9911796707
TMI Blog1980 (8) TMI 158X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1913. It became a public limited company later on and by any standard is a public company of good standing and has had commendable growth. Its total income for the financial year 1975-76 was Rs. 61 crores, for 1976-77 Rs. 69 crores, for 1977-78, Rs. 102 crores and for 1978-79 Rs. 143 crores. Its profit after tax for the financial year 1975-76 was Rs. 116 crores, for 1976-77, Rs. T58 crores, for 1977-78, Rs. 3.00 crores and for 1978-79 Rs. 9 15 crores. The company has been paying dividends regularly varying from 9 per cent, to 22 per cent, per annum ever since it became a public limited company in 1955. The figures of total managerial remuneration paid to the highest paid whole-time director of the first petitioner at a percentage of the net profits in accordance with the provisions of the Companies Act, 1956, hereinafter referred to as the Act, for the financial years ending on 31st October of each year has been as follows : 31-10-77 31-10-78 31-10-79 ( i ) Percentage of total managerial remuneration 3.7 5.5 1.5 ( ii ) Maximum percentage of remuneration to any whole-time director 0.95 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g perquisites : Petitioner No. 4 : Rs. 77,400 per annum Petitioner No. 5 : Rs. 77,400 per annum Petitioner No. 6 : Rs. 74,400 per annum The three petitioners were appointed by the company as its executive directors on the remuneration, excluding perquisites, of Rs. 77,400 per annum plus commission at half per cent, not exceeding Rs. 35,700 per annum. Before making these appointments the company had obtained the approval of the financial institutions, i.e. , the Industrial Development Bank of India, the Life Insurance Corporation of India and the Industrial Credit and Investment Corporation of India, from which three institutions the company had received long-term loans of substantial amounts. These three institutions had approved the appointment of petitioners Nos. 4, 5 and 6 as executive directors on the terms mentioned above. By an application dated November 28, 1978, addressed to the respondents, the company applied for approval of the appointment of the three petitioners as executive directors of the said company on the aforesaid terms in view of the provisions of section 269 of the Act. All the relevant information required was sent along with the application. On Apri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had been passed without a single dissenting vote by the shareholders of the company and had the fullest approval of the financial institutions which had a very substantial interest in the company as shareholders. By its letter dated October 26, 1979, the respondent made some minor amendments in the terms of approval as originally given in respect of provident fund and superannuation fund but did not make any change in the remuneration already sanctioned. In effect, therefore, the prayer stood rejected. In the meanwhile the company had also made an application to the respondent for grant of approval to the re-appointment of its chairman, Mr. Keshub Mahindra, as chairman and whole-time director, for a fresh term of five years from August 1, 1979, on the same terms and conditions which were applicable to him prior to August 1, 1979. By a letter dated July 26, 1979, the Central Govt. approved the re-appointment of Mr. Keshub Mahindra as chairman and director fixing his salary at Rs. 5,000 per month plus commission and perquisites. The salary was reduced by this approval from Rs. 10,000 per month which he had been drawing since 1964 to Rs. 5,000. The said letter also did not contain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The board of directors accepted the resignation on October 16, 1979. On enquiries made, it is represented, the petitioners have been informed that the remuneration fixed in respect of petitioners Nos. 4, 5 and 6 and Mr. Keshub Mahindra was in consequence of the guidelines issued by the Ministry of Law, Justice and Company Affairs of the Central Govt. in its Dept. of Company Affairs on November 9, 1978 See [1978] 48 Comp Cas (St.) 232. A copy of these guidelines has been produced on record and is marked as Ex. A-2. These guidelines, inter alia , lay down, amending the earlier guidelines of November, 1969, that the Government has the power to fix the remuneration of inanaging/whole-time directors and managers of a company and that while giving approval to appointments and remuneration the provisions of section 637AA are to be kept in view and the Central Govt. would have regard to the "public policy relating to the removal of disparities in income". It is further laid down in para. 4 of the said guidelines as under : " The case for reduction of ceilings: The Central Government have carefully reviewed the entire question of managerial remuneration in the context of socio-econo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amus restraining the respondent, its officers, employees and agents from enforcing against the petitioners the provisions of clause ( e )of section 637AA of the Act or the provisions of the said impugned guidelines. The petitioners further pray that the appointments of petitioners Nos. 4, 5 and 6 as executive directors with effect from September 20, 1978, for five years be ordered to be approved in accordance with law. By way of return to the rule nisi obtained by the petitioners the respondent has filed the affidavit of Mr. C. Khushaldas, a director in the Dept. of Company Affairs of the Ministry of Law, Justice and Company Affairs. He has denied that the impugned circular dated November 9, 1978, is arbitrary, discriminatory or violative of articles. 