A COMPANY IS A SOCIAL INSTITUTION HAVING DUTIES AND RESPONSIBILITIES TOWARDS THE COMMUNITY

[Mr. M. GOVINDARAJAN]

A company formed and registered under the provisions of Companies Act, is a separate legal entity. It is differing from its shareholders. Shareholders may come or go but the company will exist continuously by the perpetual succession. The shareholders are the owners of the company. Among them the equity shareholders are only having voting right and the preferential shareholders are not having any right. Recently differential voting rights are there. A company either it is a public limited company or private limited company litigation is possible in all aspects including the shareholders. Refusal to transfer of shares, oppression and mismanagement etc., are the causes for the litigation. The majority shareholders prevail over the minority shareholders.

The issue taken for discussion in this article is whether the shareholders are the real owner of the companies and whether they can do whatever they like.  It is not possible in the present concept. They have to comply with various provisions of Acts and regulations.

The Supreme Court in 'National Textile Workers' Union V. P.R. Ramakrishnan' - (1983) 1 SCC 2289, in explaining the nature of the company  held that it would be wrong to look upon it as something belonging to the shareholders. It is true that the shareholders bring capital, but capital is not enough. It is only one of the factors, which contributes to the production of national wealth. There is another equally, if not more, important factor or production and that is labor. Then there are the financial institutions and depositors, who provide the additional finance required for production and lastly, there are the consumers in the product manufactured in the concern. Then how can it be said that capital, which is only one of the factors of production, should be regarded as owner having an exclusive dominion over the concern, as if it belongs to it.

The Supreme Court further explained the modern concept of the company. It is now well accepted on all hands, even in predominantly capitalist countries, that a company is not property. The traditional view that the company is the property of the shareholders is now an exploded myth. There was a time when a group controlling the majority of shares in a company used to say - 'This is our concern; we can do what we like with it'.  The ownership of the concern was identified with those who brought in capital. That was the outcome of the property minded capitalistic society in which the concept of company originated. But this view can no longer be regarded as valid in the light of the changing socio-economic concepts and values. Today social scientists and thinkers regard a company as a living, vital and dynamic, social organism with firm and deep-rooted affiliation with the rest of the community in which it functions.

The Supreme Court further in the said considered the question of the right of workmen of a company to appear and oppose the petition for winding up of the company. The Supreme Court categorically laid down that workers of a company are entitled to appear at the hearing of the winding up petition whether to support or oppose it so long as no winding up order is made by the court and that they have locus to appear and be heard in the winding up petition either before winding up petition is admitted or after order for advertisement is made. If winding up order is passed, they would also be entitled to prefer an appeal.

Justice Chinnappa Reddy, who wrote concurrent opinion, observed as - "Private corporations hitherto regarded as bastions of private property and leaders of capitalist economy are undergoing transformation and, are surely acquiring the character of public institutions. The public interest element is now quite a predominant factor in the Act itself. There are several provisions in the Act, which take notice of the element of public interest. There are other enactments like the Monopolies and Restrictive Trade Practices Act (now repealed), the Industries (Regulation and Development) Act under whose provisions, the activities of a company may be scrutinized in the public interest. There are a host of other legislations involving employment and welfare of labour, to which the managements of companies are subject. The transformation of a company's character from private to public is going on right before our eyes even as the institution of private property is also losing its diathesis.

In 'Chetan G Cholera and another V. Rockwool (India) Ltd.' - (2010) 96 CLA 470 (AP) the High Court in deciding the reduction of share capital by a company held that in protecting the rights of workmen/employees/ shareholders/promoters and national interest, it would not be sufficient for court only to adhere to procedural and substantive aspects of a scheme of arrangement or compromise. The scrutiny must be beyond the provisions of the corporate law. State cannot ignore the preamble of the Constitution, which assures to secure a socialist State to citizens, benefits under Articles 38 and 39 and other directive principles. The Court must not lose sight of the fact that Regulatory Bodies have been established under the Acts of Parliament like SEBI to safeguard the interests of the investors. All companies offering shares to public are required to allot required quantity to retail investors. In addition to this, retails investors are provided investor friendly methods, procedures and safeguards for buying and selling securities and prevent fraud by overenthusiastic corporate brokers.   All this would be rendered illusory promoters - with a view to bypass small investors; come forward with petition to reduce share capital. In every case, it cannot be assumed that majority shareholders protect and safeguard class rights. The majority shareholders if they belong to one group or family can never be interested in safeguarding and protecting the class rights of minority.  In such cases, all aspects of the matter have to be gone into. Complying with Delisting Regulations, Buy back regulations and other regulations of SEBI as well as provisions of the Companies Act may not by themselves sufficient to grant approval to special resolution for reduction of share capital. When such special resolution is engineered by the promoter group controlling majority shareholders and it is found that such reduction is intended only to deny rights of minority shareholders or small investors the court can even pass order rejecting confirmation of the minute and/or modifying the scheme of arrangement for reduction of the capital, in such a manner that small investors derive the benefit expecting which they invested their money in the company.

Thus it is clear that a company according to the new socio-economic thinking is a social institution having duties and responsibilities towards the community in which it functions.

Discussions to this article

[CA UMA KOTHARI]

In this context company is nothing but an instrumentality or special purpsoe vehicle to carry business with resources collected from many persons.Therefore, company is also a part of community and it represents diferent segments of community- promoters, controllers,investors, consumers of products and other stake holders. All these stake holders are part of community. Company having obligations to them is definately have obligations towards society in general. CA DEV and Uma Kothari.