2002 (1) TMI 1207 - SC - Companies Law

Whether the Mysore Paper Mills which is a company incorporated under the Companies Act, 1956, and which is a Government-company as defined in section 617 of the Companies Act falls within the meaning of the word State as defined in article 12 of the Constitution of India ? Held that - Appeal dismissed. The indisputable fact that the appellant-company is a Government company as envisaged in section 617 attracting section 619 of the Companies Act, that more than 97 per cent of the share capital has been contributed by the State Government and the financial institutions controlled and belonging to the Government of India on the security and undertaking of the State Government, that the amendments introduced to the memorandum of association in the year 1994 introducing articles 5A and 5B entrusts the appellant-company with important public duties obligating to undertake, permit, sponsor rural development and for social and economic welfare of the people in rural areas by undertaking programmes to assist and promote activities for the growth of national economy which are akin and related to the public duties of the State, that out of 12 directors 5 are Government and departmental persons, besides other elected directors also are to be with the concurrence and nomination of the Government and the various other form of supervision and control, as enumerated supra, will go to show that the State Government had deep and pervasive control of the appellant-company and its day-to-day administration, and consequently confirm the position that the appellant-company is nothing but an instrumentality and agency of the State Government and the physical form of company is merely a cloak or cover for the Government. Despite best and serious efforts made on behalf of the appellant, the decision under challenge has not been shown to suffer any infirmity whatsoever to call for interference in our hands.

Issues Involved:
1. Whether the Mysore Paper Mills Ltd. is 'State' within the meaning of Article 12 of the Constitution of India.
2. Whether the transfer order of the second respondent to Calcutta is vitiated by mala fides, arbitrary, and illegal.

Issue-wise Detailed Analysis:

1. Whether the Mysore Paper Mills Ltd. is 'State' within the meaning of Article 12 of the Constitution of India:

The Full Bench of the Karnataka High Court reviewed various tests laid down by the Supreme Court to determine whether an entity qualifies as 'State' under Article 12. The Court considered the following factors:

- Government Company Status: The appellant-company is a government company as per Section 617 of the Companies Act, 1956.
- Public Interest Functions: The company is entrusted with functions of public interest closely related to governmental functions and enjoys a monopoly status conferred by the State.
- Government Control: The Government operates behind a corporate veil, carrying out governmental functions of vital importance through the company.
- Financial Contribution: More than 97% of the share capital is contributed by the State of Karnataka and financial institutions controlled by the Government of India.
- Board of Directors: The business is managed by a Board of Directors, including nominees from the Government of Karnataka and financial institutions, with significant control over appointments and management.
- Administrative Control: The company is under the control of the Government of Karnataka, including financial controls, approvals for investments, and adherence to reservation policies.
- Government Guarantees: Loans taken by the company are guaranteed by the Government of Karnataka.
- Public Premises Notification: The company's premises are notified as 'public premises' under the Karnataka Public Premises (Eviction of Unauthorized Occupants) Act, 1974.

Based on these factors, the Full Bench concluded that the appellant-company is an authority and instrumentality or agency of the State, thus falling within the definition of 'State' under Article 12 of the Constitution of India.

2. Whether the transfer order of the second respondent to Calcutta is vitiated by mala fides, arbitrary, and illegal:

The Full Bench considered whether the transfer order dated 27-11-1997, transferring the second respondent to Calcutta, was vitiated by mala fides or extraneous considerations. The Court noted the following:

- Administrative Grounds: The transfer was made on administrative grounds, as per the terms and conditions of the contract of service and Officers Service Rules.
- Lack of Substantiation: The allegations of mala fides and vindictiveness were not substantiated by the respondents.
- Legal Right to Challenge: The respondents have no legal right to challenge the transfer order when the plea of mala fides and vindictiveness is not proven.

The Court found that the transfer order was not vitiated by mala fides or extraneous considerations and was in accordance with the administrative requirements of the appellant-company.

Conclusion:

The Supreme Court upheld the findings of the Full Bench of the Karnataka High Court. The Court confirmed that the Mysore Paper Mills Ltd. is 'State' within the meaning of Article 12 of the Constitution of India due to its deep and pervasive control by the Government of Karnataka and its public interest functions. Additionally, the transfer order of the second respondent was found to be lawful and not vitiated by mala fides or extraneous considerations. The appeals were dismissed, and no costs were awarded.

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