company within the meaning of this Act; but a 'transferor company' includes a body corporate, whether a company within the meaning of this Act or not.
5. In the context of these definitions we have to see whether Munnalal Bhalotia and Co., can be said to be a 'transferee company' within the meaning of Sections 394 and 395 of the Act. In Section 3(1) it is provided, inter alia, that in this Act, unless the context otherwise requires, the expression 'company' means a company formed and registered under the Act or an existing company formed and registered under any of the previous Company Laws. Munnalal Bhalotia and Co., it is conceded, cannot be called a company as defined in Section 3(1) of the Act in the sense that it has neither been formed nor registered under the Act of 1956 or under any of the previous Company Laws. But Mr. Chakrabartti relied on the expression 'unless the context otherwise requires' in Section 3(1) and contended that on the facts and in the circumstances of this case, Munnalal Bhalotia and Co., was a company within the meaning of the Companies Act, 1956.
6. I am unable to accept this contention. As Munnalal Bhalotia and Co., has neither, been formed nor registered under the Companies Act of 1956 or any of the previous Company Laws, it cannot be a 'transferee company' under Section 395. The reason is that the Act itself in Section 394(4)(b) makes a distinction between a 'transferee company' and a 'transferor company' In the case of a 'transferor company', a body corporate is specifically included but that provision has not been purposely made in the case of a 'transferee company'. These provisions show that the Companies Act for purposes of Section 395 is indulgent only to companies within the meaning of the Act. The legislature wants to confer a benefit on these companies only, and when these companies are the transferees, they would be entitled to the advantages provided for them in Section 395. Since the common case is that Munnalal Bhalotia and Co., was neither formed nor registered under the Companies Act of 1956 or any other previous Company Laws, to call it a 'transferee company' under Section 395 would be a misnomer. An offer by Munnalal Bhalotia and Co., therefore, to purchase the shares of the petitioner can under no circumstances be an offer under Section 395. I am clearly of the view that this Section has no application to the facts of this case and, as such, the petitioner had no right to move this Court in the manner he had done.
7. Mr. Chakrabartti, it seems, had realised his difficulties under Section 395. That is why he look considerable time in addressing this Court on Clause (d) of the prayers in the petition. In this clause, as I have said earlier, the petitioner is asking this Court to direct an enquiry into the affairs of the company. Mr. Chakrabartti drew my attention to Section 237. It would be necessary to quote the entire Section for a proper appreciation of the arguments of learned counsel for the petitioner as well as the respondents. The Section runs thus :--
'237. Without prejudice to its powers under Section 235, the Central Government :
(a) shall appoint one or more competentpersons as Inspectors to investigate the affairsof a company and to report thereon in suchmanner as the Central Government may direct,if-
(i) the company, by special resolution, or
(ii) the Court, by order,
declares that the affairs of the company ought to be investigated by an Inspector appointed by the Central Government; and
(b) may do so if, in the opinion of the Central Government, there are circumstances suggesting-
(i) that the business of the company is being conducted with intent to defraud its creditors, members or any other persons, or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members, or that the company was formed for any fraudulent or unlawful purpose; or
(ii) that persons concerned in the formation of the company or the management of its affairshave to connection therewith been guilty of fraud, misfeasance or other misconduct towards file company or towards any of its members or
(iii) that the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, Including Information relating to the calculation of the commission payable to a managing or other director, the managing agent, the secretaries and treasurers; or the manager, of the company.'
8. At the outset I have to state that in the Cause Title of the petition there is no indication that this is an application under Section 237 as well In the 'Notice of Petition' also, served on the respondents only Section 395 has been mentioned. But Mr. Chakrabartti says that in the petition he has given sufficient materials to induce the Court to make an order for investigation under Section 237(a)(ii) of the Companies Act 1956. In my view, the petition is defective. If the petitioner is asking for an order under Section 237(a)(ii), more specific notice of his Intention should have been given to the respondents. Going through the said notice and the petition itself, my impression was that the petitioner was seeking to avoid acquisition of his shares at Rs. 132 per share and that was why he had made this application under Section 395. When the Court is invited to exercise the drastic powers given to it under Section 237(a)(ii), the petitioner should make it abundantly clear to the respondents that an order under that Section would be asked for. Unfortunately, that has not been done in the instant case.
