1967 (4) TMI 206 - HC - Companies Law

Court quashes order due to natural justice violation & incorrect public trust assumption. Petitioners awarded costs.

The court quashed the impugned order dated 29-7-1957 due to the violation of principles of natural justice and the erroneous assumption by the Government ... Exemption under Section 89(4) of the Companies Act - rights of ordinary shareholders under Sections 87 and 89 - public trust-classification of trust - non-application of mind / failure to consider relevant facts - natural justice - opportunity to be heard - quashing of administrative order - binding effect of prior High Court judgment on non parties - delay and laches in writ petitionsExemption under Section 89(4) of the Companies Act - public trust-classification of trust - non-application of mind / failure to consider relevant facts - natural justice - opportunity to be heard - quashing of administrative order - Validity of the Central Government's order dated 29-7-1957 granting exemption under Section 89(4) - HELD THAT: - The Court found that the Central Government granted the exemption solely on the basis that the managing agents' interests had been transferred to a public trust. Clause 21 of the deed showed the alleged trust's beneficiaries were five named individuals, and therefore it was not a public trust. The Government proceeded on a non existing circumstance and did not apply its mind to the legal effect of the deed. Further, valuable rights of ordinary shareholders under Sections 87 and 89 were affected and the Government should have given those shareholders an opportunity to show cause. An administrative order passed without considering material facts or without affording affected persons a hearing is liable to be quashed. On these grounds the impugned order was set aside. [Paras 22, 23, 24]Order of the Central Government dated 29-7-1957 quashed.Rights of ordinary shareholders under Sections 87 and 89 - exemption under Section 89(4) of the Companies Act - Effect of Sections 87 and 89 on pre existing disproportionate voting rights - HELD THAT: - Section 87(1) confers voting rights prospectively but, as qualified by Section 90, the modification of voting rights for companies existing at commencement depends on the steps contemplated by Section 89(1). The action required by Section 89(1) is a condition precedent for the full application of Section 87(1); existing rights are not automatically altered merely by the commencement of the Act except to the extent provided in Section 89(2). The Court refrained from deciding the contested question whether the Government's power under Section 89(4) ceases at the expiry of the one year period because the petition succeeds on other grounds. [Paras 18, 19, 21]Section 89(1) action is a condition precedent to the operation of Section 87(1) for existing companies; no pronouncement made on temporal limit of power under Section 89(4).Binding effect of prior High Court judgment on non parties - Whether the petitioners were bound by the Bombay High Court's decision in Special Civil Application No. 244 of 1962 - HELD THAT: - The petitioners were not parties to the Bombay proceedings; their application to be impleaded was refused and they were only permitted to intervene. A judgment in that special civil application did not bind persons who were not parties. Consequently the earlier Bombay High Court decision (which dealt with revocation dated 24-3-1962) does not preclude the petitioners from challenging the separate order dated 29-7-1957. [Paras 14, 15]Petitioners are not bound by the Bombay High Court's decision and may challenge the 29-7-1957 order.Delay and laches in writ petitions - Whether the writ petition was barred by delay or laches - HELD THAT: - Although the impugned order was made in 1957 and the petition was filed in 1965, the Court accepted the petitioners' account that they became aware of the exemption only around 1960, made representations which led to revocation in 1962, and filed promptly after relevant proceedings concluded. The grievance is of a continuing wrong and delay in such cases is a factor in the exercise of discretionary relief under Article 226 but does not constitute an absolute bar. [Paras 16]Delay and laches do not bar the petition; discretionary relief available.Locus to challenge administrative action - Whether Petitioner No.1 had standing and was estopped from challenging the order - HELD THAT: - Petitioner No.1 was a shareholder at the time the impugned order was made and therefore has the right to challenge its validity. The contention that he was estopped because he had notice of a company agenda did not succeed: the agenda did not disclose the application under Section 89(4) and did not constitute notice of the Government's exemption application. [Paras 13]Petitioner No.1 has standing to challenge the order and is not estopped by the company agenda.Final Conclusion: The writ petition was allowed: the Central Government's order dated 29-7-1957 granting exemption under Section 89(4) was quashed for being based on a non existent finding that the managing agents' interests had been transferred to a public trust and for failure to apply its mind and to afford affected ordinary shareholders an opportunity to be heard; petitioners granted costs. Issues Involved:1. Violation of principles of natural justice.2. Competence of the Government to make the order after the expiry of the statutory period.3. Vesting of rights conferred on ordinary shareholders.4. Government's power to grant exemption after a previous order.5. Validity of the order under Article 14 of the Constitution.6. Basis for the Government's conclusion on public interest.Issue-wise Detailed Analysis:1. Violation of Principles of Natural Justice:The petitioners contended that the Government's order was passed without giving the ordinary shareholders an opportunity to be heard, violating the principles of natural justice. The court agreed, stating that the Government should have given the shareholders a chance to show that the managing agents' rights had not been transferred to a public trust. The failure to do so invalidated the order.2. Competence of the Government to Make the Order After the Expiry of the Statutory Period:The petitioners argued that the Government had no competence to make the order after the expiry of the one-year period mentioned in Section 89(1) of the Companies Act, 1956. The court did not find it necessary to decide on this issue as the relief was granted on other grounds.3. Vesting of Rights Conferred on Ordinary Shareholders:The petitioners claimed that the rights conferred on ordinary shareholders under Section 87 vested in them on 1-4-1957, and the Government had no competence to take away that right after that date. The court held that the action contemplated by Section 89(1) is a condition precedent for the application of the provisions contained in Section 87(1). Until that action is taken, the existing voting rights are not affected except to the extent provided in sub-section (2) of Section 89.4. Government's Power to Grant Exemption After a Previous Order:The petitioners argued that the Government's power to grant exemption under Section 89(4) ended after making an order on 30th March 1957. The court did not pronounce on this controversy, as the relief was granted on other grounds.5. Validity of the Order Under Article 14 of the Constitution:The petitioners contended that the impugned order was void as it violated Article 14 of the Constitution. The court found this issue inapplicable to the case, stating that exemptions under Section 89(4) can only be granted to individual companies.6. Basis for the Government's Conclusion on Public Interest:The Government granted the exemption on the assumption that the third respondent was a public trust, believing it was in the public interest. The court found that the trust was not a public trust, as the beneficiaries were five individuals. The Government's assumption was erroneous, and the exemption was granted based on a non-existing circumstance, which vitiated the exercise of its power.Conclusion:The court quashed the impugned order dated 29-7-1957, as it was passed without giving the ordinary shareholders an opportunity to be heard, and the Government's assumption that the third respondent was a public trust was erroneous. The petitioners were entitled to their costs from Respondent No. 3.