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TMI Blog1996 (7) TMI 463X X X X Extracts X X X X X X X X Extracts X X X X ..... osed scheme of amalgamation had got the approval of the requisite majority under section 391(2). Controversy had arisen in the wake of objections raised by the objector-appellant that the company had proposed to increase its subscribed capital in the year 1987. The proposed increase was governed under section 81(1) of the Act, that is to say, it was the rights issue which was required to be offered to persons who on the date of offer were shareholders of the company and offer was made in proportion as nearly as circumstances admitted to the capital paid up on those shares on that date. Two civil suits were filed in the City Civil Court at Ahmedabad, which were numbered as 3181 of 1987 and 3182 of 1987, by two different shareholders. Before allotment had taken place, the City Civil Court had issued injunction on September 4, 1987, in the following terms : "The defendants are permitted to allot shares to the applicants in the rights issue subject to the clear stipulation operating that allotment of shares would be subject to the result of this litigation. They are also directed not to allot shares from the unsubscribed portion thereof to anyone except banks and/or public financia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company which was injuncted by the prohibitory order of the city civil court is estopped from contending that even if it has committed breach of the order of the court the only remedy is to initiate action of civil contempt and the allottees of share can legitimately participate in the meeting of shareholders. The party which is injuncted by the order of injunction cannot be permitted to contend that it having violated injunction, nothing further could be done or no relief can be granted by the court. Such stand from the corporate body shall have to be deprecated with a view to acknowledge reverence and regard for orders of the court and for discouraging the attitude of no respect for orders of the court. These findings are challenged lest they may bind the company in the pending application for contempt before the city civil court for violation or breach of the order. In the first instance, it was contended that the learned company judge, even assuming the allotment of concerned shares to be in breach of the injunction order and the allottees could not have legitimately participated in the meeting, could have reached the conclusion that the result is not affected. In these circ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not have been legitimately issued. Both the issues have a direct bearing on the ultimate question whether the scheme has been approved by the statutorily required majority. It has also been the case of the objector that, while conceding the end conclusion reached by the learned company judge about the present controversy that after the finding on the first issue, namely, about proper classification and proper class meeting did not find favour with the court, the approval by the requisite majority would be vitally affected by exclusion of shares allotted to NOCIL and Shushrupad in 1987 in breach of the court's injunction order. Therefore, the ultimate decision about the effect of issue of shares in contravention of the court's order is not dependent merely on the assumed state of affairs about issuance of such shares but also on the finding about proper class meetings. If the finding about proper classification is reversed, the finding on the first two issues inherent in the present objection with which we are concerned in this cross-objection becomes very much relevant. Therefore, it cannot be said that the finding on the first two issues was wholly unnecessary. In this connect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into a constitutional issue and attempt interpretation of its provisions unless it is really necessary for disposal of the dispute. This case, in our opinion, cannot be read as laying down the abstract proposition of such amplitude as contended by Mr. Vakil. In the case of Dibyasingh Malana v. State of Orissa, AIR 1989 SC 1737, the court was considering the meaning to be assigned to the term "family" in the Orissa Land Reforms Act, 1960. It has been contended before the court that according to the definition of the term "family", the land of a married daughter is liable to be attached twice, firstly, with that of her father and, secondly, with that of her husband. The court declined to go into that question, because none of the appellants before the court in appeal was a married daughter who could be said to be an affected party on that count. Here we are not concerned with the question which does not affect the parties before the court. Likewise, in the case of Dharhpakar Madan Lai Agarwal v. Rajiv Gandhi, AIR 1987 SC 1577, the court was dealing with an appeal arising from an election petition under the Representation of the People Act. The question about the validi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manner as it deems fit in deciding issues raised before it. It may proceed to examine issues raised before it seriatim and record its decision one after another. It may decide to reach its conclusion in advance and if circumstances warrant, leave deciding those issues which it may consider to have become academic due to its decision on other issues. It may proceed to decide all issues irrespective of its decision on other issues. In doing so it commits no irregularity or illegality so as to warrant interference on that ground alone in appeal. Ultimately, it rests within the discretion of the court. Be that as it may, in the facts and circumstances of the case, we are satisfied that the learned single judge was fully justified and was not in error in deciding the two questions on which decision was invited by the parties. Another contention raised before us was that, in the facts and circumstances of the case and keeping in view the provisions of the Companies Act, the court had no jurisdiction to decide the questions in these proceedings whether NOCIL and Shushrupad could participate in the meeting. It was contended that