9. I would now go into the Section itself. This section has been taken from the English Companies Act of 1948. In England it is Section 165 of that Act. In Gower's Modern Company. Law, Second Edition, p. 547, it has been observed that except where the Court orders or a special resolution is passed, the Board of Trade have a discretion whether or not to appoint Inspectors, and this discretion, it may be assumed, will always be exercised in the light of the specified grounds for an appointment on their own motion under Section 165(b). Section 165 (b) of the English Act corresponds to Section 237(b) of our Act. So far as the Court's powers are concerned, it is observed in Gower's book that it may be safely assumed that the Court will require evidence at least as strong as that needed to induce the Board to move.
10. Considering the provisions of Section 287 as a whole, particularly with reference to the chapter in the Companies Act in which it is placed, it seems to me that the views expressed in Gower's book should be accepted. In other words, a petitioner must adduce strong evidence in relation at least to matters referred to in Sub-section (b) of Section 237 to induce a Court to make an order for investigation under Section 237(a)(ii). There must be evidence either (1) that the business of the Company is being conducted with intent to defraud (1) the creditors of the company or (ii)its members or (iii) any other person or (ii) it the business is being conducted (i) for a fraudulent purpose or (ii) for an unlawful purpose or (iii) in a manner oppressive of any ofits members or (iv) that the company was Formed for any fraudulent or unlawful purpose or (3) that the persons who formed the company or managed its affairs have been guilty of (i) fraud, (it) misfeasance or other misconduct towards the company or towards any of its members or (4) that information has been withheld from the members about the company's affairs which might reasonably be expected including calculation of commission payable to (i) a managing or other director, (ii) the managing agent, (iii) the secretaries and treasurers and (iv) the managers.
11. Bearing these principles in mind let us proceed to discuss the evidence adduced in the petition to invite me to make an order under Section 237(a)(ii) of the Companies Act, 1956.
12. Mr. Chakrabartti's first contention is that the company declared dividends for the years 1956, 1957, 1958, 1959, 1960, 1961 and 1962 and set apart these dividends in the balance-sheets which were carried from year to year. The total accumulation of dividends in 1962 was Rs. 57,60,000. According to the petitioner, this sum of Rs. 57,60,000 belonged to the shareholders of the company but the company's directors in their report which was placed at the company's annual general meeting on the 1st July, 1964 proposed as follows:--
'That the dividends proposed for seasons 1956 (Part), 1957, 1958, 1959, 1960, 1961 and 1962 amounting to Rs. 57,60,000 would not be declared as no remittances would be obtained from Pakistan for this purpose. The sums previously set aside for meeting these dividends are now released and the directors propose that the sum of Rs. 57,60,000 be transferred to Contingencies Reserve Account.'
13. These allegations have been made in paragraphs 10, 11 and 12 of the petition. The company's tea gardens, I understand, are all in Pakistan and the reason for the above report was that the directors could not bring moneys from Pakistan into India for paying dividends to the company's shareholders. Mr. Chakrabartti contends that the directors of the company wrongfully transferred the dividends for 1956 to 1962 to the Contingencies Reserve Fund. By making this transfer shareholders' money was converted into the company's money.
14. It is well known that if dividend is declared it would be a debt due by the company. For the recovery of this debt a suit would lie and a winding up application would also lie. There is further a provision in Section 207 of the Companies Act 1956 that a penalty would be imposed for failure to distribute dividends within 42 days of the date on which they are declared. If the shareholders' money has been converted into the company's moneys by some process or other, the conduct of the persons responsible would undoubtedly be unlawful. But the point on which I have to be satisfied is whether In fact any dividend wasdeclared by the company in any of these years. The petitioner has set out a portion of the Directors' Report to the Annual General Meeting of the 1st July, 1964 in paragraph 12 of the petition. I have quoted this portion of the report. The directors categorically stated that dividends could not be declared from 1956 to 1962 as they were unable to obtain remittances from Pakistan. They say that certain dividends were merely proposed. These proposed dividends they were seeking to transfer to the Contingencies Reserve Account. On these facts, I cannot uphold Mr. Chakrabartti's contention that the directors have wrongfully deprived the shareholders of dividends payable to them. In fact, the said Directors' Report, I find, was passed unanimously at tbe annual general meeting of tbe 1st July, 1964.
