9911796707
TMI Blog1979 (11) TMI 223X X X X Extracts X X X X X X X X Extracts X X X X ..... spondents Nos. 4 to 11 as the directors of the company for a period of three years. Respondent No. 13 is the nominee-director of ICICI. Respondent No. 14 has been co-opted by the other directors as the director of the company. Respondent No. 12 was also appointed as the director of the company at its meeting held on April 3, 1978. Prior to April 3, 1978, there were three directors on the board of directors from the Kapadia group. However, on April 3, 1978, when they were to face a resolution for their removal, they resigned. The petitioners 1 and 2 were proposed to be elected in the place of two of the directors who were being removed. Prior to July 13, 1977, the petitioners had purchased additional 29,633 shares in respondent No. 3-company and these shares were lodged with the company for registration between July 13, 1977, and July 19, 1977. It appears that despite several meetings, the question of registration of these shares in the name of the petitioners was not considered and, therefore, petitioners 1 and 2 filed two suits bearing Suits Nos. 6991 and 6992 of 1977 in the city civil court. It appears that while the suits were pending, the petitioners were told that the question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usts of Berlia group. On some further correspondence, however, the said shares were ultimately transferred and the petitioners were informed about it by letter dated April 26, 1978, by the company. Up to this stage, therefore, the petitioners' group became registered owners of 68,698 equity shares which corresponded to about 13 per cent, of the total holding. Thereafter, between May 9, 1978 and June 5, 1978, the petitioners lodged for registration further shares aggregating to 16,346 shares which they had purchased. It appears that respondent No. 3, the company, rejected all the applications for the transfer of these shares. After the present petition came to be filed, the petitioners have filed applications for rectifying the register of members in respect of these irregularities under section 155 of the Act. These petitions under section 155 are pending. It is the case of respondent No. 3 that between April to June, 1978, shares aggregating to 27,263 were purchased by the petitioners in the names of their nominees and such shares were lodged for acceptance of transfer and registration with the object of gaining' control over the affairs of the company. 'It appears that prior to J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notice of the Central Government that the said Berlia Group had been involved in a number of irregularities committed by the Kapadia Group in the affairs of the said company, prior to the appointment by the Central Government, of persons to hold office as directors of the said company under section 408 of the Companies Act, 1956 (1 of 1956); AND WHEREAS the Central Government is satisfied, on the facts enumerated hereinbefore, and on the report received from the said company that as a result of the transfer of any share or block of shares of the said company, a change in the controlling interest of the said company is likely to take place and that such change is prejudicial to the interests of the said company; NOW, THEREFORE, in exercise of the powers conferred by sub-section (l)of section 108D of the Companies Act, 1956 (1 of 1956), the Central Government hereby directs the said company not to give effect to the transfer of any such share or block of shares and ( a )where the transfer of such share or block of shares has already been registered, not to permit the transfers of any nominee or proxy of the transferee to exercise any voting or other rights attaching to such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so vague, because the order does not even mention the names of the persons to whom the said shares have been transferred, nor the numbers of these shares are mentioned in the order. The petitioners have also challenged the constitutional validity of section 108D, as according to them, the provisions thereof violate their fundamental rights under articles 14 and 19 of the Constitution. On behalf of the Union, Chandrakant Kushaldas, who is the Director, Department of Company Affairs, New Delhi, in the Ministry of Law, has filed his affidavit dated June 28, 1979, in reply. Besides denying the allegations of the petitioners, it was asserted by him that the order was passed by the Central Govt. after being satisfied that as a result of the transfer of the shares lodged for registration by the Berlia group in their favour, a change in the controlling interest of the company was likely to take place and that such change would be prejudicial to the interests of the company. A reference is also made to two letters dated April 28, 1978, and June 6, 1978, written by the chairman of respondent No. 3-company addressed to the Chairman, Company Law Board, New Delhi, and the other written jointl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company would go from bad to worse and interests of several public institutions, nationalised banks and small shareholders would be jeopardised. For these and other reasons mentioned in the letter, the two Chairmen urged the Company Law Board that the Central Govt. should exercise its powers under sections 108A and 108D of the Act by giving directions to the