TaxTMI 
TaxTMI 
1983 (5) TMI 148
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.... General Insurance Corporation of India (Defendant No. 2) 1,250 537865 to 539114 Oriental Fire and General 1,250 541615 to 542864 Insurance Co. Ltd. (Defendant No. 3) United India Insurance Co. Ltd. 1,250 542865 to 544114 (Defendant No 4) National Insurance Co. Ltd. 1,250 539115 to 540364 (Defendant No. 5) New India Assurance Company 1,250 540365 to 541614 Limited (Defendant No. 6) Industrial Credit and Investment Corporation of India 6,250 531615 to 537864 (Defendant No. 7) Four different appeals have been filed by the defendants. Appeal No. 390 of 1982 is filed by original defendant No. 1, namely, The Unit Trust of India (hereinafter referred to as "UTI"). Appeal No. 391 of 1982 is by defendant No. 7, i.e., The Industrial Credit and Investment Corporation of India (hereinafter referred to as "ICICI"). Appeal No. 392 of 1982 is filed by defendants Nos. 2 to 6, namely, The General Insurance Corporation of India (hereinafter referred to as "GIC"). The Oriental Fire and General Insurance Co. Ltd. (hereinafter referred to as "OFGI"), ....
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....nsfer the shares in the name of the plaintiffs. This was done with a view to deprive or prevent the plaintiffs from acquiring voting strength. The plaintiffs further contend that side by side the financial institutions increased their voting strength on the basis of the impugned conversion of debentures and thus acquired additional voting power to the extent of 51,000 shares. This litigation pertains to 43,750 shares while there is another Suit No. 1110 of 1981 regarding 7,250 shares which is stilt pending. This later suit is about the issue of shares on the basis of the loan of Rs. 58 lakhs by ICICI. The learned single judge negatived practically all the contentions of the plaintiffs. However, the suit was decreed only on one ground. The agreement between the financial institutions and the company was that the financial institutions would give one month's notice while exercising the option of converting 20 per cent, of the debentures into shares. The NRC waived this period of notice and allotted the shares. This was done within a few days from the date of notice. The learned single judge came to the conclusion that this waiver of notice on the part of defendant No. 8 was mala fide....
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....he company. It would be convenient to reproduce section 81. It reads as follows: "81. Further issue of capital. -(1) Where at any time after the expiry of two years from the formation of a company or at any time after the expiry of one year from the allotment of shares in that company made for the first time after its formation, whichever is earlier, it is proposed to increase the subscribed capital of the company by allotment of further shares, then, (a)such further shares shall be offered to the persons who, at the date of the offer, are holders of the equity shares of the company, in proportion, as nearly as circumstances admit, to the capital paid up on those shares at that date ; (b)the offer aforesaid shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days from the date of the offer within which the offer, if not accepted, will be deemed to have been declined; (c)unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisiable by the person concerned to renounce the shares offered to him or any of them in favour of any other person ; and the notice referre....
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....y with the rules, if any, made by that Government in this behalf; and (b)in the case of debentures or loans other than debentures issued to, or loans obtained from, the Government or any institution specified by the Central Government in this behalf, has also been approved by a special resolution passed by the company in general meeting before the issue of the debentures or the raising of the loans...." Sub-section (1) is not relevant for our purpose. It is clear that under sub-section (1A) the company can allot shares in favour of anybody provided there is a special resolution to that effect. In the absence of such resolution, there should be an ordinary resolution but in the latter case the Central Government must be satisfied that the proposal is beneficial to the company. Sub-section (3) permits another mode of allotment of shares. This can be done by exercise of the option to convert the debentures into shares. However, the terms providing such option must be approved by the Central Govt. Financial institutions (namely, defendants Nos. 1 to 7) are the specified institutions as contemplated by prov. (4) to sub-section (3) and hence there is no need of having any resolution of....
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....t what is covered by the exemption order is a genuine issue of debentures with a conversion clause. The plaintiffs submit that in the instant case the issue was not of debentures with a conversion clause so as to be within clause 4(iv) of the exemption order. The issue in reality was an issue of shares by allotment and of debentures but was deliberately termed as an issue of debentures. The plaintiffs say that in the instant case the alleged option was such as to be exercisable simultaneously with the issue of debentures and was a mere cloak... within the clutches of section 81(1)(a), 81(1A) of the Companies Act and section 3(2) and section 4(2) of the Capital Issues (Control) Act." It was submitted that the various circumstances or facts on which the plaintiffs want to rely for the purpose of contending that the transaction in question is of direct allotment of shares and not of convertible debentures are required to be pleaded in the plaint and that in the absence of such a pleading the plaintiffs would not be entitled to urge anything about the nature of the transaction. It is true that there is the above lacuna in the plaint. However, we do not propose to reject the contention....
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....ndaram Finance Ltd. v. State of Kerala [1966] 17 STC 489; AIR 1966 SC 1178. In that case, the question was as to whether the agreement in question was a hire purchase agreement or a loan transaction. The Supreme Court held that the nature of a transaction may be determined from the terms of the agreement considered in the light of the surrounding circumstances. Mr. Nariman, however, urged that the principles enunciated in the abovementioned decisions would not be applicable when we have to construe the transaction evidenced by formal documents such as agreements, conveyance, etc. He relied upon the decision of the Privy Council in the case of Bomanji Ardeshir Wadia v . Secretary of Slate for India in Council [1929] 56 IA 51; AIR 1929 PC 34. The question arose as to whether antecedent correspondence can be considered in construing a particular deed and on pages 56 and 57, the Privy Council has observed as follows (at p. 36 of AIR 1929 PC): "The learned trial judge examined with great care the correspondence which took place between the parties before the deed of 1847 was granted, and he came to his opinion on the true meaning of the deed, as he puts it himself, after a careful con....
