TaxTMI 
TaxTMI 
1985 (2) TMI 214
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....to as "the Polytex Company"), a company governed by the Companies Act, 1956 (hereinafter referred to as "the Act"), held pursuant to a notice dated February 11, 1984, issued under section of the Act by some of its members. The controlling interest in the Swadeshi Cotton Mills Co. Ltd. (hereinafter referred to as "the Cotton Mills Company") which is also governed by the Act was acquired by Mangturam Jaipuria and his family in 1946. Sitaram Jaipuria is the adopted son of Mangturam Jaipuria. After his adoption, Mangturam Jaipuria got a natural son, Rajaram. In or about the year 1964, Sitaram Jaipuria became the chairman and managing director of the Cotton Mills Company. In 1970, the Jaipuria family decided to promote another company and accordingly the Polytex Company was established. In 1970, Rajaram became the managing director of the Cotton Mills Company and Sitaram continued as its chairman. Sitaram became the chairman and managing director of the newly established Polytex Company in which the Cotton Mills Company had acquired 10 lakhs shares of Rs. 10 each. From about 1975-76 on account of a very serious setback in its financial position, the Cotton Mills Company could not meet ....
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.... read with section 5 of the U.P. Government Electrical Undertakings (Dues Recovery) Act, 1958, do hereby appoint Shri L. N. Batra, A.D.M., Kanpur, as receiver of the said mills belonging to M/s Swadeshi Cotton Mills Co. Ltd., for a period of six months with immediate effect and direct that the receiver shall exercise the following powers : 1.The receiver shall exercise supervision over the sales of products of the said mills and the disbursement of receipts from day to day. 2.That the receiver shall ensure that the receipts of the said mills are, after the payment of labour dues and other essentials for the running of the mill, appropriated towards recoverable arrears against M/s Swadeshi Cotton Mills Co. Ltd. as land revenue. 3.That the receiver shall, if necessary, for the running of the said mills borrow money from State Government or other financial institutions and make other appropriate arrangements in this behalf for the repayment of the amount and the recovery thereof as arrears of land revenue. 4.That the receiver shall seize the shares held by M/s Swadeshi Cotton Mills Co. Ltd. in M/s Swadeshi Polytex Ltd. of the face value of Rs. 10 lakhs (ten lakhs) and shall be com....
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....the receiver pledged on November 9, 1977, 1 lakh shares out of the above 9 lakhs shares in favour of the Government of Uttar Pradesh against a loan of Rs. 15 lakhs and on January 4, 1977, 15 lakhs shares against a further loan. Thus, out of the 10 lakhs shares of the Polytex Company of the face value of Rs. 1 crore held by the Cotton Mills Company, 35 lakhs shares stood pledged in favour of the Government of Uttar Pradesh and the remaining 65 lakhs shares of the face value of Rs. 65 lakhs remained with the receiver. The events which have led to this appeal are, however, these : In the year 1976, the Cotton Mills Company filed a petition under sections 397 and 398 of the Act against the Polytex Company alleging oppression and mismanagement of the Polytex Company by Sitaram Jaipuria and other directors of the Polytex Company in Company Petition No. 20 of 1976 on the file of the Allahabad High Court. That petition was dismissed by the company judge of the High Court on April 19, 1982. Against his decision, an appeal was filed by the Cotton Mills Company in August, 1982, in Special Appeal No. 2 of 1982 before the Division Bench of the High Court. That appeal is still pending. On Febru....
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....l of Shri P. B. Menon, Shri R. D. Thapar, be and is hereby appointed as a director of Swadeshi Polytex Ltd. and in respect of whose appointment, special notices have been received from some members indicating their intention to appoint Shri R. D. Thapar as a director of the company." The requisitionists of the meeting also asked the Polytex Company to treat the said notice as a special notice under section 284(2) and (5) read with section 190 of the Act for appointment of Sitaram Singhania, Rajaram Jaipuria and R. D. Thapar in place of Ashok Jaipuria, B. M. Kaul (who was also the chairman of the Cotton Mills Company) and P. B. Menon respectively as directors of the Polytex Company. They enclosed an explanatory statement as required by section 173 of the Act to the notice containing reasons for moving the aforesaid resolutions. On receipt of the notice, an emergent meeting of the directors of the Polytex Company was held on February 23, 1984, to consider the above-said notice issued under section 169 of the Act. The following is the material part of the minutes of the said meeting: "Requisition notice The Board was informed that a notice had been received at the registered office....