company not to give effect to transfer the shares or block of shares set out in annex. A to the letter; and where the transfer of such shares had already been registered not to permit the transfer or any nominee proxy of the transferee to exercise any voting or other rights attaching to such shares; and where the transfer of such share or the block of shares has not been registered, not to permit any nominee and/or proxy of the transferor to exercise any voting or other rights attaching to such shares or block of shares or any of them; and, finally, regardless of whether such transfer of shares has taken place or not, the voting right in respect of the shares shown in annex. A should be frozen so as to disbar the registered holders of the said shares, whoever they may be, from exercising such right, " with a view to " pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meaning of section 108 at the general meeting. The mere fact that there was a possibility of a couple of directors belonging to the petitioners' group being elected cannot be a ground for holding that the petitioners were acquiring a controlling interest in the company. Even assuming that the two directors belonging to the petitioners' group or supporting them would have been elected by reason, of their acquiring the shares in question, that by itself could not enable them to acquire a controlling interest in the company in view of the fact that the majority of the directors were government nominees and they were to continue on the board of directors at least for two more years. Moreover, the appointment of the government nominated directors could be continued indefinitely even after July, 1980, by the Government by passing appropriate orders under the Act. Even otherwise, the appointment to the office of the director has got to be confirmed by the Central Government under section 408(5) of the Act, and till such confirmation, the elected directors could not hold their office. It was further contended that the order on the face of it displays a complete lack of application of mind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer of any share or block of shares of a company, a change in the controlling interest of the company is likely to take place and that such change is prejudicial to the interests of the company or to the public interest, that government may direct the company not to give effect to the transfer of any such share or block of shares and ( a )where the transfer of such share or block of shares has already been registered, not to permit the transferee or any nominee or proxy of the transferee to exercise any voting or other rights attaching to such share or block of shares. ( b )where the transfer of such share or block of shares has not been registered, not to permit any nominee or proxy of the transferor to exercise any voting or other rights attaching to such share or block of shares. (2)Where any direction is made by the Central Government under sub-section (1), the share or the block of shares referred to therein shall stand retransferred to the person from whom it was acquired and there upon the amount paid by the transferee for the acquisition of such share or block of shares shall be refunded to him by the person from whom such share or block of shares was acquired by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g given by the Central Govt. The consequences are that the transferor or a transferee are relegated to their original position before the transfer. The share stands transferred to the person from whom it was acquired and the transferee gets a refund of the amount paid by him for the acquisition of such shares. Sub-section (3) provides for the machinery to refund the amount to the transferee by the transferor. These are, undoubtedly, drastic provisions which seriously affect the rights of shareholders, and any directions passed by the Central Govt. entails civil consequences. The provisions of section 108D by themselves do not specifically provide for any hearing being given or any particulars being given to the persons who are sought to be affected by the order. Equally so, there is no prohibition contained in the said section against granting any opportunity for hearing the affected persons before the direction is given by the Central Govt. The legislation permitting such orders without hearing would be arbitrary and void as being in contravention of the provisions of article 14, but then it is well settled that there is a presumption of constitutionality of statutes unless the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e place, and that such a change was prejudicial to the company or to the public interest. On a bare perusal of the order, it is clear that there is a total non-application of mind. Mr. Zaiwala insisted before me that the impugned order is intended to affect not only the 27,263 shares but also the original holding of the petitioners, viz ., 68,853 shares. Mr. Zaiwala was at pains to submit that in view of the concluding part of the order, it must be held that the Government's satisfaction related to both the holdings of shares. The contention that the Central Govt. contemplated inclusion even with regard to the holding of 68,853 shares is wholly insupportable in view of the wording of the order itself. The preamble to the order clearly shows that the reference to 68,853 equity shares is made only in the context of