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.... Tyre Cord Project on certain terms and conditions. The NRC was informed by ICICI that they (ICICI) would have an option of converting a part of the loan into equity shares of NRC on terms to be decided later on. On 8th February, 1978, there was a bridging loan agreement (Exhibit L, part II-A, p. 1432 of the paper-book) as a part of the this transaction under which ICICI advanced Rs. 40 lakhs out of the loan amount of Rs. 58 lakhs. On 8th March, 1978, ICICI sent a letter (Exhibit M-1, part II-A, pages 1437, 1438 of the paper-book along with a draft of the final loan agreement for the entire amount of Rs. 58 lakhs which was to be executed by the company. This draft also includes the term that ICICI would have a right to convert at their option a part of the loan amount into fully paid up equity shares. On 17th January, 1978, UTI also agreed to advance Rs. 50 lakhs on debentures and one of the terms was that the UTI would have an option to convert a portion of the amount into equity shares on terms and conditions to be decided later. The letter is at Exhibit I (part II-A, page 1415 of the paper-book). On 27th March, 1978, UTI handed over a cheque for Rs. 50 lakhs(Exhibit Q, part II-....
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....charge of this loan on the company's assets. The UTI by its letter dated 19th May, 1978 (Exhibit Z-49 (2), part II-B, page 2566 of the paper-book) wrote to NRC that the finances through banks would be costly and that it was necessary for NRC to conserve its resources for getting out of the mess created by the previous management and also for diversification programme. The UTI informed NRC that they (UTI) were ready to advance an additional loan of Rs. 1 crore on the strength of debentures to be issued by the company. In that letter the UTI also informed NRC that there would be an option for conversion into equity shares of 20 per cent, of the face value of the said debentures. This again indicates that the UTI wanted to have a transaction of debentures with consequent option of conversion. On 29th May, 1978, NRC wrote a letter (Exhibit V, part II-A, page 1581 with note page 1583 of the paper-book) to UTI informing' that the board of directors of NRC has considered the above proposal and it was felt that the offer of UTI of a loan of Rs. 1 crore should be accepted as additional assistance instead of an alternative for the consortium term loan from the bank. In that letter NRC infor....
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.... financial institutions is that whenever such assistance is sanctioned, the other financial institutions also participate in that assistance and hence UTI informed NRC that the assistance of UTI of Rs. 300 lakhs would be reduced to the extent the other financial institutions would indicate their willingness to participate. The assistance was agreed to be given on certain terms and conditions. Mr. Cooper relied upon condition No. 7 and hence we intend to reproduce it verbatim. It reads as follows: "Condition No. 7. The company should agree to vest in Unit trust of India and other financial institutions the option to acquire in lieu of conversion equity shares of Rs. 60 lakhs inclusive of premium and constitutes 20 per cent, of the assistance of Rs. 300 lakhs the trust has agreed to provide. The shares will be acquired at a price on payment of Rs. 160 per share of Rs. 100 (i.e ., at Rs. 60 premium) or at such premium as may be approved by Controller of Capital Issues. The period of conversion would be 15th June, 1978, to 14th June, 1980. The company should approach the Controller of Capital Issues-Government of India for necessary approval." According to the plaintiffs, the aboveme....
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.... not necessary to reproduce all the various terms. Suffice it so say that the tenor of the letter is to render financial assistance on the basis of the private debentures. Condition No. 4 says that the commitment under the letter shall be deemed to have been fully discharged on the UTI making an application for the debentures of Rs. 50 lakhs. There are some terms dealing with the rate of interest and the mode of redemption of the debentures. This was to be decided later. Condition No. 8 reads as follows: "Condition No.8: The company should agree to vest in the Unit Trust of India the option of converting a portion of debentures into equity capital on terms and conditions to be decided by the Trust in consultation with other financial institutions. This will be advised to the company in due course." While under condition No.17, it is provided that the draft trust deed should be submitted for the approval of the UTI for being finalised, the letter is closed with a statement that the offer by that letter should not be treated as binding unless the debenture trust deed is executed by the company in such form as may be required by the UTI. Thus, the plaintiffs would not be able to mak....
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....e letter for subscription by UTI to the debentures are acceptable. It is thus clear that except condition No. 7, all the rest of the conditions and other parts of the letter are consistent with the defendants' version that what was really contemplated was the convertible debentures and not direct allotment of shares. The offer was to have debentures of Rs. 300 lakhs and this connotes that initially the entire loan was of Rs. 300 lakhs debentures. Similarly, it was specifically provided that the debenture trust has got to be approved by UTI before it was executed by the company. Mr. Cooper is right when he contends that condition No. 7 read by itself may support the plaintiffs' case. At the same time Mr. Nariman is also right when he urges that all that the rest of the letter indicates is that the parties wanted to have the usual convertible debentures. As to how such a type of document has to be construed is considered by the Supreme Court in the case of Delhi Development Authority v. Durga Chand Kaushish, AIR 1973 SC 2609. It was a case dealing with the construction of a document of lease. Though the document intended to create a lease of 90 years, still there were certain clauses....
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....e portions of Rs. 10 lakhs each to be contributed by GIC, NIC, NIA, OFGI and UI. In this letter there is a mention that there would be an option to acquire in lieu of conversion equity shares of Rs. 10 lakhs (from out of the participation amount of Rs. 50 lakhs) at the rate of Rs. 160 per share. The letter is wound up with an observation that the said offer would be subject to the condition that the debenture trust deed would be finalised in the manner as may be approved by GIC and its subsidiaries. There are also letters from NIA, NIC, OFGI and UI to the NRC agreeing to participate to the extent of Rs. 10 lakhs. All these subsidiaries except NIA have stated that the advance would be on the terms and conditions already intimated by GIC. The letter from NIA is dated 25th October, 1978 (Exhibit Z-19-C, part II-A, page 1901 of the paper-book). Though in this letter there is a mention of the GIC letter dated 16th October, 1978, there is also an additional statement that NIA was agreeable to contribute Rs. 10 lakhs on the basis of debentures subject to the condition that NIA will have a right to convert 20% of the debentures (i.e., Rs. 2 lakh debentures) into equity shares. Thus, the ot....
