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TMI Blog1964 (2) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... only reason I can see for its having run its full course is that there is absolutely no merit in it. I shall immediately proceed to state the facts giving rise to the petition. The facts are many and to some extent disputed and it is, therefore, necessary to set them out in some detail. The company concerned in the petition is Shri Sayaji Jubilee Cotton and Jute Mills Limited. I shall hereinafter refer to Shri Sayaji Jubilee Cotton and Jute Mills Limited as the company. The company was incorporated on 3rd September, 1907, under the provisions of the Baroda Companies Act, Samvat year 1953. The authorised capital of the company is Rs. 3,35,000 divided into 6,700 shares of Rs. 50 each. The subscribed and paid up capital of the company is Rs. 2,60,550 divided into 5,211 shares of Rs. 50 each. There are in all 587 shareholders of the company. The registered office of the company is situate at Induprasad Rawal's Bungalow, Bindu Sarovar Road, Sidhpur. The company was promoted for the purpose of running a textile mill at Sidhpur. Clause 6 of the memorandum of association of the company provided for appointment of a firm called Messrs. Prahladji Sevakram and Company as secretaries, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company on the terms and conditions contained in the said agreement. The remuneration set out in the said agreement, to which I shall for the sake of convenience refer as the first managing agency agreement, was a little different from that specified in clause 6 of the memorandum of association and articles 119 and 120 of the articles of association, though again that is not a matter relevant for the purpose of the present petition. The clause of the first managing agency agreement material for the purpose of the present petition was clause 7 which in its English translation provides as follows : " 7. The moneys required by way of working capital for running the mill which you agents have to procure in accordance with the memorandum of association and articles 96 and 97 under heading 11 of the articles of association shall be brought on 3'our behalf only by Shah Manilal Mulchand and his heirs and successors and such moneys shall be procured by Shah Manilal Mulchand, his heirs and successors on account of the mill on interest at the rate of six per cent, per annum and for the work of procuring moneys for working capital on interest at the rate of six per cent, per annum, purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per Rs. 100 on the amount of purchase price of cotton in consideration of the work of lending and other wise procuring moneys on interest at the rate of six per cent, per annum as above and for sincerely purchasing cotton at the market rate for the Mills Company and for sincerely selling yarn and cloth in the market in such a way as to benefit the Mills Company. (6). You shall have to include the commission (haksai) on the purchase of cotton in your invoice for the cotton purchase and as you say that there is a custom to pay the amount of purchase of cotton on the next day after it is weighed, it will be credited to your account as per that custom but no interest is to be paid on the amount of commission (haksai) . But that amount is to be credited to your account after settling the accounts at the end of the month of December. The commission (haksai) to be paid in consideration of the sale of yarn and cloth will be credited to your account after settling the accounts at the end of the month of December every year. (16). The amount to be lent by you as working capital as stated in clause i above is to be so lent by you ; or you are at liberty to have it lent from other persons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cult to run the textile mill of the company. Messrs. Prahladji Sevakram and Company accordingly handed over the management of the business of the company to the board of directors on 31st May, 1935, and also tendered their resignation as secretaries, treasurers and agents of the company. The directors thereafter ran the textile mill of the company for a few months through a committee appointed for the purpose, but the textile mill of the company had soon to be closed down. Efforts were thereafter made to restart the textile mill and, as a result of the meetings of the shareholders and the creditors, a scheme was framed for reconstruction of the company and resuming the textile mill of the company. The scheme was sanctioned by the District Court, Mehsana, on 14th October, 1935. Under the scheme the creditors of the company were divided into three classes, the first class, described as A consisted of Messrs. Prahladji Sevakram and Company and Shah Manilal Mulchand and the respective partners of those firms, the second class, described as B consisted of other creditors of the company while the third class, described as C consisted of Tapodhan Gnati Uthejak Trust and other trusts. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance-sheets of the company from year to year and the last balance-sheet which showed the amount was the balance-sheet as at 31st December, 1942. The entire amount advanced by Shah Manilal Mulchand to the company under this agreement was returned some time in 1943, with the result that the balance-sheet as at 31st December, 1943, did not show any loan as outstanding from the company in this account. As I have pointed out above, the textile mill of the company was restarted on 13th February, 1937, and between 1937 and 1946, the company made good profits from the working of the textile mil. The creditors belonging to classes B and C were regularly paid the instalments in respect of their dues from out of the profits of the company and they wore fully paid off by the end of 1941. Messrs. Prahladji Sevakram and Company and Shah Manilal Mulchand thereupon became entitled to receive commission from the company under their respective agreements with the company from Ist January, 1942, and a resolution to that effect was passed by a meeting of the board of directors held on Ist May, 1942. The result was that right from 13th February, 1937, when the textile mill of the company resumed worki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st December, 1956, when a new agreement was necessitated by reason of the enactment of the Companies Act, 1956, which came into force with effect from Ist April, 1956. A new agreement was accordingly entered into between the company and Messrs. Prahladji Sevakram and Company Limited on 10th January, 1958, after obtaining the requisite sanction of the Central Government and under this new agreement the remuneration payable to Messrs. Prahladji Sevakram and Company Limited as managing agents of the company was fixed at ten per cent, of the net profits of the company in accordance with the provisions of the Companies Act, 1956, and the minimum remuneration was determined at Rs. 25,000 per year. This agreement was to be operative from Ist January, 1957. It may be pointed out at this stage that the managing agency of Messrs. Prahladji Sevakram and Company Limited thereafter came to an end on 15th August, 1960, by reason of the provisions contained in section 330 of the Companies Act, 1956. Since the Companies Act, 1956, was coming into force from Ist April, 1956, and section 314 provided that except with the previous consent of the company accorded by a special resolution, no firm in w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rival versions a little later when I examine the arguments advanced on be half of the parties. To continue the narration further, on the textile mill of the company being closed down, the Majoor Mahajan Sangh, being a representative union of the employees of the company, preferred an application before the authority under the Payment of Wages Act for payment of retrenchment compensation and the claim preferred by them on behalf of the workmen aggregated to Rs. 7,66,074. Before I narrate the history of what happened on this application, I must point out that on Ist December, 1947, a letter was addressed by Chandrakant Bakubhai, Rameshchandra Bakubai and Sanatkumar Bakubhai, as partners of Shah Manilal Mulchand, to the company terminating the adat agreement in view of the fact that the textile mill of the company had closed down. By this letter they also requested the company to make up accounts in respect of the dealings between Shah Manilal Mulchand and the company and to do the needful in the matter. A meeting of the board of directors of the company was held on 8th December, 1957, to consider amongst others this letter received from the partners of Shah Manilal Mulchand. At this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... machinery which constituted the rest of the movable