15. Tbe second contention of Mr. Chakrabartti is that it appeared from the Director's Report dated the 13th August, 1965 that N. C. Lance, G.D. Jatia, R.L. Nellore, C.P. Wallis and P.D. Bangur had resigned their offices of Directors and H. J. Silverston, S.R. Bhalotia and M.P. Bhalotia had been appointed additional Directors of the company. The petitioner's counsel says that tbe Articles of the company do not confer any power on tbe Board of Directors to appoint additional Directors: (Vide paragraph 22 of the petition).
16. In this connection we have to consider Section 260 of the Companies Act 1956 and certain Articles of this company. Section 260 prescribes that nothing in Sections 255, 258 or 259 shall affect any power conferred on the Board of Directors by the Articles to appoint additional Directors, provided that such additional Directors shall hold office only upto the date of tbe next Annual General Meeting of the company; provided further that the number of the Directors and additional Directors together shall not exceed tbe maximum strength fixed by the Articles.
17. We have now So see whether the Articles of this Company give any power to the Board of Directors to appoint additional Directors and if so on what conditions. In this Company Article 91 is as follows:
'The Board shall have power at any time and from time to time to appoint any person as a Director, as an additional to the Board but so that the total number of Directors shall not at any time exceed the maximum number fixed by these Articles. Any Director so appointed shall hold office only until the next Annual General Meeting of the company and shall then be eligible for re-election.'
18. As to the number of Directors Article 88 provides as follows:
'Until otherwise determined by Special Resolution, the number of Directors of the Company shall not be less than three nor more than six.'
19. In paragraph 11 of the affidavit-in-opposition of Mahabir Prasad Bhalotia affirmed on the 4th June, 1966, it is stated: 'After the resignation of M/s Duncan Brothers and Co. Ltd., three Directors of the Company namely, Mr. N.C. Lance, Mr. R.L. Miller and Mr. G.D. Jatia resigned and Mr. S.R. Bhalotia andMr. M.P. Bhalotia were appointed additional Directors of the Company. In January 1965 Mr. C.P. Wallis resigned as Director of the Company and Mr. H.J. Silverston was appointed as additional Director of the Company and in March 1965 Mr. P.D. Bangur resigned his office as Director of the Company' These averments on facts have not been traversed in the affidavit-in-reply of Navratan Mull Surana affirmed on the 13th June, 1966.
20. It is, therefore, not true that the Board of Directors had not the power under the Company's Articles to appoint additional Directors. This power was expressly conferred on the Board by Article 91. The petitioner does not allege that the maximum number of the Directors specified in Article 88 has been violated. In these circumstances, the petitioner's contention that additional Directors nave been unlawfully appointed must be overruled.
21. Mr. Chakrabartti then argued that the resignation of M/s. Duncan Brothers and Co. Ltd. who were tbe Managisg Agents of Patrakola Tea Co. Ltd. contravened the relevant provisions of the Companies Act 1956 and the Managing Agency Agreement with Messrs. Munnalal Bhalotia and Co. is consequently of no effect (Vide paragraph 29 of the petition). .
22. Learned counsel first referred to Sub-clause (v) of Clause 3 of the Memorandum of Association of the Company. This sub-clause gives power to the Company--'To carry on all or any part of the business of the company through the agency of the members for the time being of the firm of Messrs. Duncan Brothers and Co. of Calcutta or their successors in business, or in tbe event of tbe said firm ceasing to act as such agents, then through such other agency as may be determined from time to time by the Company in General Meeting.' Learned counsel for tbe petitioner then referred to Section 342 of tbe Companies Act 1956. This Section inter alia lays down that unless the Managing Agency Agreement otherwise provides, a Managing Agent may, by notice to the Board, resign his office as from such date as may be specified in the notice, but such resignation shall not be effective until it is accepted by the Company by a resolution passed in a General Meeting. Learned counsel also relied on Section 343 of the Act, which, inter alia, provides that the Managing Agent of a Company shall not transfer his office to another person or enter into any agreement or arrangement with another person by or under which the Managing Agent parts with, or which has the effect of transferring, his right to manage the whole or substantially the whole of the affairs of the Company in favour of or to that other person unless the approval of the Company in General Meeting and also of the Central Government has been accorded to such transfer, agreement or arrangement.