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.... which they would secure from the shareholders. The plaintiffs filed writ petition No. MP-1904 of 1978, challenging this order. This writ petition came for hearing before the court on 28th June, 1978, and the court stayed the operation of the freezing order subject to the plaintiffs giving an undertaking to vote for the amended item No. 4. It is material to note that the original item No. 4 was with respect to the resolution under section 293 of the Companies Act, for the loan of Rs. 108 lakhs (i.e., loan of Rs. 58 lakhs by ICICI and debentures loan of Rs. 50 lakhs to UTI). By the amendment, the proposed resolution was to sanction not only the loan of Rs. 108 lakhs but also the additional loan of Rs. 300 lakhs. The amended resolution made a mention that from out of the total transaction of Rs. 408 lakhs, there was to be a loan of Rs. 58 lakhs and the remaining amount was to be subscribed on the basis of the debentures, i.e., debentures of Rs. 250 lakhs by UTI, Rs. 50 lakhs by ICICI, Rs. 50 lakhs and Rs. 50 lakhs by GIC and its subsidiaries. In terms of the orders passed in Writ. Pet. No. 1904 of 1978, plaintiffs voted for this amended resolution, which covered the entire transactio....
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....tion the issue of 35,000-11% debentures of Rs. 1,000 each. The draft resolution further states that each of the financial institutions would have an option to convert a part of the debenture loan into equity shares. The resolution also mentions that such conversion should be to the extent of 31,250 shares each of Rs. 100 in favour of the UTI and 6,250 shares each of Rs. 100 in favour of ICICI and 1,250 shares each of Rs. 100 in favour of GIC and its four subsidiaries. It appears that, accordingly, the board of directors passed an appropriate resolution and though the resolutions themselves are not on record, the plaint para. 72 (relevant portion appears on pp. 117 to 121 of the paper-book) has reproduced in verbatim the resolution so passed. The passing of those resolutions is again consistent with the defendants' case that the transaction was to be of convertible debentures. Messrs. Amarchand Mangaldas Hirachand and Co. (who were the common attorneys for the financial institutions and the NRC), addressed a letter dated 29th May, 1979 (Exh. Z-3, part II-A, p. 1949) to the financial institutions, the NRC, as also to the Bank of Baroda. The letter is based on the earlier discussions....
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....lution passed by the company on 29th June, 1978. That resolution is reproduced verbatim and we have already observed that the said resolution is with respect to the debentures of Rs. 350 lakhs. Clause (16) says about the issue of 35,000-11% convertible debentures of Rs. 1,000 each. Clause (20) recites the resolution of the board meeting of the NRC dated 24th May, 1979, about the issue of 35,000-11% convertible debentures of Rs. 1,000 in seven series, viz., "A" to "G" in favour of each of the financial institutions. After this preamble the recitals in the trust deed proper follow. It says that the debentures mean, the debentures issued as per series "A" to "G" and the debenture-holders would mean the "holders so entered in the register of the debentures". Clause (2) then deals about the issue of 35,000-11% convertible debentures (series "A to G") of the nominal value of Rs. 1,000 each in favour of each of the financial institutions. Clause (3) has made a provision as to how the amount of "A" series debentures totalling Rs. 250 lakhs is to be repaid and the debentures should be redeemed. The period of redemption is spread over from 1982 to 1988, but the important factor is that this....
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.... value of Rs. 50,00,000 (rupees fifty lakhs) at any time and from time to time between the 15th day of June, 1978, and 14th day of June, 1980, (both days inclusive), by notice in writing of not less than one month given either before or during the said period of conversion and delivered at the registered office of the company accompanied by the relative debenture certificate have the right of conversion conferred under the trust deed and shall be entitled to call for the allotment to UTI as the registered holder of 31,250 fully paid up equity shares of the company of the face value of Rs. 100 each at a premium of Rs. 60 per share or pro rata of an equivalent nominal value in respect of such series 'A' debentures so intended to be converted and to be applied towards the nominal value of each such equity share and to require the company to apply the nominal value of such converted series 'A' debentures in full payment of such equity shares inclusive of premium and the company shall allot to UTI in satisfaction of the amount of such converted series 'A' debentures such equity shares as aforesaid credited as fully paid up and ranking for dividend from the date of allotment of such equi....
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....h immediate effect 5000 debentures from "A" series into 31,250 fully paid up equity shares. There is a minor change in other notices so far as the number of shares that were to be demanded on such conversion. On 5th June, 1979, the NRC passed necessary resolution for the allotment of shares on such conversion and this allotment is of 43,750 shares (so far as this litigation is concerned) as detailed in para. 1 above. Section 75 of the Companies Act, 1956, requires filing of the returns with the Registrar of Companies for the allotment of such shares and the said return has been filed on 27th June, 1979 (vide Ex. 17, part II-D, p. 3578). All this is again consistent with the defendants' case. As stated above on May 31, 1979, a number of events have taken place. The debenture trust deed was executed. The financial institutions sent letters of subscription to the privately placed debentures. On the same day, the company issued letters of allotment of debentures. The financial institutions then issued notices of converting 20% of debentures into equity shares. These transactions were preceded by letter dated May 29, 1979, from Amarchand Mangaldas, the common attorney of the financial ....