properties of the company were also pledged by the company in favour of these parties including Shah Manilal Mulchand to secure payment of the amounts respectively due and payable by the company to them and in their turn they agreed to give time to the company to repay the said amounts up to 28th March, 1959. The company also created an equitable mortgage of its immovable properties in favour of the same parties to secure repayment of the amounts respectively due and payable to them by the company. Two memoranda of pledges were executed by the company in respect of the aforesaid pledges created by the company in favour of these parties and Shah Manilal Mulchand and a memorandum of equitable mortgage was executed by the company in respect of the aforesaid equitable mortgage made by the company in favour of Shah Manilal Mulchand. All these documents were executed on 29th March, 1958. Considerable reliance has been placed on behalf of the petitioners on these facts and the creation of these securities has been attacked as an act on the part of the directors constituting oppression of the minority shareholders including the petitione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the history of the facts I may state here that after the textile mill was closed down on 25th April, 1957, the sale of the properties of the company was advertised in the issue of the Times of India on 17th, 20th and 22nd June, 1957, since the directors felt that it would not be possible to run the textile mill with the hope of making any profit and that it would be in the interests of the company to sell off its properties at a reasonable price. Pursuant to these advertisements only one offer was received by the company and that was from Messrs. Indian Textile Traders. By their letter dated 23rd July, 1957, Messrs. Indian Textile Traders made an offer for purchase of the machinery of the company for Rs. 6,07,500. The directors, however, found the offer to be too low and they accordingly did not pursue the same further. A number of persons interested in the purchase of the properties of the company came to see the properties but none of them gave a concrete offer of even Rs. 7 to Rs. 8 lakhs. Ultimately, in or about September, 1958, Mehsana Jilla Sarvodaya Audyogic Sangh made an offer to purchase the entire block of the company including the dead stock for the price of Rs. 9,75,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any after the sale was finalised. It appears that Induprasad Prahladji Rawal and Rameshchandra Bakubhai thereafter carried on negotiations with Bharat Kala Bhandar Limited and ultimately as a result of the negotiations an offer in writing was made by S. M. Junjunwala, advocate on behalf of Bharat Kala Bhandar Limited, to Messrs. Kanga and Company, solicitors on behalf of the company, by a letter dated 12th July, 1961. It is not necessary at this stage to set out the terms and conditions of the offer for I shall have occasion to consider the same in greater detail when I consider the question whether any of the material terms and conditions of the offer were omitted to be set out in the explanatory statement issued under section 173 of the Companies Act, 1956, while con vening the extraordinary general meeting of the company for the purpose of obtaining the consent of the company under section 293 of the Companies Act, 1956. All that need be pointed out here is that the offer was accepted on behalf of the company by a letter dated 12th July, 1961, addressed by Messrs. Kanga and Company to S. M. Junjunwala on behalf of Bharat Kala Bhandar Limited. Another meeting of the board of dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence at 1-25 p.m. The extraordinary general meeting of the company was thereafter held on 5th September, 1961. At this meeting an objection was raised on behalf of some of the shareholders that the resolution giving consent to the sale of the block of the company to Bharat Kala Bhandar Limited could be passed only as a special resolution and not as an ordinary resolution and that the resolution could not, therefore, be carried unless there was 3/4th majority of votes in favour of the resolution. The objection was not well founded and was, therefore, negatived by the chairman. Certain other objections were also taken by these shareholders who did not want the resolution to be passed and a statement was handed in by them to the chairman containing those objections. Those objections were in the opinion of the chairman frivolous and were, therefore, rejected by him. Of these objections, the only one relevant for the purpose of the present petition which has been relied upon by the learned advocate appearing on behalf of the petitioners is that based on non-compliance with the requirements of section 173 of the Companies Act, 1956. After the objections were overruled by the chairman th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce and Industries Limited, Nagda, to Sidhpur in or about July, 1961, for the purpose of keeping a watch on the machinery of the company, so that none of the machinery of the company might be. removed or damaged during the pendency of the negotiations. Shankerlal Ramlal Sharma was staying in a bungalow situate in the mill premises at Sidhpur and he was keeping a watch on the machinery with the help of two jamadars taken by him. It was this Sankerlal Ramlal Sharma who received the letter date 5th September, 1961, on behalf of Bharat Kala Bhandar Limited when it was tendered by the postman. After receiving the letter he forwarded it to Bharat Commerce and Industries Limited, Nagda. Considerable controversy centered round this incident since one of the contentions raised in the course of the arguments before me was that by this letter, dated 5th September, 1961, which also contained a copy of the statement of objections and which was received on 8th September, 1961, by Shankerlal Ramlal Sharma, Bharat Kala Bhandar Limited acquired notice of the fact that the resolution passed at the meeting of the company held on 5th September, 1961, was invalid and that the company was, therefore, not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve their consent to the sale of the block to Bharat Kala Bhandar Limited and they accordingly joined as confirming parties in the deed of sale. The result was that on 9th September, 1961, the property in the movable properties of the company passed in favour of Bharat Kala Bhandar Limited and so far as the immovable properties were concerned, the deed of sale transferred the property in the immovable properties to Bharat Kala Bhandar Limited and the entire price of Rs. 11,40,000 was paid off by Bharat Kala Bhandar Limited to the company. The transaction was thus carried out in its entirety on 9th September, 1961, and the only thing which thereafter remained was registration of the deed of sale. On receiving the amount of the purchase price from Bharat Kala Bhandar Limited, the company paid off the amounts due and owing by it to its secured creditors. It may be pointed out that apart from these secured creditors, there were no other creditors of the company. Out of the amount of the purchase price an aggregate sum of Rs. 4,69,962 was paid off by the company to four directors who were among the secured creditors of the company and an aggregate sum of Rs. 6,62,223 was paid off by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst Bharat Kala Bhandar Limited. Immediately after filing the suit, an application for interim injunction was made on behalf of these two shareholders and on the application an ad interim injunction was granted restraining the company from acting upon the resolution dated 5th September, 1961. No ad interim injunction was issued against the Sub-Registrar of Assurances. The Sub-Registrar of Assurances at Bombay, however, refused to register the deed of sale since a copy of the ad interim order issued by the court of the Civil Judge, Junior Division, Sidhpur, was served upon him. Bharat Kala Bhandar Limited thereupon preferred a Special Civil Application No. 742 of 1962 in the High Court of Bombay under articles 226 and 227 of the Constitution on 7th May, 1962, for a writ of mandamus requiring the Sub-Registrar of Assurances to register the deed of sale. At the hearing of the Special Civil Application when it was pointed out that there was no ad interim order restraining the Sub-Registrar of Assurances from registering the deed of sale, it was stated by the Advocate-General of the State of Maharashtra appearing on behalf of the Sub-Registrar of Assurances that the deed of sale would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e such sum or sums to the assets of the company as and by way of compensation in respect of mismanagement and malpractices committed by them in relation to the affairs of the company as the court might think fit, though I may point