1962 (3) TMI 33 - SC - Companies Law

Power to pay certain commissions and prohibition of payment of all other commissions, discounts, etc.

Issues Involved:
1. Construction of Section 76(1) and (2) of the Companies Act, 1956.
2. Validity and enforceability of promoters' commission agreement post-Companies Act, 1956.
3. Applicability of English company law principles to Indian company law.
4. Interpretation of statutory provisions regarding payment of commission out of profits versus capital.

Detailed Analysis:

1. Construction of Section 76(1) and (2) of the Companies Act, 1956:
The principal issue revolves around the interpretation of Section 76(1) and (2) of the Companies Act, 1956. The appellant argued that the statutory provision limiting the payment of commission applies only to payments out of capital and not to payments out of profits. The court, however, held that Section 76(1) places an absolute ceiling on the payment of commission, irrespective of whether it is paid out of capital or profits. The court emphasized that the word "commission" in Section 76(1) refers to both capital and profits, and the ceiling imposed acts as a prohibition against exceeding the specified limit.

2. Validity and Enforceability of Promoters' Commission Agreement Post-Companies Act, 1956:
The appellant sought a declaration that the agreement for the payment of commission to promoters was valid and enforceable even after the Companies Act, 1956 came into force. The respondent company contended that the agreement had become illegal and void under Section 76. The court concluded that the agreement, which provided for a commission exceeding the statutory limit, was indeed void under the Act. The appellant's claim was dismissed on the grounds that the agreement could not be enforced as it contravened the statutory provisions.

3. Applicability of English Company Law Principles to Indian Company Law:
The appellant argued that the provisions of the Indian company law should be interpreted in line with the English company law, which permits the payment of commission out of profits without any limitation. The court examined the corresponding provisions of the English Companies Acts and noted that the English law had historically allowed payment of commission out of profits. However, the court held that the Indian Companies Act, 1956, had its own distinct provisions, and the interpretation of Section 76 should not be influenced by English law. The court emphasized that the Indian legislature had intended to impose stringent restrictions on payments out of profits, and this intention was reflected in the statutory provisions.

4. Interpretation of Statutory Provisions Regarding Payment of Commission Out of Profits Versus Capital:
The court analyzed the language and structure of Section 76(1) and (2) to determine whether the prohibition on payment of commission applied to both capital and profits. The court observed that Section 76(1) clearly prescribes a ceiling on the payment of commission, without distinguishing between capital and profits. Section 76(2) further reinforces this by prohibiting any indirect methods of circumventing the ceiling imposed by Section 76(1). The court concluded that the statutory provisions were designed to prevent extravagant payments out of the company's profits and to safeguard the company's financial health.

Additional Judgment by Sarkar J.:
Sarkar J. delivered a separate judgment, dissenting from the majority. He argued that the provisions of Section 76(1) should be interpreted as an enabling provision, allowing the payment of commission out of capital but not restricting the payment of commission out of profits. He contended that the historical context and the principles of company law supported the view that companies could freely pay commission out of profits. Sarkar J. concluded that the agreements for payment of commission out of profits remained valid and enforceable under the Companies Act, 1956.

Conclusion:
The majority judgment held that the agreements for payment of commission to promoters, which exceeded the statutory limit, were void and unenforceable under Section 76 of the Companies Act, 1956. The court emphasized the need to interpret the statutory provisions in line with the legislative intent to impose stringent restrictions on payments out of profits. The appeal was dismissed with costs.

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