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.... the details thereof. Suffice it to say that at serial No. 1 in the statement there is a loan transaction of Rs. 158 lakhs which was given to Balarpur Industries Ltd., on June 15, 1981. However, the option to convert a part of the loan into equity shares was agreed to be exercised between February 1, 1979, to July 31, 1981. This means that the period of conversion had already commenced long before the loan was advanced. Similar is the case of loans to J.K. Synthetics, Rallis India Limited and Raymond Woollen Mills Ltd. The witness was also asked to produce a statement as to whether there have been instances when the option was agreed to be exercised not during the fixed period but at any time during the currency of the loan. Entry at Serial No. 2 of part II of the statement (p. 3234) shows that Rs. 11,00,000 were granted to Nagpal Petrochem on March 4, 1980, and the option was to be exercised during the currency of the loan. The option was exercised within about 10 days, i.e ., on 14th March, 1980. The more important item is about the loan of Rs. 60 lakhs to Motor Industries (serial No. 3, p. 3234). On October 1, 1973, Rs. 60 lakhs were advanced on debentures. The period of convers....
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....978-79 is mentioned. The capital was increased in 1979 by 51,000 shares. There is also a reference to the premium on shares received in that year. Plain tiff No. 1 was present in the said meeting while the directors' report and the balance-sheet have been prepared by the board of directors, in which plaintiff No. 2 was one of them. It would thus be clear that all the correspondance and the documents except a part of the letter dated June 1, 1978, and the two letters dated June 6, 1978, and June 8, 1978, consistently speak of the transaction being that of convertible debentures and not of the direct allotment of the shares. We may add that it is material to note that the plaintiffs have not referred to the two letters dated June 6, 1978, and June 8, 1978, in their plaint. The plaint is silent about these letters. Similarly, the trust deed also does not refer to these two letters. For all these reasons it will not be possible to hold that the parties ever intended a direct allotment of shares as contemplated by section 81(1A) of the Act. This is more so when we look to certain guidelines issued by the Government as to how the financial institutions should behave while advancing loan....
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....ld be fixed after the scheme for which the financial assistance is to be extended is completed and the company is in a position to pay a reasonable dividend. The grievance of Mr. Cooper is that these guidelines of November 17, 1978, have not been properly followed as the financial institutions were allowed to exercise the option within two years, i.e., even before the modernisation programme was completed. It is this modernisation programme for which a major part of the financial assistance of Rs. 350 lakhs was sanctioned. It is very material to note that the said guidelines appear to have been framed by the financial institutions including the Industrial Development Bank. The IIM dated May 31, 1978, was attended by all the financial institutions as also by the Industrial Development Bank and it is in this meeting that the period of conversion is determined as between June 15, 1978, to June 14, 1980. In this background it will not be possible to accept the contention of Mr. Cooper that it was necessary to have a further decision about the period of conversion. Apart from that, Mr. Cooper did not contend that such alleged breach would itself make the transaction as that of direct al....
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....on of Mr. Atmaramani deals with this aspect. Certain suggestions were made that the letter dated May 29, 1978. was not in fact received on that day from the NRC but it was received later on. The inward register of the UTI shows that the letter was inwarded on 4th June, 1978, which was a Sunday. But it appears that there were also other entries in the register of that day. A comment was also made that this inward entry is not in the usual inward registers of letters but is in the inward register of documents. It is, however, material to note that this letter dated May 29, 1978, from the NRC has been referred in the report of Mr. Atmaramani. Not only that there is a reference to this letter in the subsequent correspondence between the NRC and the UTI dated June 1, 1978 (p. 1588) and dated June 2, 1978 (p. 1603). A copy of the letter was forwarded to the CLB by the NRC itself on July 6, 1978. This can be seen from p. 1714. The usual practice of sanctioning the loan by the financial institutions is to have a detailed prior appraisal of the proposal made by the applicant company. In the present case, the IIM sanctioned the loan without such an appraisal and the argument of Mr. Cooper is....
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....al purpose, viz., for issuing and giving the voting powers to the financial institutions. It was also alleged that the power of the directors to issue debentures and to grant loans is a fiduciary power and it was abused. Of course, there is a statement in that very para, that the immediate need, if any, would have been well met by inviting the existing shareholders to subscribe to the capital. Thus in this para. No. 73(e), the plaintiffs have alleged that the NRC was not at all in need of money so as to enter into a transaction of loan and debentures and that the suit transaction was a mala fide one. When Issue No. 20 pertaining to these allegations has not been pressed at the time of the argument in the court, we are not able to see as to how all the above cross-examination of Mr. Atmaramani is relevant for deciding the nature of the transaction. It is for this reason that we do not propose to discuss in detail the various submissions made by Mr. Cooper that the company was not in any urgent need of the finances. As a matter of fact, we would like to state that at one stage of the argument Mr. Cooper did not challenge the financial need of the company. His grievance is that there ....
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....s of the plaints are at Ex. D-1, part II-A, pp. 1267 to 1321. The allegations in both the suits are that the NRC had wrongly refused to register the transfer of shares in their favour. These suits were filed on 1 st September, 1977. Both the plaintiffs then filed Company Petition No. 607 of 1977 in respect of 27,183 shares (which were covered by Suit No. 6691/77). The petition was under section 155 of the Companies Act, with a request that the register of the shareholders should be rectified by including the names of the plaintiffs as the shareholders of the above shares. Similar Petition No. 736 of 1977 was filed with respect to 2,450 shares which were the subject-matter of Suit No. 6692/77. The meeting of the company (NRC) was fixed on 23rd September, 1977. A question arose in Company Petition No. 677 of 1977 as to what interim orders should be passed. This court on 21st September, 1977, passed an order that the meeting as scheduled should be held. However, it was ordered that item No. 2 in the agenda, viz., the question of the election of a director in place of Dr. Rossi should not be considered or voted till the decision of the petition. These four proceedings came to an end on....