out that this relief was not seriously pressed on behalf of the petitioners. On the petition being admitted, a notice was issued to the Central Government under section 400 of the Companies Act, 1956. The Central Government has, however, not filed any affidavit in response to the notice. At the date when the petition was filed, no one was made a party respondent to the petition and that was presumably done having regard to the form prescribed for such petitions by the Companies Court Rules, 1959. But when the petition came up for hearing it was felt that it would be desirable to add the company, its directors and Bharat. Kala Bhandar Limited as party respondents to the petition since the reliefs claimed in the petition were directed against them. I, therefore, made an order on the application of the petitioners on 27th February, 1963, and pursuant to that order, the company, its directors and Bharat Kala Bhandar Limited were added as respondents to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot binding on the company for three reasons, namely, (1) of the three directors present at the meeting, Chandrakant Bakubhai being a partner of Shah Manilal Mulchand was interested in the resolution but he had not disclosed the nature of his concern or interest as required by section 299 of the Companies Act, 1956 ; (2) Chandrakant Bakubhai was interested in the cancellation of the adat agreement and yet he took part in the discussion on the resolution ; and (3) the presence of Chandrakant Bakubhai could not be counted for the purpose of forming a quorum at the time of any such discussion and there was accordingly no quorum and besides the resolution was also oppressive to the petitioners and other shareholders of the company and prejudicial to the interests of the company. The application for leave to amend the petition was opposed on behalf of the respondents. The main ground of opposition was that the fact that the resolution dated 8th December, 1957, was passed by the board of directors was mentioned in the balance-sheet and profit and loss account of the company for the year ended 31st December, 1957, and the petitioners were, therefore, aware of the said fact and the ground s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir affidavit in rejoinder came forward in the contention that the said resolution was illegal, invalid and not binding on the company. Of course the petitioners should have, as soon as the true position was brought to their notice by the affidavit in reply, taken immediate steps to put the petition in order by applying for the necessary amendment, but the petitioners did not do so and it was only after the petition had gone on before me for some time that the application was made for leave to amend the petition. That, however, cannot be a sufficient ground for refusing leave to amend the petition. If the factual position is that the adat agreement was not subsisting between the company and Shah Manilal Mulchand at the date of the petition but was cancelled by the resolution dated 8th December, 1957, the petitioners must be given an opportunity to amend the petition by challenging the said resolution as constituting conduct oppressive to the petitioners and other shareholders of the company and prejudicial to the interests of the company. Of course it is not a proper subject-matter of inquiry in a petition under section 397 or 398 of the Companies Act, 1956, to consider whether a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... behalf of the company and the directors. This however, was not the end of the applications for leave to amend the petition. Yet another application for leave to amend the petition was made on behalf of the petitioners on 18th April, 1963. Extensive amendments were sought in the petition on this occasion. After paragraph 21 a new paragraph 21A was sought to be added. By this paragraph the petitioners wanted to aver facts showing that the letter dated 5th September, 1901, addressed by Dahyalal Chhotalal Patwa to Bharat Kala Bhandar Limited was received by Shankerlal Ramlal Sharma on behalf of Bharat Kila Bhandar Limited on 8th September, 1961, and that Shankerlal Ramlal Sharma was an agent of Bharat Kala Bhandar Limited authorized to receive the letter on behalf of Bharat Kala Bhandar Limited. Since the averments in this paragraph did not seek to introduce any new ground of attack but merely amplified the allegations already contained in the petition, I allowed the amendment in so far as it related to this paragraph even though the amendment was applied for at a very late stage of the proceedings after the learned advocates appearing on behalf of the petitioners and Bharat Kala Bhan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers (f)(i ) and (f)( ii) after prayer (f) in the petition. These prayers were consequential upon the averments made in the petition and merely amplified the relief which was already sought in prayer (a) of the petition. I, therefore, allowed the introduction of these prayers by way of amendment. In reply to these amendments permitted by me, two affidavits in reply were filed on behalf of Bharat Kala Bhandar Limited, one made by Pratapvardhan Deva, the constituted attorney of Bharat Kala Bhandar Limited and the order made by Shankerlal Ramlal Sharma. On these affidavits an application was made on behalf of the petitioners for an order that Pratapvardhan Deva and Shankerlal Ramlal Sharma should be produced for cross-examination by the petitioners and I, accordingly, made an order directing the attendance of Pratapvardhan Deva and Shankerlal Ramlal Sharma for such cross-exanil nation. Pratapvardhan Deva and Shankerlal Ramlal Sharma were there after cross-examined on behalf of the petitioners and their evidence was recorded by me and the arguments were thereafter concluded. Before I examine the various arguments which were advanced before me on the merits of the petition, I must refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roceed to examine the scope and ambit of these sections. Sections 397 and 398 are part of a fasciculus of sections commencing from section 397 and ending with section 407 and this fasciculus of sections occurs in section A dealing with powers of court under Chapter VI headed " Prevention of oppression and mismanagement ". Under section 397 any members of a company who complain that the affairs of the company are being conducted in a manner oppressive to any member or members including any one or more of themselves, may petition the court which, if satisfied that the company's affairs are being conducted in a manner oppressive to any member or members and that the facts justify the making of a winding-up order on the ground that it is just and equitable to do so but that this would unfairly pre judice such member or members, may make such order as it thinks fit with a view to bringing to an end the matters complained of. This section corresponds to section 210 of the English Companies Act, 1948. Section 398 consider ably enlarges the scope of the remedy by providing that any members of a company who complain that the affairs of the company are being conducted in a manner prejud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principle of interpretation, it is not possible to accept the construction contended for on behalf of the petitioners. The reasons are as follows : Prior to the enactment of the Companies Act, 1956, the statute relating to companies was the Indian Companies Act, 1913. There was in the Indian Companies Act, 1913, section 153C which corresponded to sections 397 and 398 of the Companies Act, 1956. This section was introduced in the Indian Companies Act, 1913, by Act 111 of 1951 following the enactment of section 210 in the English Companies Act, 1948. The genesis of the provisions contained in sections 397 and 398 of the Companies Act, 1956, is therefore, to be found in section 210 of the English Companies Act, 1948. Now the position which obtained prior to the enactment of section 210 of the English Companies Act, 1948, was that even if the affairs of a company were being conducted in a manner oppressive to some part of the shareholders or in a manner prejudicial to the interests of the company, the aggrieved share holders had no effective remedy to put an end to such conduct, for unless the case fell within any of the three recognized exceptions to the rule in Foss v. Harbottle [1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was expand ed by removing in cases covered by section 398 the requirement that the aggrieved shareholders must make out a case for winding up under the just and equitable clause before they can apply for relief under that section. The object and purpose of the remedy, however, remained the same, namely, to cure the mischief of oppression or mismanagement on the part of controlling shareholders by