23. It is common case that Duncan Brothers and Co. was originally the Managing Agents of Patrakola Tea Co. Ltd. This firm was succeeded by Duncan Brothers & Co. Ltd. It is also admitted that Munnalal Bhalotia and Co. is now in control of the Company's business. Mr. Chakrabarti says that the resignation of Duncan Brothers and Co. Ltd. and the transfer to Munnalal Bhalotia and Co. Ltd. are illegal, as they contravene the provisions of both Section 342 and Section 343 of the Act. The resignation was not accepted by a resolution in a General Meeting nor has the transfer to Munnalal Bhalotia and Co, been either approved in the General Meeting or by the Central Government.
24. Prima facie these allegations are serious and I have to scrutinize them carefully. The term 'Managing Agent' has been defined in Section 2(25) of the Act. It means any individual, firm or body corporate, entitled, subject to the provisions of the Act, to the management of the whole, or substantially the whole, of the affairs of a Company by virtue of an agreement with the Company, or by virtue of its Memorandum or Articles of Association, and includes any individual, firm or body corporate, occupying the position of a Managing Agent, by whatever name called.' It is clear from this definition that a Managing Agent is entitled subject to the provisions of the Act to the management of the whole or substantially the whole of the affairs of a Company.
25. Now, in paragraph 5 of the affidavit-in-opposition of Mahabir Prasad Bhalotia affirmed on the 4th June, 1966, I find that the firm of Messrs. Duncan Brothers and Co. were the Managing Agents of the Company upto 1923. Thereafter Messrs. Duncan Brothers and Co. Ltd. were the Managing Agents till the 31st March, 1956. Mahabir Prasad Bhalotia's case is that between April 1956 and August 1964 Duncan Brothers and Co. Ltd. were not the Managing Agents but merely the agents of the Company. The Agents, it is undisputed, resigned in August, 1964. These statements in paragraph 5 of the affidavit-in-opposition are also Dome out by the balance-sheets of the company which nave been produced before me. I find, for instance, in the Annual Report of 1963, the notice of the Annual General Meeting to be held on the 1st July, 1964 has been printed and this notice apparently was signed by Duncan Brothers and Co. Ltd., as agents of the company by the order of the Board. Learned counsel for the company has also produced before me a copy of the agreement dated the 28th March, 1956 between Patrakola Tea Co. Ltd., and Duncan Bros and Co. Ltd. Another copy of the agreement was given to Mr. Chakrabartti. In Clause (1) of this agreement it is stated that the company appoints Messrs. Duncan Brothers and Co. Ltd., as agents in India to act for the company as from the first day of April, 1956, for the period of five years certain and thereafter for such period or periods and upon such terms and conditions as the company and the agents may mutually agree upon provided always, that the agents may determine this agreement at any time on giving to the company six months' previous notice in writing of their intention so to do. In the second clause of this agreement it is stipulated that the agents shall, save as otherwise direct-ed by the directors of the company, perform and do in India all such acts and things onbehalf of the company as are usually done by general agents and shall in addition advise the company and its assents in Pakistan on technical and other matters as may from time to time be required for the purpose of maintaining the efficient cultivation and manufacture of tea by the company in Pakistan provided always that the agents shall not at any time have or be entitled to the management of the whole or substantially the whole of the affairs of the company whether subject to the superintendence, direction and control of the directors of the company or otherwise.
26. From what I have stated above, it would appear that Duncan Brothers and Co. Ltd., were not the managing agents of the company at all since April, 1956. If they were not the managing agents, the question of violation either of Section 342 or 343 of the Act does not arise.
27. The next allegation of Mr. Chakrabartti's client also deserves serious consideration. In Paragraph 32 of the petition, it is alleged that Munnalal Bhalotia and Co., has acquired about 50% of the shares of the Patrakola Tea Co. Ltd., including the sizeable holding of Messrs. Duncan Brothers and Co. Ltd., and its associates at a price of not less than Rs. 500/-per share and other cash considerations. The petitioner in this paragraph 'challenges the ability of Messrs. Munnalal Bhalotia and Co., to have the financial capacity to acquire the shares they did without the backing of some secret agency.'
