Court dismisses appeals, upholds board reconstitution under sections 397, 398, 402. Costs awarded to respondents.

The court found both appeals incompetent due to the company's waiver of the right to appeal and the improper filing by shareholders instead of directors. Regarding the reconstitution of the board, the court held that it was legal under sections 397, 398, and 402, despite technical violations. The court justified the seven-year term for the reconstituted board to address mismanagement issues. Appeal No. 154/69 was dismissed with costs to be paid by the shareholders, while Appeal No. 153/69 was also dismissed with costs to be paid by the appellants.

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Issues Involved:
1. Maintainability of the appeals.
2. Legality of the reconstitution of the board of directors.
3. Propriety of the reconstituted board and the duration of its term.

Detailed Analysis:

1. Maintainability of the Appeals:

Preliminary Objections:
- Appeal No. 154 of 1969: Mr. Khambatta raised objections to the maintainability of the appeal by respondent No. 1-company. He argued that the company had submitted to the court's orders without objection, thus waiving its right to appeal. He also contended that the appeal, filed through shareholders, was incompetent as it should have been filed through directors.
- Appeal No. 153 of 1969: Both Mr. Khambatta and Mr. Phadke argued that respondents Nos. 8 and 10, being directors and not shareholders, had no standing to appeal as no adverse order was made against them.

Court's Analysis:
- Submission to Court Orders: The court found that respondent No. 1-company, by submitting to the court's orders, had waived its right to appeal. This was based on the company's conduct and the resolutions passed by its board, which indicated an acceptance of the court's decision.
- Shareholders' Capacity to Appeal: The court held that normally, appeals should be filed through directors per section 291 of the Companies Act and the company's articles of association. The shareholders' appeal was deemed incompetent as they had not taken proper steps to challenge the board's resolutions.
- Directors' Appeal: The court found that respondents Nos. 8 and 10, having submitted to the court's orders and being part of the reconstituted board, could not appeal on behalf of the company.

Conclusion: The court upheld the preliminary objections, declaring both appeals incompetent.

2. Legality of the Reconstitution of the Board of Directors:

Contentions:
- Violation of Sections 255 and 408: It was argued that the reconstituted board violated section 255 by not subjecting all directors to retirement by rotation and section 408 by allowing three Central Government nominees, exceeding the statutory limit of two.

Court's Analysis:
- Powers under Sections 397, 398, and 402: The court emphasized the wide powers conferred under these sections to address oppression and mismanagement. It held that these powers allowed the court to reconstitute the board and amend the articles of association, even if such actions contravened other provisions of the Act.
- Section 9(b) and Section 404: The court rejected the argument that the new article 95 was void under section 9(b) and clarified that section 404(2) ensured the binding effect of court-ordered alterations to the articles.

Conclusion: The court ruled that the reconstitution of the board and the amended article 95 were within its jurisdiction and powers under sections 397, 398, and 402, and were not illegal.

3. Propriety of the Reconstituted Board and the Duration of Its Term:

Contentions:
- Drastic Curtailment of Shareholders' Rights: It was argued that the reconstituted board drastically curtailed shareholders' rights for an unreasonable period of seven years.
- Lack of Hearing: It was contended that the shareholders were not adequately heard before the reconstitution.

Court's Analysis:
- Judicial Discretion: The court noted that the reconstitution was an exercise of judicial discretion to address serious allegations of mismanagement and ensure proper future management.
- Seven-Year Term: The court justified the seven-year term, considering pending criminal and taxation proceedings, and the need to stabilize the company's management.

Conclusion: The court found the reconstitution and the seven-year term proper and necessary under the circumstances.

Final Order:
- Appeal No. 154/69: Dismissed with costs. Costs of the Union of India to be paid by the shareholders of the company. Costs of the company represented by the board of directors to come out of the company's assets.
- Appeal No. 153/69: Dismissed with costs. Costs of respondents Nos. 1 and 2 to be paid by the appellants (original respondents Nos. 8 and 10).

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