bringing to an end such oppression or mismanagement so that it does not continue in future. The remedy was intended to put an end to a continuing state of affairs and not to afford compensation to the aggrieved shareholders in respect of acts already done which were no longer continuing wrongs. It is in the light of this background that the principle of interpretation relied on by Mr. S. B. Vakil must be applied and applying that principle of interpretation the widest power may be inferred for the court to interfere in the internal management of a company with a view to putting an end to oppression or mismanagement on the part of controlling shareholders so as to advance the remedy and suppress the mischief. But no power, I am afraid, can be inferred by the application of that principle of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of in an application under these sections being a course of conduct on the part of controlling shareholders in the management of the affairs of the company which is oppressive to any shareholder or shareholders or prejudicial to the interests of the company, it is clear that an order can be made under these sections only for .the purpose of bringing to an end such course of oppressive or prejudicial conduct, that is, for the purpose of putting an end to oppression or mismanagement on the part of controlling shareholders so that there may not be in future such oppression or mismanagement. The language of sections 397 and 398 leaves no doubt as to the true intendment of the legislature and it is trans parent that the remedy provided by these sections is of a preventive nature so as to bring to an end oppression or mismanagement on the part of controlling shareholders and not to allow its continuance to the detriment of the aggrieved shareholders or the company. The remedy is not intended to enable the aggrieved shareholders to set at naught what has already been done by controlling shareholders in the management of the affairs of the company. If such were the intention of the legisla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejudicial conduct in the management of the affairs of the company. This, in my opinion, is the true import of sections 397 and 398 and it is amply supported by the heading under which the sections occur. It is now well settled that headings of this kind can be referred to for the purpose of construction of the sections ranged under the headings. In Inglis v. Robertson [1898] AC. 616, Lord Herschell, called upon to construe section 3 of the Factors Act, 1889, relied upon the fact that the section appeared in a group of sections headed " Dispositions by Mercantile Agents " and after referring to the headings of different parts of the Act, observed : "These headings are not, in my opinion, mere marginal notes, but the sections in the group to which they belong must be read in connection with them and interpreted by the light of them." Lord Collins also said much to the same effect in Toronto Corporation v. Toronto Railway [1907] AC. 315, 324, when he observed : " This clause is the last of the fasciculus, of which the heading is 'Track, & C, and Railways ' and, as was held in Hammersmith Ry. Co. v. Brand [1869] LR. 4 HL. 171, such a heading is to be regarded as giving the ke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that on this construction the exceptions to the rule in Foss v. Harbottle [1843] 2 Here 461 would be enlarged beyond the three well recognized exceptions and whenever any transaction is entered into by a company with a third party which is part of oppressive or prejudicial conduct on the part of those in management of the affairs of the company, it would be liable to be challenged at the instance of the aggrieved shareholders. Now could the legislature have intended to bring about such a result which would have the effect of almost abrogating the rule in Foss v. Harbottle [1843] 2 Here 461 in so far as transactions with third parties are concerned ? Could the legislature have intended to strike a death-blow to the rule in Foss v. Harbottle [1843] 461 Here 461 which has held the field now for well-nigh over a hundred years and that too in this indirect manner ? I should be certainly slow to accept a construction which would have the effect of producing this consequence. Not only would this consequence ensure but also the basic and fundamental principle on which the three well recognized exceptions to the rule in Foss v. Harbottle [1843] 2 Hare 461 have been evolved would be compl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... course of oppressive or prejudicial conduct on the part of controlling shareholders. But this would mean that individual shareholders would have a right to ask the court to set aside any transaction entered into by the company with a third party on the mere ground that such transaction, though otherwise perfectly legal and valid and hence, incapable of being avoided by the company, was oppressive to the complaining shareholders or prejudicial to the interests of the company. Such a view would make it impossible for any outsiders to deal with the company and far from advancing the interests of the company would be clearly detrimental to the interests of the company, for it would scare away persons dealing with the company. How would an outsider dealing with the company know or even have the means of knowing whether the affairs of the company are being conducted in a manner oppressive to some part of the shareholders or prejudicial to the interests of the company ? The result would be that having entered into a transaction perfectly lawful and valid with a company, an outsider may suddenly discover one fine morning that his transaction is bad, because it was oppressive to some part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r prejudicial conduct, terminate, set aside or modify such agreement. Clause (e) of section 402 deals with a situation such as this and does not profess to strike at any past and concluded transactions between a company and third parties which are no longer continuing wrongs. The question, therefore, remains to be considered only in so far as clause (f) of section 402 is concerned. Clause (f) of section 402 undoubtedly deals with past and concluded transactions between a company and third parties which are no longer continuing wrongs. But, I am afraid, it is not possible to say that this clause is illustrative of a general category of orders which can be made by the court under section 397 or 398, setting aside or interfering with transactions between a company and third parties which are past and concluded and are no longer continuing wrongs. If such were the position, the logical consequence would be that independently of clause (f) of section 402 the court would have power under sections 397 and 39S to set aside transactions amounting to fraudulent preference and such power would extend not only to transactions effected within three months but also to transactions effected beyo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indicating that only transactions amounting to fraudulent preference effected within the said period of three months may be set aside and no others. The provision in clause (f) of section 402 is clearly not a provision which in any way derogates from the general power of the court under sections 397 and 398. As a matter of fact and that is the second difficulty, which Mr. S. B. Vakil has to meet, the provision in clause (f) of section 402 is a provision which is enacted without prejudice to the generality of the power conferred on the court under section 397 or 398 and it cannot, therefore, be construed as derogating from the power of the court under sections 397 and 398 or limiting that power to transactions amounting to fraudulent preference effected within three months before the date of the application. On the construction of Mr. S. B. Vakil, clause (f) of section 402 would act as a limitation on the power of the court under sections 397 and 398 and would have the effect of curtailing such power, which certainly is not the function of a section which professes to set out the particular orders which may be passed by the court without prejudice to the generality of the powers of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the company's claim against them if they have misapplied or retained or become liable or accountable for any money or property of the company or committed any misfeasance or breach of trust in relation to the company. The court can, therefore, in cases covered by section 543 as set forth in Schedule XI award, on an application under section 397 or 398 at the instance of the aggrieved shareholders, compensation to the company and through the company to the aggrieved shareholders, in respect of past and concluded transactions which are not continuing wrongs. Just as