28. It is obvious that on vague allegations like these, a Court cannot be expected to make an order for enquiry. Paragraph 32 of the petition has been verified as true to the knowledge of the petitioner in his affidavit affirmed on the 31st March, 1966. The petitioner should have told this Court exactly at what price Duncan Brothers and Co. Ltd., and its associates have sold their shares to Munnalal Bhalotia and Co. The petitioner should have told this Court what other cash considerations were there in respect of these transactions. The petitioner should have told further who the secret agents arc behind Munnalal Bhalotia and Co. On general allegations attempting to arouse the suspicion of the Court, the powers under Section 237(a)(ii) of the Act cannot be exercised. (29) Mr. Chakrabartti drew my attention to Paragraph 24 of the petition and the first annexure thereto which was the letter of G.P. Pyne dated the 21st February, 1986. It is true that Munnalal Bhalotia and Co., offered to pay only Rs. 132/- per share to the petitioner. Then Mr. Chakrabartti wanted me to read Paragraph 30 of the petition which says : The Financial Express of Bombay dated 28th August, 1964 has a relevant reference to the sale of the Company's shares and appears to give a meaning to the agreement between the outgoing and incoming Managing Agents of the Company. A copy of the same is annexed hereto in the annexure collectively marked 'A'.
30. The report of the Financial Expressof Bombay of August 29, 1964 is as follows:--
'The latest though unconfirmed news aboutPatrakola Tea Co., from the Duncan BrothersGroup is that a large number of shares in the company has been bought by Pakistani interests--the Adamji Haji Dowood Group--and a substantial portion of the controlling interest is believed to have been sold around Rs. 600 a share of Rs. 100 each against the market price of Rs. 200. Since the share capital of Rs. 30 lakhs made up of 36,000 shares of Rs. 100 each is supported by reserves aggregating Rs. 180.16 lakhs the controlling interest appears to have changed hands at its book value. Patrakola, incorporated in 1910, owns tour estates situated at Patrakola, Madabpore, Kurmah and Champarai in the Sylhet District of East Pakistan. The combined planted area including seed reserves is approximately 1,800 hectares producing a crop or about 1.9 million kg.'
31. The petitioners Counsel strongly relied on this report in the Financial Express for an order of investigation under Section 237(a)(ii) of the Act. The person who was responsible for the publication of this report has not affirmed any affidavit. The report itself does not convey any definite or specific information. It is bused on certain 'unconfirmed news'. The petitioner, in these circumstances, cannot expect that this Court will make an order for investigation on this type of materials placed before it. If he was serious about an order under Section 237(a)(ii), he should have taken the trouble of finding and producing before this Court far more reliable materials and much stronger evidence.
32. On the evidence adduced, it may be possible to draw the conclusion that Duncan Brothers and Co. Ltd., have perhaps sold their shares to Munnalal Bhalotia and Co., at exorbitantly high prices and now the purchaser of Duncan's shares is offering to buy the other shares in the company at a ridiculously low figure. On the motive behind the transactions, however, between Duncan Brothers and Co. Ltd., and Munnalal Bhalotia and Co., there is no clear evidence before the Court.
33. In these circumstances, I am constrained to say that at what price Messrs, Duncan Brothers and Co. Ltd., sold their shares to Munnalal Bhalotia and Co., is not a matter which concerns the Patrakola Tea Co. Ltd., at all. The affairs of the Patrakola Tea Co. Ltd., cannot be investigated for the alleged fraud or misconduct of some of its shareholders. The sins of the shareholders should not visit the company. With better materials and stronger evidence I might have been inclined to direct an enquiry; but to my mind it would be unfair to proceed on evidence produced by the petitioner in this application and to make an order under Section 237(a)(ii) The powers of the Court under this Section should be exercised with caution and the Court ought to require far more convincing proof of the allegations the petitioner has made.
34. In the result this application is dismissed. The petitioner will pay one set of costs to the respondents.
35. Certified for counsel.