14 and 19 of the Constitution. He disputes that the said guidelines place any unreasonable or arbitrary restrictions on the fundamental rights of the board of directors of the company or its shareholders. He has referred to the aims and objects of enacting section 637AA of the Act as follows (See 42 Comp. Cas. (St.) 245, clause 36): "This clause is intended to make it clear beyond doubt that the Central Government has power to ado ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c opinion." Who constitute the cross-sections of enlightened public opinion is not specified. He goes on further to aver : "I say that in the implementation of the policy that led to the issuance of the guidelines considerations relating to the turnover-profit-making capacity of different companies are not relevant, and cannot be relevant. What is material is the disparity in the income of a class of persons as compared with others. In formulating the guidelines, no statutory provisions have been overlooked. In fact, all considerations applicable to sections 637A and 637AA of the Act have, inter alia , been cumulatively assessed before the guidelines were finalised and issued. The guidelines do not place any fetter on the powers conferred by the Act on the Company Law Board or on the Central Government. The provisions contained in the circular relating to ' expatriates ' and ' persons possessing high or rare skills are neither vague nor arbitrary". In para. 7 of his affidavit it is admitted by Mr. Khushaldas that the impugned guidelines were the basis of the impugned orders issued with regard to petitioners Nos. 4, 5 and 6 and Mr. Keshub Mahindra. However, the letters convey ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by way of return to the rule nisi, it has been said that in issuing the impugned guidelines the Government had kept in view the recommendations of the Bhoothalingam Committee and the Sachar Committee. It has been further said that the provisions of sections 637A and 637AA along with the provisions of sections 269, 309 and 311 have been kept in view. The impugned guidelines are said to have been issued in conformity with the directive principles of State policy contained in the Constitution, the recommendations of the aforesaid two Committees and "the view of several cross-sections of enlightened public opinion". In other words, it is not disputed that the impugned guidelines were issued in consequence of the Government policy. It. has not been specifically said that there was any public policy. With regard to the Bhoothalingam Committee and the Sachar Committee the petitioners have placed on record a communication dated October 6, 1979, received by the first petitioner from the respondent that the remuneration of Mr. Keshub Mahindra had been scaled down from Rs. 10,000 to Rs. 5,000 per month "having regard to the facts and circumstances of the case including the present policy of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d." The term "managing director" is defined by section 2(26) as under : " 'Managing Director' means a director who, by virtue of an agreement with the company or of a resolution passed by the company in general meeting or by its board of directors or, by virtue of its memorandum or articles of association, is entrusted with substantial powers of management which would not otherwise be exercisable by him, and includes a director occupying the position of a managing director, by whatever name called : Provided that the power to do administrative acts of a routine nature when so authorised by the board such as the power to affix the common seal of the company to any document or to draw and endorse any cheque in the account of the company in any bank or to draw and endorse any negotiable instrument or to sign any certificate of share or to direct registration of transfer of any share, shall not be deemed to be included within substantial powers of management : Provided further that a managing director of a company shall exercise his powers subject to the superintendence, control and direction of its board of directors". Section 198(1) reads as under: "The total managerial r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an the period for which the person is proposed to be appointed by the company". Section 309 provides for remuneration of directors and sub-section (1) thereof reads as under : "309. (1) The remuneration payable to the directors of a company, including any managing or whole-time director, shall be determined, in accordance with and subject to the provisions of section 198 and this section, either by the articles of the company, or by a resolution or, if the articles so require, by a special resolution, passed by the company in general meeting and the remuneration payable to any such director determined as aforesaid shall be inclusive of the remuneration payable to such director for services rendered by him in any other capacity; Provided that any remuneration for services rendered by any such director in any other capacity shall not be so included if ( a )the services rendered are of a professional nature, and ( b )in the opinion of the Central Government, the director possesses the requisite qualifications for the practice of the profession". Sub-section (3) of section 309 lays down that a director, who is either in the whole-time employment of the company or a managin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atter; ( b )to give any direction in relation to any matter; or ( c )to grant any exemption in relation to any matter, then in the absence of anything to the contrary contained in such or any other provision of this Act, the Central Government or the Company Law Board may accord, give or grant such approval, sanction, consent, confirmation, recognition, direction or exemption subject to such conditions, limitations or restrictions as it may think