clause (f) of section 402 enables the court to set at naught transactions amounting to fraudulent preference effected within three months before the date of the application under section 397 or 398, even though they are no longer continuing wrongs, so also section 406 enables the court to award compensation in respect of past and concluded transactions falling within section 543 as set forth in Schedule XI, even though they are no longer continuing wrongs. These are the only two cases in which on an application under section 397 or 398, the court is empowered to give relief in respect of past and concluded transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the present case since Bharat Kala Bhandar Limited had no knowledge at the date when it purchased the movable and immovable properties of the company that there were any irregularities in the passing of the resolution dated 5th September, 1961, or that the affairs of the company were being conducted in a manner oppressive to the petitioners and other minority shareholders or prejudicial to the interests of the company and that the sale was a part of such conduct so as to render the sale liable to be set aside under section 397 or 398 and Bharat Kala Bhandar Limited was, therefore, protected by the doctrine of indoor management. Now it is a well settled rule of company law that an outsider dealing with a company is affected with notice only of its public documents and that if everything appears to be regular so far as it can be seen from the public documents, the outsider when dealing with the company is entitled to assume that all internal regulations of the company have been complied with, unless of course he has knowledge to the contrary or there are suspicious circumstances putting him on inquiry. This rule has come to be known as the rule in Turquand's case (supra) si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company. The second answer which Mr. S. B. Vakil gave was that even if 9th September, 1961, be taken as the date at which it should be considered whether Bharat Kala Bhandar Limited had knowledge of the invalidity of the resolution dated 5th December, 1961, notice of invalidity of the said resolution was given by Dahyalal Chhotalal Patwa by his letter dated 5th September, 1961, which was received by Shankerlal Ramlal Sharma on 8th September, 1961, and Bharat Kala Bhandar Limited had, therefore, notice of invalidity of the said resolution on 8th September, 1961, i.e., a day prior to 9th September, 1961. Now both these answers given by Mr. S. B. Vakil are in my opinion not well founded and do not meet the argument advanced by Mr. I. M. Nanavati based on the doctrine of indoor management. Turning first to the contention of Mr. S. B. Vakil that the date at which it must be considered whether Bharat Kala Bhandar Limited had notice of invalidity of the resolution dated 5th September, 1961, should be taken to be 6th August, 1962, I agree with Mr. S. B. Vakil that so far as the immovable properties of the company are concerned, though the sale deed conveying the said immovable pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on dated 5th September, 1961, before 5th September, 1961. For affecting Bharat Kala Bhandar Limited with notice of the invalidity of the resolution dated 5th September, 1961, prior to 9th September, 1961,Mr. S. B. Vakil relied on the letter dated 5th September, 1961, addressed by Dahyalal Chhotalal Patwa to Bharat Kala Bhandar Limited which was received by Shankerlal Ramlal Sharma on 8th September, 1961. Mr. S. B. Vakil contended that the notice of the invalidity of the resolution dated 5th September, 1961, was given by the said letter and since Shanker lal Ramlal Sharma who received the said letter was the agent of Bharat Kala Bhandar Limited, the notice of the invalidity of the said resolution received by Shankerlal Ramlal Sharma must be imputed to Bharat Kala Bhandar Limited and Bharat Kala Bhandar Limited must be regarded as having received notice of the invalidity of the said resolution on 8th Sept ember, 1961, when Shankerlal Ramlal Sharma received the said letter. This contention was pressed quite vigorously by Mr. S. B. Vakil and in order to make good this contention, Mr. S. B. Vakil cross-examined Pratapvardhan Deva and Shankerlal Ramlal Sharma, but I am afraid this conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was sent by Shri D. P. Birla who was acting on behalf of Bharat Kala Bhandar Limited to keep a watch on the machinery of the company, he was certainly an agent of Bharat Kala Bhandar Limited for the purpose of keeping a watch on the machinery of the company. But that was the only scope and ambit of the agency of Shankerlal Ramlal Sharma. He was not an agent of Bharat Kala Bhandar Limited for the purpose of receiving any letters on behalf of Bharat Kala. Bhandar Limited or for the matter of that for any other purpose than keeping a watch on the machinery of the company. He was cross-examined by Mr. S. B. Vakil but he emphatically stated that apart from keeping watch on the machinery of the company, he had no other work in Sidhpur. It is an undisputed fact that he received the letter dated 5th September, 1961, which was addressed to Bharat Kala Bhandar Limited but from that circumstance alone it cannot be concluded that he was an agent of Bharat Kala Bhandar Limited for the purpose of receiving the said letter. It must be remembered that Bharat Kala Bhandar Limited had no office in Sidhpur up to 9th September, 1961, and Shankerlal Ramlal Sharma was the only person in Sidhpur until 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n received by Shankerlal Ramlal Sharma on 8th September, 1961, could not be imputed to Bharat Kala Bhandar Limited since the invalidity of the said resolution was not a fact or circumstance material to the business of the agency of Shankerlal Ramlal Sharma who was employed merely as an agent to keep a watch on the machinery of the company and it could not be said to have come to his knowledge in the course of his employment as agent of Bharat Kala Bhandar Limited. For these reasons I am of the opinion that notice of the invalidity of the resolution dated 5th September, 1961, could not be said to have been received by Bharat Kala Bhandar Limited prior to 9th September, 1961, when Bharat Kala Bhandar Limited paid the full purchase price to the company against delivery of possession of the movable and immovable properties of the company and in any event completed the purchase of the movable properties of the company. Bharat Kala Bhandar Limited was, therefore, clearly entitled to claim the protection of the doctrine of indoor management and neither the company nor the petitioners could ask the court to set aside the sale on the ground that there were irregularities committed in the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onduct must fall in order to constitute oppression to one or more shareholders. Human ingenuity is such that there may be an infinite variety of ways in which oppression may be caused to some shareholders by the others. It is, therefore, neither possible nor expedient to define what oppression is. But a useful working rule about the meaning of oppression in this context is to be found in the following words of Lord Cooper in Elder v. Elder & Watson [1952] SC. 49 where the learned law Lord from Scotland said that " the essence of the matter seems to be that the conduct complained of should at the lowest involve a visible departure from the standards of fair-play on which every shareholder who entrusts his money to a company is entitled to rely ". More succinctly, it may be said that the complaining shareholders must be under a burden which is " unjust or harsh or tyrannical " or that there must be " a lack of probity and fair dealing in the affairs of the company to the prejudice of " the complaining shareholders. Bearing this in mind, I shall now proceed to examine whether the petitioners have succeeded in establishing that the affairs of the company were being conducted in a manne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking their moneys out of the company and to relieving Shah Manilal Mulchand from its obligations under the adat agreement. I shall presently examine the facts with a view to showing the fantastic nature of this allegation, but before I do so, I must point out one basic and important fact, namely, that the directors and their relatives were not only creditors of the company but they were also holding a large block of shares in the company and if the allegations made on behalf of the petitioners are well-founded, it would mean that the directors and the controlling shareholders acted in a manner prejudicial to their own interests, for it is axiomatic that if any action was taken which was prejudicial to the interests of the company, it would not only hurt the