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....he High Court of Allahabad to fix a fresh date for the meeting, the High Court declined to do so by its order dated May 22, 1984, because the temporary injunction order had been issued by a court not subordinate to it. It appears that another shareholder applied for injunction in a suit filed in the Civil Judge's Court at Gwalior and a third shareholder moved the City Civil Court, Madras, for a similar relief. Then the requisitionists filed two special leave petitions before this court against the order of the Allahabad High Court dated May 22, 1984. On June 20, 1984, this court passed the following order on the said petitions which were numbered as Civil Appeals Nos. 2597 and 2598 of 1984: "Special leave granted. The High Court of Allahabad shall make a fresh order directing the holding of the meeting of the company and that meeting shall be held in accordance with the order of the High Court notwithstanding any order of injunction, etc., issued by any other court or authority in India or to be issued hereafter. If any person has any grievance about the holding of the meeting, he shall approach the High Court of Allahabad for appropriate directions. If the requisitionists or th....
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.... one week after it is ascertained. The resolutions passed at the meeting shall not come into effect until further orders by this court. The matter may be listed in the third week of October, 1984." After the report submitted by the chairman of the meeting was received by this court, this court passed a further order on October 12, 1984, which reads as follows : "The report of the chairman of the extraordinary general meeting which has been submitted to this court in a sealed cover is opened and perused by the court. The report states that all the resolutions other than the resolution for adjournment have been lost. The photo stat copies of the report along with the enclosures may be made available to the parties at their expense. List the matter on 29-10-1984 before this Bench." After the above order was passed, the Industrial Development Bank of India and the Industrial Finance Corporation of India who were aggrieved by the result of the counting of votes given on the taking of poll at the meeting filed applications before this court questioning the correctness of the report of the chairman as regards the result of the meeting. They contended that the chairman had wrongly rejec....
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....anaging director till his re-election at the next annual general meeting of SPL. 4.SRI will continue to be the chairman of the company and as such will preside over the board meetings of SPL. He voluntarily undertakes not to have any second or casting vote. 5.All minutes of the board meetings shall be prepared by a nominee of the financial institutions and shall be signed by the chairman. 6.The next annual general meeting of SPL shall be called and held on May 15, 1985. The chairman of the said annual general meeting shall be appointed by this court.' 7.All the members of the reconstituted board appointed pursuant to clause 1 above (excluding nominees mentioned in clause 1(a) (including non-rotational directors, i.e., SRJ and/or Shri F. R. Beshania, shall resign and a new board shall be elected at the said annual general meeting. All shareholders of SPL (including SRJ and RRJ) shall be entitled to propose names of any persons for appointment as directors of SPL at the said annual general meeting. Members of the reconstituted board may, if they so desire, seek re-election at the said annual general meeting. 8.All pending matters before this court including the Transfer Case No.....
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....o enjoy the privileges of a member of the Polytex Company by reason of the appointment of a receiver by the Collector of Kanpur in respect of the ten lakhs shares in the Polytex Company held by the Cotton Mills Company, the attachment of the nine lakhs shares out of the said 10 lakhs shares and also the pledge of 3,50,000 shares out of the said 10 lakhs shares with the Government of Uttar Pradesh as security for the loans advanced by it. The total paid-up equity share capital of the Polytex Company is Rs. 3,90,00,000 (39,00,000 shares of Rs. 10 each) and it is not disputed that if the 10 lakhs shares held by the Cotton Mills Company are omitted from consideration, the remaining requisitionists would not have sufficient voting strength to issue a notice under section 169 of the Act. The appellants contend that the Cotton Mills Company could not, therefore, join the other requisitionists in issuing the notice under section 169 of the Act calling upon the Polytex Company to call the extraordinary general meeting and without the support of the shares held by the Cotton Mills Company, the remaining requisitionists would not have been eligible to requisition the meeting. The material par....
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....s of the company and on its registration shall be entered as members in its register of members. A subscriber to the memorandum is liable as the holder of shares which he has undertaken to subscribe for. Any other person who agrees to become a member of a company and whose name is entered in its register of members shall be a member of the company. In his case, the two conditions, namely, that there is an agreement to become a member and that his name is entered in the register of members of the company are cumulative. Both the conditions have to be satisfied to enable him to exercise the rights of a member. Subject to section 42 of the Act, a company or a body corporate may also become a member. When once a person becomes a member, he is entitled to exercise all the rights of a member until he ceases to be a member in accordance with the provisions of the Act. The voting rights of a member of a company are governed by section 87 of the Act. Section 87 of the Act says that subject to the provisions of section 89 and sub-section (2) of section 92 of the Act, every member of a company limited by shares and holding any equity share capital therein shall have a right to vote, in respec....