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....the writing or the signature of the alleged sender, limited though it may be, as also his knowledge of the subject-matter of the chain of correspondence to speak to its authorship." It is true that a link in a chain of correspondence would be relevant while considering the authorship but the Supreme Court has observed that in case of such links, the recipient of the document is able to speak about the authorship with the help of that link. In the present case, the plaintiffs have not led any evidence of the recipient of the letters. Similarly, the plaintiffs themselves have not entered the witness box to speak anything about the link of these documents forming a chain of correspondence. It is true that Mr. Cooper relied upon some other letters for the purpose of contending that the authorship of the above-mentioned letters should be held proved. But in our opinion, the procedure sought to be adopted by Mr. Cooper is too risky and flimsy to prove the authorship, particularly on account of the absence of the evidence of the recipient of the letters. It would not, therefore, be possible for Mr. Cooper to contend that the above letters should be admitted in evidence. However, the plai....
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....e company continued to receive representations and a decision was taken that a transfer without any limit of 50 shares should be effected except the dealings of Kapadias and Berlias were concerned. The letter further refers to the order dated 9th November, 1977, appointing an inspector as prayed for by the company. The letter also states that the advocates of the NRC were of the view that it would not be possible to sustain the refusal of transfer in favour of Berlias and it was for this reason that the company agreed to transfer shares in favour of Berlias. The company has also stated in the letter that such a decision was taken in the background that even after the transfer of the shares in favour of Berlias, their total holding would come to 68,853 and that as against the holding of 1,14,696 by the financial institutions. The company has further stated that Berlias were not to get any controlling interest of the company on account of the transfer of the shares. It is thus clear that the NRC had taken certain decisions not to transfer the shares in favour of Berlias. Mr. Cooper urged that this attitude was a purposeful one inasmuch as the then board of directors wanted to harass....
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....sfer applications on their merits. There is nothing on record to show the reasons for which the NRC had rejected the transfer application. But the absence of such reasons would not necessarily mean that the NRC wanted to act maliciously against Berlias particulary when the company had certain apprehensions as discussed above. The result therefore, is that though the NRC had refused to transfer certain shares in favour of Berlias still that fact would not be a circumstance to suggest that the NRC in conjunction with the financial institutions decided to outvote Berlias by entering into a transaction of allotment of shares in the garb of debentures with a conversional option. Before closing this discussion, we may also observe that in all these proceedings there is no allegation that the financial institutions were behind the back of the NRC in refusing the transfer of shares. In fact, the plaintiffs' solicitor, Mr. D.K. Pandya, has admitted that Berlias did not have any complaint against defendants Nos. 1 to 7 (financial institutions) in regard to the affairs of the NRC. Hence, this circumstance would not have much bearing while deciding the nature of the transaction. Mr. Cooper al....
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....e conclusion that it would be prejudicial to the interest of the company if Berlias would gain the controlling interest of NRC and that if they are able to have their nominees on the board of directors, they would be able to utilise all the information of the company for their own purpose and interest. The meeting, therefore, resolved that directions be issued under section 108D of the Companies Act, not to transfer any share exceeding a block of 50 shares lodged by any individual. It was also resolved that the department of Company Affairs should examine whether further directions under section 108D should be issued. The copy of the minutes was sent to the Director of Department of Economic Affairs for taking appropriate action. This can be seen from the letter dated 5th May, 1978 (Ex. Z-54, part II, page 2632). The UTI was also informed about this meeting and it appears that its views were called. Hence, on 23rd May, 1978, the UTI wrote a letter (which is part of Ex. Z-52, part II, p. 2572) to the Director (Investment), Department of Economic Affairs, New Delhi. The UTI informed the said director that the matter is somewhat serious as the plaintiffs were hand in glove with Kapadi....
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.... mind that the Government of India, i.e ., its Department of Company Affairs and the Department of Economic Affairs, had already taken a decision on June 26, 1978, that necessary action under section 108 should be taken. In the present litigation, we are not concerned much with the correctness or otherwise of that order but we have to see as to whether that order is on account of any joint efforts of the NRC and the financial institutions. The request of the NRC for such an order was already rejected in February, 1978. Thereafter, the two concerned Departments of the Govt. of India held a meeting and took certain decisions. There is nothing on record to show that either the NRC or the financial institutions have persuaded the Govt. of India to take any particular decision in the meeting. Under these circumstances, though a freezing order just prior to the AGM of 1978 was issued, still it will be very difficult for the plaintiffs to contend that such an order was a result of any move of the NRC and the financial institutions. At any rate, even if it is assumed that the said order was at the instance of the financial institutions, still it will not be possible to connect that order w....
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....cular debentures up to 20 per cent, for conversion. The notice given by each of the financial institutions does not comply with the requirement that it should be one month's notice. It was, therefore, urged that on account of the above deficiencies, the allotment of shares is totally bad. In our opinion, all the above-mentioned requirements did not constitute a condition precedent for exercising the option. All these provisions are meant to avoid any difficulty or problem as to who are the debenture holders and which debentures are to be converted into equity shares. The term debenture is defined in section 2(12) of the Companies Act, 1956. It is an inclusive definition. It is true that the parties intended that debentures in the prescribed form should be issued. But the question is as to what would be the effect of omission in that respect. Our attention is drawn to the following observation on p. 146 of Palmer's Company Pre cedents, 16th edn: "Where a company offers debentures for subscription and states the security offered, and any debentures are taken up on the faith of the prospectus, the subscribers stand in equity in the same position as if the securities had been actuall....
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....ting the debentures into shares it was necessary for the financial institutions to surrender the debentures and he argued that in the absence of the debentures there was no possibility of their surrender. Mr. Nariman submitted that all this was for the benefit of the parties and the parties would be entitled to waive them. A provision for surrender of the debentures was for the purpose of identifying which of the debentures have been converted. If there is no such dispute about the identification, the omission to surrender the debentures would be immaterial and it would not affect the legality of issue of the shares. The Controller of Capital Issues has granted approval for the incorporation of the option clause in the debentures of the value of Rs. 70 lakhs (out of Rs. 350 lakhs). It was urged by Mr. Cooper that on account of this approval, the company should have issued two types of debentures, debentures worth Rs. 70 lakhs with an option clause and the debentures of Rs. 280 lakhs without such a clause. Instead, the debenture trust deed speaks only of the total debentures being of Rs. 350 lakhs and then a provision is made that 20% thereof can be converted. In our opinion, the o....