under section 87 of the Companies Act every member of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effect on the issue before us, that too in the context of finding out whether the holders of such shares could by their approval of the scheme fulfil the requisite statutory majority ? In the context of the court's jurisdiction to find out whether the proposed scheme of compromise or arrangement proceeds in compliance with the statutory requirement and whether it offers a fair deal to all concerned on the thinking plane of ordinary men of business, the court has jurisdiction to try all ancillary questions necessary for reaching a conclusion on the main issue. In the context of the application under section 391/394 of the Act, the question whether any shares that have been issued contrary to the court's order can be taken into account for constituting the statutory majority squarely arises as an ancillary issue to be decided by the company court. If the court were to hold that the shares were allotted contrary to the restraint order and cannot bring into the desired legal effect such allotment made in breach of the court's order, then rectification of the register of members would be the consequence of the court's order. It would not be a result of finding about sufficiency of reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which we are informed has not yet been decided. The petitioner while raising the objection against sanctioning of the scheme by this court has raised the objection that the scheme has not been approved by the required majority. In support of this plea, he raised a number of grounds which includes that the equity shares in question having been issued contrary to the orders of the court cannot have legal effect for the purpose of participating in the proceedings and for counting the requisite majority because of the illegality attached to it. We are not able to appreciate how the petitioner is estopped from raising this issue if the shares have been allotted in defiance of the order and if such allotment cannot have legal consequence. It is a matter of law, orders of court, act of company in defiance and legal effect ensuing ; no part of the conduct of the appellant is involved to give rise to plea of estoppel. A person may be estopped from raising any plea or from claiming a right if by his conduct he can be said to be a person who has acquiesced in or allowed a certain state of affairs to come into existence and later on takes a plea to avoid the legal consequences thereof. So a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appointed. The court came to the conclusion that sections 397 and 398 deal with powers of the court for prevention of oppression and mismanagement in the affairs of a company and the remedy given by these sections is, therefore, of preventive nature intended to prevent the occurrence or continuance of oppression or mismanagement in the affairs of the company and is not intended to set at naught what has already been done by the controlling shareholders in the course of such oppression or mismanagement which is past and concluded and no longer a continuing wrong. Obviously, the decision was rendered with reference to the scope and ambit of enquiry in an application under sections 397 and 398 which is quite different from the scope of enquiry under sections 591 and 394. The case, therefore, offers little assistance in the present controversy as to whether the court can enquire into questions which are incidental to find out whether the majority in meeting, approving the scheme, answers the requirement of the requisite statutory majority. We shall, therefore, examine the contentions on the merits. In respect of the contention that there is no allotment of shares to NOCIL and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ither themselves or have opted to renounce the same in favour of somebody else, who may or may not be a member, are satisfied. Application for allotment of additional shares by a member other than in respect of renouncement made in his favour by another member or application of any person other than a member can only be considered after applications for rights issue are satisfied. None the less, as soon as an application has been made for allotment of shares by any one member or renouncee, or otherwise has to be considered as subscription to the issue by the applicant. It is only to the extent no application has been received by the company for allotment from any quarters that it can be considered as unsubscribed portion of the issue. Reference was made to section 69 which provides that no allotment shall be made of any share capital of a company to the public for subscription unless the amount as stated in the prospectus as the minimum amount which, in the opinion of the board must be raised by such issue in order to provide for matters specified in clause (5) of the Second Schedule has been subscribed. The amount stated in the prospectus for the aforesaid purposes is termed the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nary, means "contribution to fund". The term "subscription to memorandum can be relatable to the dictionary meaning "to read one's name on a document either as a witness or to sign one's name to signify assent or adhesion to by signing one's name". Another meaning which has been given to "subscribe" is to give one's assent to a proposal or to express one's agreement concurrence or acquiescence. In the present context of a rights issue the dictionary meaning which can be attributed is "to give assent to a proposal", viz., acceptance to offer of rights issue and not to offer to pay sum of money for shares if .alloted. In the context of public issue, it may mean to promise over one's signature to pay a sum of money for shares in that undertaking. Therefore, one has to look to the context in which the meaning of subscribed or unsubscribed portion of an issue is to be ascertained. Here, we are concerned with a case where the company, whose board of directors have decided to increase the subscribed capital by allotting new shares. The company had not decided to act under section 81(1A) of the Act for allotment of shares by inviting the public to