interests of the minority shareholders but also the interests of the directors and the controlling shareholders and in the case of the latter the injury would certainly be greater than the injury in the case of the former. There is no reason why the directors and the controlling shareholders should have so conducted the affairs of the company that their own interests as share holders be prejudiced. The only answer given by Mr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he management of the company, therefore, naturally felt that it would not be advisable to continue to run the mill, for such running would mean incurring of further losses and this in its turn would further affect the financial position of the company. The management, there fore, closed down the mill on 23rd April, 1957. The notice dated 23rd April, 1957, put up by the manager of the company clearly stated that the financial position of the company was not sound and the mill was running in losses and there was no sign of improvement of the financial position in the near future and the mill was, therefore, being closed. The report of the commit tee appointed by the Government of Gujarat to which I have already referred also stated that the losses incurred by the company in the years 1956 and 1957 led to the closure of the mill. Now it was not the allegation of the petitioners that the losses in the working of the company were deliberately caused by the directors and the controlling shareholders. It was also not alleged by the petitioners that the losses were incurred because of shortage of working capital. The losses were obviously incurred in the normal course of working of the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing shareholders for an ulterior object. Then again there is one other circumstance which also militates strongly against this case of the petitioners. Immediately after closing down the mill the company inserted an advertisement in three issues of the Times of India on 17th, 20th and 22nd June, 1957, inviting offers for sale of the movable and immovable properties of the company and though a number of persons came to see the said properties, no one made concrete offer of even Rs. 7, 00,000 to Rs. 8,00,000 for the same. It was only in September, 1958, that the company could secure an offer of Rs. 9,75,000 from Mehsana Jilla Sahakari Audyogik Sangha Limited, but that offer also did not materialise into a transaction of sale since the company could not settle the claim of the workmen for retrenchment compensation. No concrete offers were thereafter received until the offer of Rs. 11,40,000 made by Bharat Kala Bhandar Limited. If the mill was in good condition and it was possible to work the mill as it was at a profit, the company would not have found it so difficult to find a purchaser for the same. This circumstance also supports the case of the company and its directors that the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave had to advance moneys for working capital but that would be against security of cloth and yarn and if the mill could run at a profit, there was no reason why Shah Manilal Mulchand should not advance moneys to the company as provided in the adat agreement and earn adat which was definitely on the higher side. It would be against the interest of Shah Manilal Mulchand to close down the mill unless it was really impossible to run it at a profit. It is, therefore, not possible to appreciate the contention of the petitioners that the mill was closed down in order to extricate Shah Manilal Mulchand from its obligations under the adat agreement. If the mill could run at a profit, the continuance of the adat agreement was in the interest of Shah Manilal Mulchand and there could be no question of Shah Manilal Mulchand trying to get out of its obligations under the adat agreement. As a matter of fact Shah Manilal Mulchand supplied whatever working capital was required under the adat agreement, but despite that the company continued incurring losses and the management had, therefore, no choice but to close down the mill, despite the fact that by so doing, Shah Manilal Mulchand could no lon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terminating the adat agreement. This letter was placed before the meeting of the board of directors held on 8th December, 1957. Now the position which obtained at that date was that the mill of the company had stopped working since 23rd April, 1957. Efforts were being made by the company to sell the mill and advertisements had actually appeared in three issues of the Times of India on 17th, 20th and 22nd June, 1957. There was a large claim of over Rs. 7,00,000 which was made by the workmen for retrenchment compensation. It was in this background that the board of directors had to consider the letter dated Ist December, 1957, and the question is whether under these circumstances can it be said that the accept once of the termination of the adat agreement was an act which was oppressive to the minority shareholders or prejudicial to the interests of the company. Now it is clear from the adat agreement that the obligation of Shah Manilal Mulchand was co-extensive with the continuance of the mill and that if the mill closed down, the obligation of Shah Manilal Mulchand also came to an end. Clause (1) clearly showed that the obligation of Shah Manilal Mulchand to advance moneys by way ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the adat agreement was being terminated, the company had no choice but to accept the termination of the adat agreement. Moreover, it must also be remember ed that under the adat agreement adat was to be paid by the company to Shah Manilal Mulchand at the end of every year but the company admittedly failed to pay the amount of such adat to Shah Manilal Mulchand and that was also an additional reason why the company could not insist on the continuance of the adat agreement when Shah Manilal Mulchand by its letter dated Ist December, 1957, put an end to it. Quite apart from these circumstances, it is difficult to see how the termination of the adat agreement could be said to be against the interests of the company. As a matter of fact the continuance of the adat agreement was against the interests of the company and it was desirable that it should be put an end to. The adat payable by the company to Shah Manilal Mulchand was, as pointed out by the committee appointed by the Government of Gujarat, on the higher side and was actually more than what is payable according to normal practice. The only additional consideration which the company obtained from Shah Manilal Mulchand for p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 31 provided that except with the previous consent of the company accorded by a special resolution, no director of a company or a relative of such director, shall hold any office or place of profit carrying a total monthly remuneration of five hundred rupees or more, except certain offices or places of profit with which I am not concerned in the present case, and since the partners of Shah Manilal Mulchand were Chandrakant Bakubhai and his brothers, Ramesh Bakubhai and Sanatkumar Bukubhai, of whom Chandrakant Bakubhai and Ramesh Bakubhai were the directors of the company, a special resolution was passed by the company on 24th March, 1956, according the consent of the company to the continuance of the adat agreement. If the object of the directors and the controlling shareholders was to extricate Shah Manilal Mulchand from its obligations under the adat agreement, they could have easily carried out this object by not moving such a special resolution or even if such a special resolution was moved, then by defeating it. But the very fact that they got the special resolution passed shows that their object was not to put an end to the adat agreement. They could have also achieved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irectors and the controlling shareholders were not actuated by any ulterior object. The past conduct of the directors and the controlling shareholders speaks eloquently of their desire to protect and safeguard the interests of the company. In 1935 at a time when the company was in serious difficul ties and the working of the company had almost come to an end, it was the managing agents and Shah Manilal Mulchand who came to the rescue of the company and not only agreed to postpone their claims against the company to the claims of other creditors but also agreed to forgo the com mission respectively due and payable to them under the first managing agency agreement and the adat agreement for a period of several years. Right from 1937 up to the end of 1941, Messrs. Prahladji Sevakram and company and Shah Manilal Mulchand gave up their respective commission and Messrs. Prahladji Sevakram and Company managed the affairs of the company and Shah