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....liberties powers, immunities and privileges and burdens like duties, liabilities, disabilities, etc. Whatever advantages a man may have as a result of the ownership of a right may be curtailed by the disadvantages in the form of burdens attached to it. As observed by Dias, an owner may be divested of his claims, etc., arising from the right owned to such an extent that he may be left with no immediate practical benefit. He remains the owner none the less because his interest will outlast that of other persons in the thing owned. The owner possesses that right which ultimately enables him to enjoy all rights in the thing owned by attracting towards himself those rights in the thing owned which for the time being belong to others, by getting rid of the corresponding burdens. An owner of a land may get rid of the interest of a mortgagee in it by redeeming the mortgage, may get physical possession of land by terminating a lease and may get rid of an attachment by discharging the debt for which it is attached. A receiver appointed by a court or authority in respect of a property holds it for the benefit of the true owner subject to the orders that may be made by such court or authority.....
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....r sub-section (1) or sub-section (3) shall be made except after giving notice to the defaulter to show cause, and after considering any representations that may be received by the Collector in response to such notice : Provided that an interim order under sub-section (1) or sub-section (3) may be made at any time before or after the issue of such notice : Provided further that where an interim order is made before the issue of such notice, the order shall stand vacated if no notice is issued within two weeks from the date of the interim order. (4) The provisions of rules 2 to 4 of Order XL, contained in the First Schedule to the Code of Civil Procedure, 1908, shall apply in relation to a receiver appointed under this section as they apply in relation to a receiver appointed under the Code with the substitution of references to the Collector for references to the court." Section 149 of the Land Revenue Act, which provides for the attachment and sale of movable property belonging to a defaulter, reads thus : "149. Attachment and sale of movable property.-The Collector may, whether the defaulter has been arrested or not, attach and sell his movable property. Every attachment and....
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.... obtained by the members of the company. This court observed at page 21 of 24 Comp. Cas. thus : "Mr. Pathak argued that the plaintiff was entitled to reliefs ( a) and (b) both in his suit as well as in the receiver's suit and that the receiver's suit was wrongly dismissed by the High Court. We are unable to agree. In our opinion, the High Court rightly held that the receiver appointed in the suit of Sir Padampat could not acquire the newly issued shares in his name. That privilege was conferred by section 105C only on a person whose name was on the register of members. The receiver's name admittedly was not in the register and the company was not bound to entertain that application. Mr. Pathak argued that that may be so but the receiver was not making an application in his individual right but he had been armed by the court with power to apply in the right of the defendant, Reddy. The fact, however, is that the receiver made the application in his own name. Even if Mr. Pathak's contention is right, the company was no party to the suit filed by Sir Padampat against Reddy and that being so, no order could be issued to the company in that suit to recognize the receiver as a sharehold....
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....se till such registration takes place." In this case, this court followed the dictum of Chitty J. in Wala Wynaad Indian Gold Mining Co., In re [1882] 21 Ch 849 (Ch D) which emphasised that the entry of the name of person in the register of members was an essential condition for exercising voting rights at the meeting of the company concerned. In Buckley on the Companies Acts (14th edn.), vol. I, p. 972, it is stated thus : "Company cannot enquire into beneficial ownership.-As between the shareholder and the company, the person entitled to exercise the right of voting is the person legally entitled to the shares, the member whose name is on the register." In Kurapati Venkata Mallayya v. Thondepu Ramaswami and Co. [1963] Supp. 2 SCR 995 ; AIR 1964 SC 818, this court had occasion to consider the validity of a suit instituted by a receiver to collect debts due to a party to a suit in his own name. The court upheld the right of the receiver to maintain the suit observing that a receiver invested with full powers to administer the property which is custodia legis or who is expressly authorised by the court to institute a suit for collection of debts was entitled to institute a suit i....