offer, but has decided to act in term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The provision also emphasises that the offer is to be made by notice specifying the number of shares offered disclosing the limit of time within which such offer is to be accepted, failure to exercise that option to accept that offer within that limit amounts to declining the offer made to the shareholders. It is only after the expiry of the time specified in the notice aforesaid or on receipt of earlier intimation from such shareholder to whom notice is given that he declines to accept the share offered that the board of directors may dispose of such shares by which the subscribed capital was proposed to be increased in such a manner as it thinks most beneficial to the company. From the aforesaid, it is clear that in the case of a rights issue no public offer is made inviting applications. Therefore, the stage for expressing agreement to subscribe to share capital by persons other than the existing shareholders does not reach before expiry of the time for exercise of the option to accept the offer for allotment of the share or to renounce such offer of allotment either in full or in part in favour of a third party or refusal to accept the offer of allotment. One important differe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d it to allot such shares to any one else except with the permission of the court. In the context of section 81(1), non-subscribed portion of rights issue can have no meaning other than the portion of additional issue for allotment meant for increase in the subscribed capital except the one which has been refused or deemed to have been refused by the existing shareholders. Therefore, subscribed portion of rights issue in the context of rights issue cannot have reference to application for additional allotment by existing shareholders. We, therefore, are in agreement with the learned company judge on the question of interpretation of section 81. We are mindful of the fact that here we are concerned with the ambit and scope of the restraint order passed against the company referred to above and the question is not solely of the interpretation of section 81. The words "non-subscribed portion of rights issue" are not the expression used in section 81. The meaning of the restraint order will have to be gathered in the context in which the court has made the order and the attendant circumstances to which our attention was invited qua the statement about the under subscription of the ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IL was not an existing shareholder. It could not have been an applicant to the rights issue. It could have been only an applicant to the unsubscribed portion of the rights issue. Therefore, it could not have been considered to be a person to whom the court permitted allotment. So also Shushrupad to the extent, it made offer for additional shares it was in no better position than that of NOCIL. May fee that for the purpose of facilitating the board in exercising its discretion for making allotment out of expected unaccepted offers of rights issue the shareholders have been given opportunity to make simultaneous application for allotment of additional shares, it cannot be considered as part of subscription to the rights issue. We are, therefore, also in agreement with the learned single judge that allotment of shares made to NOCIL who was not holder of equity shares of the company and to Shushrupad of additional shares applied for without seeking permission of the court, was in contravention of the temporary injunction operating against the company. It was strenuously urged that notwithstanding that shares were allotted to NOCIL and Shushrupad in breach of the restraint order, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected by Mt. Talia Begam who was not subject to the restraint order. The court declined to affect the validity of the sale made by Mt. Talia Begam on the ground that the sale was effected by a person who was not under the restraint order and, secondly, the property was not attached. Hence, the consequence of section 64 of the Civil Procedure Code would not follow. Obviously, this case is of little assistance as far as the present controversy is concerned. The person who carried out the transaction was not at all subject to the injunction order. In the case of Hakim Singh v. Wasan Singh, AIR 1928 Lahore 639, initially property was sold before the restraint order was communicated to the person injuncted. The court proceeded on the assumption that the prohibitory injunction becomes effective only when communicated and when any act is done in ignorance of such restraint order, before the prohibitory order is communicated, such act is not a nullity. The case of Darbari Ram v. Ghulam Farid-Fazal Karim, AIR 1930 Lahore 858, was also of like nature, as was of 1928 Lahore. In this case, injunction was issued against the defendants which was served on the defendant 'X' and not th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the issue of the effect of an injunction order on the sale inasmuch as the injunction order came to an end as soon as the suit was decreed. The sale of the property was after the decree had been passed, the decree holder was claiming rateable distribution of the proceeds of property in attachment in execution of another decree. The sale was made by the judgment-debtor by private negotiation and the claim of that decree holder in whose execution proceedings the property was attached was satisfied. The plea of the first decree holder to hold such sale to be invalid was not accepted in view of the existing provisions then in force under section 276 of the Code of 1874. There was no provision like the Explanation appended to section 64 in the Code of Civil Procedure, 1908, which protected the claims for rateable distribution of the assets of the judgment-debtor. Balbhaddar v. Balla, AIR 1930 All 387, was also a case of like nature where temporary injunction in a money suit restraining the defendants from alienating the property in question was made on the same day on which the suit was decreed. The property was sold on the next day. The decree-holder filed a suit for