Manilal Mulchand acted as purchasing and selling agents of the company without any remuneration. Even during the years 1957 to 1960, Messrs. Prahladji Sevakram and Company Limited gave up the minimum managing agency commission of Rs. 25,000 per yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncerned in a petition under section 397 or 398 is whether the action of the directors- whether within the law or outside the law-is oppressive to the minority shareholders or is prejudicial to the interests of the company. Having regard to this, it is obvious that once I have come to the conclusion that the resolution dated 8th December, 1957, was not oppressive to the minority shareholders or prejudicial to the interests of the company, all further inquiry in regard to the said resolution must cease so far as this petition is concerned. But Mr. S. B. Vakil contended that the very fact that in passing the said resolution the directors had committed a contravention of a provision of law was sufficient without any further proof to establish that the said resolution was prejudicial to the interests of the company and that it was not even open to the company to show that it was not so prejudicial. Whether or not the said resolution was beneficial was, argued Mr. S. B. Vakil,' irrelevant where there was violation of a provision of law in passing the said resolution. I cannot accept this contention. It may be that a resolution may be passed by the directors which is perfectly legal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and that the resolution was, therefore, illegal and invalid. Now there are more answers than one to this contention. In the first place, the letter dated It December, 1957, addressed by Chandrakant Bakubhai, Ramesh Bakubhai and Sanatkumar Bakubhai as partners of Shah Manilal Mulchand to the company was placed before the board of directors and the board of directors had, therefore, notice that Chandrakant Bakubhai was a partner of Shah Manilal Mulchand and was, therefore, interest ed as such partner in the termination of the adat agreement. The nature of his concern or interest was thus disclosed by Chandrakant Bakubhai at the meeting of the board of directors. Secondly, in any event, the directors knew that Chandrakant Bakubhai was interested in the termination of the adat agreement as partner of Shah Manilal Mulchand and it was, therefore, entirely immaterial whether any formal disclosure of his concern or interest was or was not made by Chandrakant Bakubhai at the meeting of the board of directors. Thirdly, even if there was contravention of section 299, such contravention did not have any invalidating consequence so far as the resolution dated 8th December, 1957, was concerned. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een the company and Messrs, Prahladji Sevakram and Company Limited. The Companies Act, 1956, came into force from Ist April, 1956, and as a result of the provisions contained in that Act, the managing agency agreement which subsisted between the company and Messrs. Prahladjt Sevakram and Company Limited required to be modified in order to bring it in line with those provisions. The company, therefore, took steps to bring the managing agency agreement in line with the provisions of the companies Act, 1956, and after obtaining the consent of the Central Government entered into the agreement dated 10th January, 1958, with Messrs. Prahladji Sevakram and Company Limited. The agreement was entered into with effect from Ist January, 1957. The mill of the company was working up to 25th April, 1957, and thereafter also the company continued to exist and it was, therefore, necessary that the managing agency agreement should be in accordance with the provisions of the Companies Act, 1956, and it was only with a view to achieving this purpose that the agreement dated 10th January, 1958, was entered into by the company with Messrs. Prahladji Sevakram and Company Limited. Of course the agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e creditor, though it may not be necessary, the action cannot be said to be oppressive to the minority shareholders in their capacity as shareholders. But on the facts I do not think that the giving of securities was an entirely gratuitous act on the part of the company. The resolutions of the board of directors dated 29th March, 1958, show that demands for the amounts respectively due and payable to them were made by Shah Manilal Mulchand and the other creditors and they were pressing for the said amounts and it was because the company agreed to give securities to them that they agreed to wait for payment of the said amounts for a period of one year. Of course, the partners of Shah Manilal Mulchand and the other creditors were either the directors of the company or were the relatives of the directors, but that surely did not prevent them from taking action against the company and if such action was taken and the movable and immovable properties of the company were sold in execution of decrees which might be obtained by them against the company, such sale being a distress sale would have fetched a price very much lower than the market price and the interests of the company and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mortgage and pledges. The short answer to this contention is that section 293 did not apply since what was being done by the execution of the said equitable mortgage and pledges was not disposition of the whole or substantially the whole of the undertaking of the company within the meaning of that section. The second ground urged by Mr. S. B. Vakil was that the directors did not disclose their interest in the transaction at the meeting of the board of directors and that the execution of the equitable mortgage and pledges was, therefore, bad. This ground is also without any substance. It is clear from the minutes of the meeting of the board of directors held on 29th March, 1958, that the directors interested in each of the three transactions, namely, the equitable mortgage and the two pledges, disclosed the nature of their interest at the said meeting. The names of the directors to whom moneys were due from the company and in whose favour the said equitable mortgage and pledges were proposed to be executed by the company to secure payment of those dues were set out in the resolutions and all the directors present at the meeting, therefore, knew the nature of the concern or interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of Induprasad Prahladji Raval as regards the value of the machinery. This statement was obviously not based on any valuation made by the company. Induprasad Prahladji Raval in his affidavit filed in reply to the present petition pointed out the circumstances in which this statement came to be made by him and he stated that the valuation given in this statement was based on an offer given by one machinery merchant on the footing that he would be entitled to remove the individual items of machinery from Sidhpur with the permission of the Government of India, but such permission was not obtainable from the Government of India and it was, therefore, not possible to avail of the said offer. The offer did not materialise into a contract and the valuation given by Induprasad Prahladji Raval on the basis of such an offer can have no significance. Moreover the offer was on the basis that the individual items of machinery would be possible to be removed from Sidhpur and it is elementary that the sale of individual items of machinery would always fetch a better price than the sale of an entire block. Apart from this valuation given by Induprasad Prahladji Raval in the affidavit made by him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o sell the movable and immovable properties of the company and it was only on 12th July, 1961, that a firm offer to purchase the movable and immovable properties of the company for Rs. 11,40,000 was received from Bharat Kala Bhandar Limited. These facts clearly show that the maximum offer received by the company after the mill was closed down on 25th April, 1957, was the offer of Bharat Kala Bhandar Limited for Rs. 11,40,000 and if the directors and the majority shareholders thought that it was worth while accepting this offer, it cannot be said that they did something which was oppressive to the minority shareholders or prejudicial to the interests of the company. It is significant to note that neither the petitioners nor any of the shareholders supporting them raised any objection at the extra ordinary general meeting of the company held on 6th September, 1961, that the price at which the movable and immovable properties of the company were proposed to be sold was not a fair price. It is also noteworthy that neither the petitioners nor any of the shareholders supporting them has been able to bring forward any definite