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....aning so as to cover the privileges or conditions about redemption, surrender, etc. We do not think that such a restricted meaning to the word "otherwise" should be given. If the debentures are within the powers of the board of directors, the term of option being a part of such debentures would also be within that very power. It will not, therefore, be possible for Mr. Cooper to contend that the option clause is bad in the absence of the resolution of the general body. The net result of the above discussion is that the transaction in question is not liable to be challenged on any of the grounds mentioned above. Before going to certain other points raised by the plaintiffs as well as by the defendants, we would like to dispose of the contention of the plaintiffs about the constitutional invalidity of section 81(3) of the Companies Act. In a nutshell that sub-section confers powers on the Central Government to specify certain institutions. The effect of this specification is that in the case of debentures (with option to convert into equity shares a part of the debentures) to these institutions, it is not necessary that the proposal about the debentures is to be got approved by a s....
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....otherwise of any provision of section 81(3) without making the Union of India a defendant when the very purpose of raising such a contention is to set at naught the notification issued by the Union of India. Mr. Cooper relied upon the provisions of O. 27A of the CPC which lays down that the notice to the Attorney General should be issued whenever in any suit it appears to the court that any question as is referred to in article 132(1) of the Constitution is involved. He submitted that the trial court has issued such a notice and that, therefore, there would not be any difficulty in deciding the question about the validity of the above-mentioned part of section 81(3). It is true that a notice to the Attorney General is so provided. But if any notification is issued on the basis of the powers under a section which is challenged as unconstitutional, the authority which has issued the notification has every right to urge the validity of the notification on all the counts including the validity of the concerned section. It is for this reason that we told Mr. Cooper that we would not allow him to agitate this constitutional point when the Union of India is not a party to this litigation.....
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.... 36 (vide p. 961 of the paper-book). According to him, this correction was made after the evidence was recorded and hence the defendants were at a disadvantage. According to Mr. Cooper correction was not a surprise to the defendants. He submitted that even at the time when he opened the case before the trial court (that is, before leading the evidence), he had stated that the words and figures "29th June, 1978", were a mistake and that they should read as 28th June, 1979. However, no formal amendment application was made in the trial court and the court corrected the date the order of the court dated 6th July, 1982, reads as follows; "Mr. Cooper, referring to para 72(V), of the plaint, had stated in his opening that the date in the first sentence read '29th June, 1978' by mistake and that it should read '28th June, 1979'. The question now having arisen, Mr. Cooper reaffirms that statement. The date accordingly will read as ' 28th June, 1979 ', and the court has altered the date in the original plaint without formal amendment." Thus, at the time when the parties led evidence there was a mere statement about the mistake but the plaint was not actually amended. There is, however, mu....
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....shares ceased when the freezing order under section 108 was obtained? A: It is not correct." No specific case has been put to this witness in the cross-examination that there was particular hurry in 1978 and that the notice was waived in order to complete the transaction, maliciously and in a hurried manner. Similarly, no questions were put to Atmaramani in cross-examination that the financial institutions were in need of getting additional voting strength for the meeting of 1979. Relying upon this omission, Mr. Nariman contended that the evidence of Atmaramani as far as the happenings in 1979 remained unchallenged. He drew our attention to a decision of the Calcutta High Court in the case of A. E. G. Carapiet v. A. Y. Derderian AIR. 1961 Cal 359, wherein it is laid down that the omission to put one's case in the cross-examination should be interpreted to mean that the said party, so to say, accepts the account given by the witness earlier in the examination-in-chief. Mr. Cooper did not challenge this legal position. He, however, urged that the need for putting the case to a witness would arise only with respect to the evidence given by the witness in examination-in-chief. He fur....
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.... waiving the notice. Mr. Cooper wanted to rely upon a number of previous antecedent events for the purpose of contending that the waiver of notice was mala-fide. For example, he drew our attention to the fact that the company had refused to transfer the shares of Berlias in 1977 and 1978 and that Berlias were required to go to the court for getting reliefs. The other factor on which he wants to rely is the freezing order dated 17th June, 1978, and the correspondence pertaining thereto. We have, in the earlier part of the judgment, discussed the details thereof. Mr. Cooper has also relied upon the fact that in April, 19J8, Berlias had lodged proxies to the extent of 1,74,500 as against the financial institutions' voting strength of 1,04,000 odd. It is on the basis of these various circumstances that a submission was made that the waiver of notice was a mala fide one. The learned single judge has come to a conclusion that a prima facie case of mala fides in the waiver of notice has been made out and that it was necessary for the company to lead evidence to disprove this prima facie case. It is also observed that in the absence of such evidence, the plaintiffs would be entitled to su....
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....ere having majority of shares in Millers and they had issued a statement dated 27th June, that they would act jointly for rejecting any offer from Howard Smith Ltd. The directors of the company were, however, in favour of Howard Smith Ltd. Hence, in order to favour the attempt of Howard Smith Ltd. to take over the Millers Company, the directors on 6th July issued a large number of shares in favour of Howard Smith Ltd. Thus, in view of the fact that the majority shareholders did not want that Howard Smith Ltd. should take over the Millers Company, the court held that the allotment of shares to Howard Smith Ltd. was mala fide. Obviously, what was relevant was the fact that on 27 th June, the majority shareholders opposed the offer of Howard Smith Ltd. and within ten days, the directors issued shares in favour of Howard Smith Ltd. It is thus clear that there was evidence of mala fides. In the case of Piercy v. S. Mills and Co. Ltd. [1920] 1 Ch 77 (Ch D), the facts were of a similar type. The plaintiff in that case was serving as a manager in the company. Differences arose between him and the two directors of the company. The directors felt that the plaintiff was not suitable to work a....