fit to impose and may, in the case of contravention of any such condition, limitation or restriction, rescind or withdraw such approval, sanction, consent, confirmation, recognition, direction or exemption". Section 637AA was enacted as a consequence of a judgment of this court and reads as under : "637AA. Notwithstanding anything contained in section 198, section 309 or section 637A, the Central Government may, while according its approval under section 269, to any appointment or to any remuneration under section 309, section 310, section 311 or section 387, fix the remuneration, of the person so appointed or the remuneration, as the case may be, within the limits specified in this Act, at such amount or percentage of profits of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tein Consolidated Mines Ltd. [1902] AC 484, 491, 492 (HL) observed as under: "In treating of various branches of the law learned persons have analysed the sources of the law, and have sometimes expressed their opinion that such and such a provision is bad because it is contrary to public policy; but I deny that any court can invent a new head of public policy; so a contract for marriage brokerage, the creation of a perpetuity, a contract in restraint of trade, a gaming or wagering contract, or, what is relevant here, the assisting of the King's enemies, are all undoubtedly unlawful things; and you may say that it is because they are contrary to public policy they are unlawful; but it is because these things have been either enacted or assumed to be by the common law unlawful, and not because a judge or court have a right to declare that such and such things are in his or their view contrary to public policy. Of course, in the application of the principles here insisted on, it is inevitable that the particular case must be decided by a judge; he must find the facts, and he must decide whether the facts so found do or do not come within the principles which I have endeavoured to d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. These sections have already been read earlier. The point in question, therefore, is whether the impugned guidelines are intra vires or ultra vires the two sections. In Upper Doab Sugar Mills Ltd. v. Company Law Board [ 1971 ] 41 Comp Cas 643 (Delhi), the question which came up for consideration before a Bench of this court was whether any administrative guidelines could be issued under section 637A of the Act and the remuneration of directors fixed according to those guidelines. The contention of the petitioner was that the Company Law Board, to which the power of approval had been delegated, in granting approval to the appointment of managing directors could not, pursuant to the administrative policy of the Government, impose a condition that the total remuneration of each managing director by way of commission and salary shall not exceed Rs. 1,20,000 per annum. It was contended that the sanction for the fixing of the remuneration had to be given in accordance with the provisions of sections 198, 269(1) and 309 of the Act and not pursuant to an administrative policy. This court held that a study of the scheme of the Companies Act showed that the Legislature had its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver, now to be seen is as to what is the effect of the enactment of section 637AA. The general power, in my opinion, is to be found in sections 198, 269, 309 and 637A. The manner of exercise of that power is now laid down in section 637AA. Parliament was aware of the decision of the Delhi High Court in Upper Doab Sugar Mills Ltd.'s case and indeed it was as a result of that decision that section 637AA was enacted. It, therefore, laid down a clear-cut policy and gave an absolute direction as to how the power is to be exercised. Section 637AA starts with a non obstante clause purporting to exclude the strict connotation of section 198 or section 309 or section 637A and so, gives a flexibility to governmental action. This flexibility given by Parliament is not, however, absolute. In terms, the latter portion of section 637AA lays down that the Central Govt. is to fix the remuneration " within the limits specified in this Act, at such amount or percentage of profits of the company, as it may deem fit". The further guideline given to the Central Govt. by section 637AA in fixing the remuneration is mandatory for the section lays down that the Central Govt. shall (emphasis supplied) h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s stated by the respondent that it has taken any other factor into consideration. This clearly amounts to the exercise of a power contrary to the provisions of the Act. It has been submitted that even if the power has not been exercised in accordance with section 637AA, as there is power to fix remuneration by virtue of the provisions of section 637A the exercise of power should be upheld. In other words, section 637AA does not militate against such an interpretation being given and the ratio of the Supreme Court in Upper Doab Sugar Mills Ltd. would apply. This theoretical aspect need not be commented upon inasmuch as it is clearly the stand of the respondent in its correspondence with the first petitioner that the remuneration has been fixed keeping in view "the present policy of the Central Government" and at best the administrative instructions contained in the impugned guidelines. Though it has been said in the affidavit that the impugned guidelines were issued keeping the provisions of section 637A in view, the respondent seems to forget that the manner of the exercise of the power under section 637A has been clearly delineated by Parliament by section 637AA. Therefore, th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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