offer of a larger amount or even to produce any evidence which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the movable and immovable properties need not have been sold at all and this again was put on two counts. Firstly, it was con tended that the mill could have been run at a profit for the benefit of the share holders and, secondly, that nothing would be received by the shareholders from the sale and on these two counts it was urged that the sale of the movable and immovable properties of the company was against the interests of the company and the minority shareholders. The argument on both the counts is in my opinion unsustainable. So far as the first count is concern ed, the answer is clear, namely, that it was impossible to run the mill at a profit for the benefit of the shareholders, I have already dealt with this aspect of the matter and I need not say anything more beyond observing that there were continued losses from 1949 to 1957 and as pointed out by the committee appointed by the Government of Gujarat, the machinery of the company was old and the unit was a small and uneconomic unit and without scrapping the weaving unit and running the spinning unit after carrying out a large rehabilitation programme it was not possible to work the mill as an efficient profit making un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l meeting as required by section 293 of the Companies Act, 1956. Now a resolution giving the consent of the company was certainly passed at the extraordinary general meeting of the company held on 5th September, 1961, but the validity of this resolution was challenged on the ground that the meeting of the company at which the resolution was passed was convened without com plying with the requirements of section 173 of the Companies Act, 1956. The contention of Mr. S. B. Vakil was that under section 173 an explanatory statement was required to be sent to the shareholders along with the notice of the meeting and that such explanatory statement was required to set out all material facts concerning the item of business to be transacted at the meeting including in particular the nature of the concern or interest, if any, therein, of every director and managing agent, if any, and this particular requirement of the section was not satisfied in the present case. He contended that the explanatory statement sent along with the notice did not set out the material facts concerning the proposed sale of the movable and immovable properties of the company to Bharat Kala Bhandar Limited as also th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsons, or advantage to those guilty of the neglect, without promoting the real aim and object of the enactment, such an intention is not to be attributed to the legislature. The whole scope and purpose of the statute under consideration must be regarded." Lord Campbell in Liverpool Borough Bank v. Turner [1860] 30 LJ. Ch. 379 observed : " No universal rule can be laid down as to whether mandatory enactments shall be considered directory only or obligatory with an implied nullification for disobedience. It is the duty of courts of justice to try to get at the real intention of the legislature by carefully attending to the whole scope of the statute to be construed." It is, therefore, clear that regard must be had to the whole scope and purpose of the statute for the purpose of determining whether the statute is mandatory or directory. Judged by that test, the conclusion is irresistible that section 173 enacts a provision which is mandatory and not directory. The object of enacting section 173 is to secure that all facts which have a bearing on the question on which the shareholders have to form their judgment are brought to the notice of the shareholders so that the share holders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt was oral or in writing. AH that the meeting was concerned with was whether to accord consent to the sale of the undertaking by the company to Bharat Kala Bhandar Limited. The agreement of sale between the company and Bharat Kala Bhandar Limited was not required to be placed for approval of the meeting. Sub-section (3) of section 173 had, therefore, no application and there was accordingly no non-compliance with the requirements of that sub-section. The second matter on which according to the petitioners there was non-compliance with the requirements of section 173 was in regard to sub section (2) of that section inasmuch as the explanatory statement did not set out the nature of the concern or interest of the directors and the managing agents in the proposed sale of the movable and immovable proper ties of the company. There is no substance in this contention. If one looks at the explanatory statement it is clear that it has been set out there that out of the directors of the company, four directors, namely, Induprasad Prahladji Raval, Chandrakant Bakubhai, Ramesh. Bakubhai and Rameshchandra Induprasad, were interested in the proposed sale, inasmuch as they were secured credito ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od of two months, provided it was completed within the time fixed by either party making such time as the essence of the contract. Of course the sale was a composite sale of both movable and immovable properties, but it was essentially a mercantile transaction for sale of the entire block of the company and time was, therefore, not of the essence of the contract and the period of two months specified in the agreement was, therefore, not a material fact concerning the proposed sale. In any event I think that the time of completion of the purchase could not be said to be a material fact concerning the transaction of sale which would influence the judgment of the share holders in deciding whether to give consent or not. Clause 10 provided for delivery of vacant possession of the bungalows and staff quarters, if possible. That was an usual clause consequential upon sale and was not a material fact which would affect the judgment of the shareholders on the advisability or otherwise of the transaction. Clause 14 embodied a provision which is an usual provision in all agreements of sale, namely, that the stamp duty and registration charges on the conveyance shall be borne and paid by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... general meeting to the sale of the movable and immovable properties of the company to Bharat Kala Bhandar Limited for the price of Rs. 11,40,000 and so far as that resolution was concerned, it was entirely immaterial to state in the explanatory statement that under the agreement of sale Bharat Kala Bhandar Limited was entitled to transfer the benefit of the agreement of sale to any nominee or nominees and that the company was bound to complete the sale in favour of such nominee or nominees. The consent sought from the general meeting being a consent to the sale of the movable and immovable properties of the company to Bharat Kala Bhandar Limited and not to any nominee or nominees of theirs, it was not a matter of any consequence to be set out in the explanatory statement that there was a provision in the agreement of sale that the benefit of the agreement of sale could be transferred by Bharat Kala Bhandar Limited to any nominee or nominees and that if this was done, the Company was bound to complete the sale in favour of such nominee or nominees. The resolution embodied the consent of the general meeting to the sale of the movable and immovable properties of the company to Bharat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he annual general meetings of the company held respectively on 25th December, 1959, 24th September, 1960, and 28th June, 1961, that there were secured creditors of the company in the aggregate amount of over Rs. 12,00,000 which exceeded the amount of the sale proceeds. The share holders, therefore, knew that there were secured creditors of the company who would have to be paid off out of the sale proceeds and that after payment to them, nothing would remain for the shareholders. Apart from that, the fact that there were secured creditors and that they had consented to the sale was set out in the explanatory statement and from that it should have been obvious to the shareholders that the secured creditors would have to be paid off from the sale proceeds and that after such payment, nothing would remain with the company for distribution to the shareholders. More over the fact that the sale proceeds were going to be utilised for paying off the secured creditors and that nothing' would remain with the company after payment to them could not be said to be a material fact concerning the transaction of sale. This fact related to the effect of the sale. It dealt with the question as to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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