decla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the tarwad. In those circumstances, the court held that it will be going much too far to say that a person in the position of Andi Achan being so restrained is not liable to repay the money which he in fact borrowed and if the money borrowed was utilised for the benefit of the tarwad that the tarwad is not liable. The case obviously offers no parallel to the case in hand laying down any principle of universal application. It was a case in which the court has permitted to borrow money in relaxation of the injunction order against the management. Money had been borrowed in a different mode. Then money was borrowed for necessity of a joint family, for which the property of the tarwad would have otherwise been liable, irrespective of the competence of the contracted person. Then the tarwad having accepted the benefit of the borrowing was estopped from disowning its liability to repay. Hence, this case does not offer any assistance to the case of a company in defending a breach of injunction by it. Another case referred to by learned counsel was Kusuma Dei v. Malati Bewa, AIR 1969 Orissa 195. The High Court said that the principle applicable to an attachment order affecting an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not in any way deprive or suspend the rights of a person, it did accept that it only aims at a prohibition to act in a particular manner. With utmost respect we may notice that there is a distinction between the right of person in property and right of a person to deal with property by entering into a valid contract. While the former remains unaffected, the latter, namely, to deal with the property in any manner, is affected to the extent the restraint order provides and if that right to deal in property is right in person, then, in our view, the person is incapacitated to deal with the property in the manner prohibited and cannot bring about the legal consequences by acting with incapacity. Another case falling in this genre is Udairam v. State [1963] RLW 66. It was a case in which "S" obtained a decree for possession of fields and in execution a warrant of delivery of possession was issued. Before the Tehsildar could execute the warrant of delivery, B instituted a suit against "S" restraining him from interfering with the possession of fields. The Tehsildar who was assigned the task to execute the warrant for delivery of possession in execution proceedings executed a warr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 71, the apex court said : "Question on which there is no discussion or on which no arguments have been advanced, reproduced in the law report or dealt with, then the observation, if any, not necessary for the decision in the case and not discussed in judgment on appeal, cannot be regarded any more than a general observation and not obiter dicta much less the ratio decidendi of the case. Such observations have no binding effect." One case, which directly concerns this issue and has been referred to in some of the cases relied on by learned counsel is Delhi and London Bank Ltd. v. Ram Narain [1887] ILR 9 All 497. It was a case in which the defendant hypothecated property to a bank in defiance of the injunction order restraining him from alienating property. When the property was attached in execution of a money decree, the bank put forward its claim that the property can be sold only subject to the right of the bank under hypothecation. The plea about invalidity of the alienation for want of authority in the defendant to alienate was negatived primarily on the ground that no precedent was cited. But, with utmost respect, any precedent to the contrary was also not cited or not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mills' case [1985] 58 STC 282 and also observed that since interpretation of procedural laws is prevailing in the State for some time, it need not be disturbed. Thus, apart from upholding the case on the merits, it was a case where statutory functionaries acted in furtherance of such interpretation to bring about certain legal effects. The case squarely fell within the ratio that such decisions on the basis of which title and transaction must have been founded ought not to be easily departed from. The present cannot be said to be a case of that genre. Title and transaction are not founded on decisions relied on. On the basis of those decisions, the consequences of a wrongful act are being sought to be avoided. Likewise in B. Lakshmipathi Naidu v. District Educational Officer, AIR 1992 SC 2003, an interpretation affecting the eligibility for appointment to the post of headmaster was in force in the State of Tamil Nadu for quite some time. The court directed the State authority to consider the case of the appellant in accordance with the prevalent status of interpretation of law relating to eligibility. This was also a case where a decision was affecting the foundation of a pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose of temporary injunction to restrain doing certain acts or directing to do certain acts under Order 39, rule 1 of the Code of Civil Procedure is stated to be for the purpose of staying and preventing the wasting, damaging, alienation, sale, removal or disposition of the property or staying and preventing dispossession of property or otherwise causing injury to the plaintiff in relation to any property in dispute. These are the objects to be achieved through injunction orders as per the statutory provisions contained in Order 39, rule 1 of the Code of Civil Procedure. Rule 2A provides for detention in civil prison of a person who is found to be guilty of disobedience. The property of the defier is also liable to be attached. It also provided that in case disobedience continues in spite of attachment,' the property may be sold and the proceeds may be allotted as compensation to the injured party as the court may deem fit. However, rule 2A only provides for punishment for committing breach of the order of the court. It does not spell out as to what shall be the effect on the act done in breach of the injunction order. So also where the decree for perpetual injunction has been