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.... at page 310 : "the power of the company and its directors to deal with the property comprised in the appointment (both property subject to a floating charge and property subject to a fixed charge), except subject to the charge, are paralysed", which was relied on by the appellants, is not of much use to them. It only means that the authority competent to appoint a receiver may give directions regarding the property. It does not imply that the right of the company to exercise the right to vote on the basis of the shares of another company held by it at the meeting of such other company becomes automatically suspended. Under section 51 of the Code of Civil Procedure, 1908, a receiver may be appointed by a civil court on the application of a decree-holder in execution of a decree for purposes of realising the decree-debt. This is only a mode of equitable relief granted ordinarily when other modes of realisation of the decretal amount are impracticable. A receiver appointed under that section will be able to realise the amounts due from a garnishee and his powers are akin to the powers of a receiver appointed under 0. 40, rule 1 of the CPC, 1908. But he would not have any beneficial ....
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.... as may be prescribed make a declaration to the company specifying the name and other particulars of the person who holds the beneficial interest in such share. The Companies (Declaration of Beneficial Interest in Shares) Rules, 1975, are made in this connection. It is obvious from the foregoing that none of the provisions referred to above has any bearing on the question before us. Mere appointment of a receiver in respect of certain shares of a company without more cannot, therefore, deprive the holder of the shares whose name is entered in the register of members of the company the right to vote at the meetings of the company or to issue a notice under section 169 of the Act. The consequence of attachment of certain shares of a company held by a shareholder for purposes of sale in a proceeding under section 149 of the Land Revenue Act is more or less the same. The effect of an order of attachment is what section 149 of the Land Revenue Act itself says. Such attachment is made according to the law in force for the time being for the attachment and sale of movable property under the decree of a civil court. Section 60 of the CPC, 1908, says that except those items of property me....
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....eprived the Cotton Mills Company of its rights in them. Having carefully gone through the said decision, we find that it has not much relevance to the case. In that case, the chairman and the manager of a company had purchased certain shares of the company held by one of its members in two separate lots after paying consideration there for contrary to article 13 of the company's articles of association which granted a right of pre-emption to all the other members in respect of the shares in question. 'Immediately after the said purchases were made, another member of the company obtained a money decree against the transferor of the shares and also a charging order over the shares standing in the name of the transferor but which had been sold earlier either to the chairman or the manager. He claimed that since the transfer of the shares was contrary to article 1 3 of the company's articles of association, the transfer was void and, hence, he was entitled to enforce the charging order against those shares for realising his decretal amount. The court negatived his claim holding that notwithstanding the complete failure to comply with the company's articles in regard to the procedure to....
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....s hand. A short passage in Mula's Code of Civil Procedure (14th Edn), Vol. II at page 151s instructive and reads thus : "There is no provision in the Code for charging orders, but on the Original Side of the High Courts, which have inherited the older jurisdiction of the Court of Chancery, it is the practice in cases where it is considered undesirable to grant immediate execution to make a charging order in the form made in the case of Kewy v. Attil [18] 34 Ch D 345. When the assets require nursing, the advantage of a charging order is that it enables the court on the one hand to gain time and on the other hand to protect the decree-holder. It also avoids the confusion that might ensue if the court were to allow a direct attachment while it is administering the assets of the partnership. The effect of a charging order is to constitute the decree-holder a secured creditor although he undertakes to deal with the charge subject to the further orders of the court." An order of attachment cannot, therefore, have the effect of depriving the holder of the shares of his title to the shares. We are of the view that the attachment of the shares in the Polytex Company held by the Cotton Mil....
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....wnee in the instant case, i.e., the Government of Uttar Pradesh, could not be treated as the holder of the shares pledged in its favour. The Cotton Mills Company continued to be the member of the Polytex Company in respect of the said shares and could exercise its rights under section 169 of the Act. It may be stated here that the Government of Uttar Pradesh and the Collector who are the parties to this appeal have not questioned the correctness of the judgment of the High Court. One other subsidiary contention urged on behalf of the appellants relates to the effect of an order made by the Central Government on April 13, 1978, under section 18AA(1)(a) of the Industries (Development and Regulation) Act, 1951, taking over the management of Swadeshi Cotton Mills along with five other industrial units belonging to the Cotton Mills Company which was the subject-matter of dispute in Swadeshi Cotton Mills v. Union of India [1981] 51 Comp. Cas. 210 (SC); [1981] 2 SCR 533, and the order of extension passed by the Central Government on November 26, 1983, which is the subject-matter of dispute in a case now pending before this court. It is urged on behalf of the appellants that on the pass....