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....s of the greater number of shares in the company, and of obtaining the necessary statutory majority for passing a special resolution while, at the same time, not conferring upon the minority the power to demand a poll." The above-mentioned underlined portion would show that the allotment of shares was cancelled as on the evidence as was available, the immediate object was to disturb the majority for a particular sinister purpose. In Clemens v. Clemens Bros. Ltd. [1976] 2 All ER 268 (Ch D), the allotment of shares was held bad because there was evidence and circumstances to indicate that this was done for a definite purpose to have control of the company. Two other cases were also cited before us, namely, W. M. Roith Ltd., In re [1967] 1 All ER 427 (Ch D) and Lee, Behrens & Co. Ltd., In re [1932] All ER Rep. 889. Both these cases deal with the question as to whether the grant of pension to the legal representatives of the erstwhile director of the company was a bona fide action and, on the facts that were available there, it was held that such action should not be permitted. Halsbury has discussed the powers of the directors in para. 499 of Vol. VII in following words: "Directors....
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....elevant. We will have to find out as to whether there was any immediate or urgent apprehension in the mind of the company and the financial institutions that the financial institutions should require this additional voting strength in the meeting of 28th June, 1979. Was there anything to suggest that the company or the financial institutions ever thought that they would be requiring additional voting strength of 43,750 shares? None of the plaintiffs have entered the witness box to depose that he intended to raise certain objections or to put certain resolutions which would require voting. As a matter of fact nothing controversial took place in the said meeting. No resolution was moved on which there was any debate. There was thus no occasion for exercising voting power for or against any resolution. There is no evidence to suggest that the plaintiffs or any other shareholder had given prior indication to the company or the financial institutions that there was the possibility of any debatable issue being raised in the meeting. The plaint also does not allege anything in this respect. Thus, the evidence, as it stands in this case, does not prove that there was any immediate need to ....
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....l institutions, initially purposefully created a hurdle by providing one month's notice and thereafter they got over that hurdle by maliciously waiving the notice. There would not have been any question of malice in waiving the notice if such a notice clause was not at all provided for As discussed above, the provision for such one month's notice was not compulsory and nothing prevented the parties to provide the exercise of option without such one month's notice. In para. 29, we have already referred to the cross-examination of Shri Nareshchandra Singhal and the statement (Ex. Z-75, part II, p. 3232, onwards), which he has produced at the instance of the plaintiffs. That statement shows that there are a number of instances when the period of option was agreed to commence even before the advancement of loan. Similarly, there are instances where the option was exercisable at any time during the currency of the loan and not on or before a particular date. The loan to motor industries was advanced on 1st October, 1973. The option was exercised and the shares were allotted on the very day, though 15 days' notice was contemplated before exercising such an option. Mr. Nariman is right w....
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.... the facts of each case, namely, pleadings and the reliefs claimed. This court in the case of Vyankatesh Dhonddev Deshpande v. Sou. Kusum Dattatraya Kulkarni, AIR 1976 Bom. 190, held as follows (at p 205): "It is, however, well established that where the plaintiffs can obtain complete and effective reliefs from the court in respect of the subject-matter in dispute against a party, it is not necessary to join any other party, whether it is Government or others. In the present case, as already stated above, the contention of the plaintiffs was that the auction sale of the suit land was ultra vires, illegal, unauthorised and void and, therefore, the possession of the defendant was also illegal. The plaintiffs were entitled to a complete and effective relief by obtaining possession of the land from the defendant. They sought no relief against the Government. They were not bound to seek any relief against the Government." In the case of Narayan Chandra Garai v. Matri Bhander Pvt. Ltd., AIR 1974 Cal 358, the Calcutta High Court held as follows (at p. 358): "A person is not to be added as a defendant merely because be or she would be incidentally affected by the judgment. The main cons....
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.... has stated as follows: vide at pp. 3511 and 3512 of the paper-book. "9. FINANCE: Your company is coming ahead with the programme of modernisation to which I had made detailed reference in my last year's statement as also in the directors' report. In this context I am happy to report that the documentation concerning financial assisstance of Rs. 300 lakhs sanctioned by the financial institutions for modernisation has been completed. Subscriptions have been received from all the institutions against the privately placed debentures issued for the purpose. Some orders have been released on vendors for supply of machinery and equipment for modernisation. Other proposals are being processed and orders will be released in the near future. 10. CAPITAL STRUCTURE: In accordance with the terms of financial assistance sanctioned by the Institutions for financing the Nylon Phase II programme and also the modernisation programme, in all amounting to Rs. 408 lakhs, the institutions have opted to convert Rs. 81.6 lakhs into equity shares at a premium of Rs. 60 per share. Accordingly, 51,000 equity shares have been issued to UTT, ICICI and GIC and its subsidiaries. Consequently, the paid up eq....
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....en the plaintiffs themselves want to rely upon them. As contended by Mr. Nariman, it would be necessary to admit those minutes in evidence. Formal exhibiting of the document will have to be done by the office in terms of this order. The copies of the minutes are at p. 4598 onwards. Those minutes show that the plaintiff No. 2 attended the meeting. In that meeting, the board of directors considered and discussed the annual accounts of the financial year ending 31st December, 1979. Similarly, the balance-sheet and profit and loss account for the year 1979 were approved by the board of directors. The directors report was also approved with certain changes. The said directors report as well as profit and loss account are at p. 207 onwards of vol. 8. On p. 220, there is a reference to the allotment of shares in the year 1979 to the financial institutions on account of conversion. Needless to say that this includes the allotment in dispute. The profit and loss account and more particularly the position of the share capital as mentioned therein show the increase of the share capital, and this increase pertains to the disputed allotment of shares to the financial institutions. There is also....