gran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he property in attachment does not prevent the court from taking such course of action to enforce its orders or to order to bring into existence a fact situation even in case orders have been vacated, if still capable of enforcement in any manner. The cases are not wanting where person under restraint order for maintaining status quo alters the status quo in breach of restraint order can be directed to restore status quo by mandatory direction. If the legal effect and efficacy of a transaction carried out in breach of a restraint order is not affected and the only remedy is to commit the defaulter for imprisonment under contempt, such course would not be open. In this connection, reference may be made to the judgment in the case of Magna v. Rustam, AIR 1963 Raj 3. In that case, the defendants made a certain construction in the disputed property in defiance of the injunction order. The trial court ordered demolition of such construction. The defendant approached the High Court on the plea that penalty for such defiance has been provided for under Order 39, rules 2 and 3 and no other penalty can be imposed hence no order of demolition can be made. The court held in paragraph 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt has come to know of the order either by communication from the court passing the stay order or by an affidavit from one party or the other or in any other way the executing court cannot proceed further and if it does so it acts illegally. There can be no doubt that no action for contempt can be taken against an executing court, if it carries on execution in ignorance of the order of stay and this shows the necessity of the knowledge of the executing court before its jurisdiction can be affected by the order. In effect, therefore, a stay order is more or less in the same position as an order of injunction with one difference. An order of injunction is generally issued to a party and it is forbidden from doing certain acts. It is well-settled that in such a case the party must have knowledge of the injunction order before it could be penalised for disobeying it. Further, it is equally well-settled that the injunction order not being addressed to the court, if the court proceeds in contravention of the injunction order, the proceedings are not a nullity. . . That, in our opinion, is the only difference between an order of injunction to a party and an order of stay to a court. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in cutting at the very roots of the effective nature of the orders and attainment of the object for which the courts exist and exercise judicial power. In Satyabrata Biswas v. Kalyan Kumar Kisku, AIR 1994 SC 1837, in a civil suit, the trial court had passed an injunction for maintaining status quo about fixed property. During the pendency of the suit, a sub-tenancy was created in respect of the property. The sub-tenancy was sought to be affected on the ground that creation of the sub-tenancy in violation of injunction order was illegal. Creation of the sub-tenancy was sought to be justified on the ground that the injunction for status quo did not suspend the right of the parties and merely concerned the physical possession of the property. It was also pleaded that in contempt proceedings taken in pursuance of disobedience of the injunction order, the sub-tenant was not a party. The court rejecting plea said (pages 1843-44) : "Such an order cannot be circumvented by parties with impunity and expect the court to confer its blessings. It does not matter that to the contempt proceedings, Somani Builders was not a party. It cannot gain an advantage in derogation of the rights of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and the party concerned asks it to do so." As in such cases during the interim period proceedings are not a nullity, the remedy was made available to the party concerned only. Bui where the court gets the knowledge, the court held the proceedings thereafter to be nullity passing into the realm of void from voidable. There is yet another aspect of the matter which needs consideration. A temporary injunction, undoubtedly, does not suspend the rights of the respective parties in the property but prohibits the doing of such acts in respect of the property in question. As noticed above, it was on this principle that the argument was canvassed drawing support from the decisions referred to above by learned counsel that the right to alienate a property remains with the person injuncted and, therefore, exercise of that right is not invalidated by any provision of law. The right to alienate is one thing but to enter into a contract in exercise of that right is another. For bringing about an alienation, a valid contract has to come into existence, for which the parties must be competent to contract in terms of section 10 of the Contract Act. Section 11 of the Contract Act provides th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act to the extent the prohibitory order directs in respect of that property and is attached with that person. Competency to enter into the contract is affected which is a right in personam. By acting in breach of that order, in our opinion, the person acting under the injunction order cannot bring about legal effect thereon. He would clearly be a person disqualified by law for the time being to enter into any contract relating to that property in respect of which he is to forbear from dealing under the restraint order of the court which under the law he is bound to obey. Law recognizes temporary in competency to enter into any contract by a person in certain circumstances. One such circumstance has been stated in the Act itself. In section 12, it is provided that a person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind. Similarly, where a person having right to transfer his property and is competent to make contract in respect of that property to alienate it, while acting under the restraint order, though not denuded of his rights in property, acts under temporary disqualification under law from entering in any cont ..... X X X X Extracts X X X X X X X X Extracts X X X X
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