the alleged attempt of the petitioners to acquire further shares in the name of the persons belonging to their group for the purpose of gaining the controlling interest in the company. Undoubtedly, the last paragraph of the order does not specify any particular share or shares but merely quotes the section, and if that part alone is to be read, each one of the shares belo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h less. On what basis, therefore, the Central Govt. could reach this satisfaction regarding the existence of the conditions laid down in the section or the necessity of the order thereunder ? It is now pointed out that these 27,263 shares are said to have been transferred in the name of ten different persons other than the petitioners. If it is the case of the Government that these ten persons are the nominees of Berlia, then they could not rely merely on the basis of the allegations in that behalf. The satisfaction could not be reached unless and until the Central Govt. applied its mind to the question as to whether the allegations were true or not. In fact, there was neither any inquiry nor was any material placed before the government on the basis of which the satisfaction could be reached. In the letter of April 28, 1978, by the 4th respondent to the Chairman of the Company Law Board, it was mentioned that in the meeting held on 3rd April, 1978, the chairman had announced that proxies numbering over 1,74,500 favouring the Berlias were received for the extraordinary general meeting, and that confirmed the suspicion which they had expressed in their previous letter to the Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of shares had taken place or not, the voting right in respect of the shares shown in annex. A should be frozen so as to debar the registered holders of the said shares, whoever they may be, from exercising such right, and consequentially preventing the Berlias from gaining control of the company or from having any of their nominees or agents on the board of directors either at the forthcoming annual general meeting of the shareholders on the 29th June, 1978, or at any other general meeting. As indicated earlier, it is not possible to identify the 27,000 odd shares from Annex. A which covers about 1,75,000 shares; nor could the annexure form the material for reaching the satisfaction contemplated under section 108 of the Act. The learned counsel for the respondent also could not show how annex. A could be useful for reaching the satisfaction under section 108D. Indeed, Mr. Zaiwala gave up his attempt to show that the said two letters could form the material on the basis of which "the government could reach its satisfaction under the said provisions and fried to contend that because an urgent situation was created by reason of the possibility of the two directors belonging to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was passed without giving any hearing to the petitioners and their alleged nominees whose rights were adversely affected. Both Mr. Zaiwala appearing for respondents Nos. 1 and 2, and Mr. Andhyarujina appearing for respondents Nos. 3 and 14 relied on the decision in the case of Maneka Gandhi v. Union of India, AIR 1978 SC 597, and contended that the petitioners' grievance about their not being given a fair opportunity of being heard before passing the order can be redressed by giving the petitioners a post facto hearing. It was contended that the government was ready and willing to give a post facto hearing to the petitioners even at this stage and would consider any representation they would like to make in support of their grievance. They also submitted that it would not be proper 1o set aside the order or to declare it void and illegal at this stage, but the ends of justice would be met by directing a post facto hearing, because, in the event of the government accepting the contentions that may be raised by the petitioners, the government would itself set aside the order. In Maneka Gandhi's case, AIR 1978 SC 597, the petitioner's (Mrs. Maneka Gandhi's) passport was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 108D also leads to the only inference that neither any satisfaction was reached nor any valid order was passed under section 108D of the Act. The order is thus null and void independently of the question as to whether the principles of Datural justice were violated before passing the order. The post facto hearing offered must be in respect of a definite order passed after due consideration and satisfaction. Under the circumstances, it is not possible to extend the principles laid down in Maneka Gandhi's case, AIR 1978 SC 597, to the case in hand. In my view, the said decision of the Supreme Court cannot assist the government. It is needless to state that the setting aside of the impugned order would not preclude the government from passing a fresh order under section 108D of the Act after proper investigation and collecting proper material and after following the principles ;of natural justice by giving the petitioners a fair opportunity of hearing to rebut the allegations. In the result, the petition succeeds, the impugned order dated June 17, 1978, Ex. E to the petition, is quashed and set aside. Rule is made absolute in terms of prayer ( a ); the interim order dated ..... X X X X Extracts X X X X X X X X Extracts X X X X
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