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.... not, there is nothing which calls upon him to assert his own rights. Lastly, the defendant, the possessor of the legal right, must have encouraged the plaintiff in his expenditure of money or in the other acts which he has done, either directly or by abstaining from asserting his legal right. Where all these elements exist, there is fraud of such a nature as will entitle the court to restrain the possessor of the legal right from exercising it, but, in my judgment, nothing short of this will do." It is, however, material to note that the Privy Council in the case of Sarat Chunder Dey v. Gopal Chunder Laha [1892] LR 19 IA 203, has considered this aspect in a different manner as mentioned below: "It is quite unnecessary in order to create estoppel that the person whose acts or declarations induced another to act must have been under no mistake himself, or must have acted with in intention to mislead or deceive. Estoppel mainly results from the fact that another has been induced, in reliance upon personal representations, acts, or omissions, to act as he otherwise would not have acted." This court in the case of Sitabai v. Wasantrao Nana Moroba [1901] 3 Bom. LR 201, has held that ....
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....ector, but in the circulars issued by Ruia, Kirloskar and the solicitor-director the contrary position was taken up or in any event suggested. Thus, the shareholders had no clear indication whether the solicitor-director had any interest or concern as alleged by the plaintiffs and they could not be said to have voted in favour of the resolution approving the appointment for a further term with knowledge of the interest or concern of the solicitor-director and its consequent effect on the resolution of the board. There can be no ratification except with full knowledge of the facts and the shareholders were never asked to ratify the said resolution after the aforesaid facts were made known to them." Mr. Nariman relied upon a decision of this court in the case of V. N. Bhajekar v. K. M. Shinkar [1934] 36 Bom. LR 438 ; [1934] 4 Comp. Cas. 434 , where the question of ratification by the general body of an action by a director was considered in the following words (at p. 443 of 4 Comp. Cas.): "......a company cannot confirm or ratify anything which is beyond its powers, express or implied, in the memorandum or conferred by statute. Short of that a transaction by the directors which is ....
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.... to his detriment...... In those circumstances (which were available in the case), it would be inequitable and unconscionable for the defendants to frustrate the second plaintiff's expectations which the defendants had themselves created." This decision has considered a number of other cases. The relevant portion of some of the decisions have been reproduced in the judgment and, in addition, the learned judge while deciding that case has also recorded certain findings. We would like to reproduce certain portions of the judgment including the observations in the earlier decisions.. After considering the case of Willmott v. Barber [1880] 15 Ch 96 (Ch D) and certain other cases it observed as follows (at p. 911 of [1981] 1 All ER and p. 588 of [1981] 2 WLR): "Now, convenient and attractive as I find counsel's submission as a matter of argument, I am not at all sure that so orderly and tidy a theory is really deducible from the authorities-certainly from the more recent authorities which seem to me to support a much wider equitable jurisdiction to interfere in cases where the assertion of strict legal rights is found by the court to be unconscionable." At p. 913 of [1981] 1 All ER a....
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....g factor in certain cases-in the overall inquiry. This approach, so, it seems to me, appears very clearly from the authorities to which I am about to refer." Atpage 917 of [1981] 1 All ER and at page 594 of [1981] 2 WLR: "Indeed I cannot see why in considering whether the defendants were behaving unconscionably it should have made the slightest difference to the result if, at the time when the plaintiff was encouraged to open his access to the road, the defendants had thought that they were bound to grant it...... The particularly interesting features of the case in the context of the present dispute are, first, the virtual equation of promissory estoppel and proprietary estoppel or estoppel by acquiescence as mere facets of the same principle and, secondly, the very broad approach of both Lord Denning MR and Scarman L.J., both of whom emphasised the flexibility of the equitable doctrine." Similar subject is also discussed in the case of Amalgamated Investment and Property Ltd. (In liquidation) v. Texas Commerce International Bank Ltd. [1981] 1 All ER 923; [1981] 2 WLR 554 (QB). The relevant headnote reads as follows: "Where there was a representation by one party to another t....
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.... directors' report as also the balance-sheet prepared by the board of directors is consistent with this position. Plaintiff No. 1 was present at the time of the AGM on May 15, 1980. The plaintiffs have alleged in the plaint mala fides in the waiver of notice. This means that before the filing of the suit, the plaintiffs had obtained the knowledge about the mala fide waiver. However, the, plaint is silent as to when they received this knowledge. This omission has an importance. If the plaintiffs had such knowledge befere the abovementioned meetings dated March 27, 1980, and May 15, 1980, they would not have acted in the manner mentioned above. On the contrary, they would have raised a grudge about the allotment of the shares. It is for this reason that the date on which they received the knowledge was relevant. Not only that there is no pleading in this respect but none of the plaintiffs have entered the witness box to depose as to when he came to know about the alleged mala fides. The question is as to on whom the burden of proving such knowledge need not detain us any longer in the background of plaintiffs' omission to enter the witness box. The fact that the plaintiffs obtained t....
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.... register. It was alleged that the transaction of surrender of shares was bad. The court found that the transaction was bad, however, rectification was refused by holding that the discretionary relief should not be granted. The relevant observations on p. 273 are as follows: "It does not follow that because the surrenders of shares were bad the plaintiffs are now entitled to succeed in their claim to be restored to the register in respect of them. The power of rectifying the register given by the 35th section of the Act of 1862 is discretionary in this sense- that the court properly can only exercise it if satisfied of the justice of the case, and on many applications the court has declined to exercise this power on the ground that it would not be fair to do so, or, to put it more technically, that the applicant has not established any equity to disturb the existing state of things. And, in considering this, the court has always had regard to the lapse of time, and to any facts and circumstances indicating acquiescence in the existing state of things by those on whose behalf the application is made to disturb it." The discretion can be exercised by passing orders which would be a....