Delhi High Court
S. P. Gupta vs M/S. Packwell Manufacturers ... on 26 August, 2013
Author: R.V. Easwar
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 19th August, 2013
Date of decision: 26th August, 2013
+ CO. A. (SB) No.35/2013 & CO. APPL. Nos.399-1401/2013
S. P. GUPTA ..... Petitioner
Through : Mr. Sudhir Nandrajag, Sr. Adv.
with Mr. Atul Sharma, Mr
Nitesh Jain, Mr Sugam Seth and
Ms. Sagriti Ahuja, Advocates.
versus
M/S. PACKWELL MANUFACTURERS
(DELHI) PVT. LTD. .....Respondent
Through: Mr. U. K. Chaudhary, Sr.
Advocate with Mr. Shario Reyaz
and Mr Mohd Saif Abbasi,
Advocates.
CORAM:
HON'BLE MR. JUSTICE R.V.EASWAR
JUDGMENT
R. V. EASWAR, J.:
1. This is an appeal filed by one S.P. Gupta under Section 10F of
the Companies Act, 1956 (hereinafter referred to as „the Act‟). It is
directed against the order passed by the Company Law Board („CLB‟,
for short) on 26.04.2013 in Company Application No.156/2013 [in
CO. PET. No.1(ND)/2010]. The contesting respondents are: (i) M/s.
Packwell Manufacturers (Delhi) Pvt. Ltd.(R-1); (ii) Mrs. Rajni Gupta,
W/o. Late Mr. B.C. Gupta (R-2) and (iii) Ms. Gudiya Gupta, D/o. Late
Mr. B.C. Gupta (R-3).
2. The appeal came to be filed in the following circumstances.
Respondent No.1 is a company incorporated on 13.03.1970 with an
authorised share capital of `15 lakhs. The appellant and respondent
No.2 were the promoter directors of the respondent-company. M/s.
Vinod Sanjeev Bindal & Co. Chartgred Accountants, were appointed
the statutory auditors of respondent No.1 in 1980‟s. It would appear
that the appellant was removed from the Board of Directors on
20.06.2009 under Section 283(1)(g) of the Act; earlier on 18.11.2008,
respondent No.3 had been appointed as director of respondent No.1,
allegedly without any meeting of the Board of Directors. Since
differences between the appellant on the one hand and respondent No.2
and respondent No.3 on the other had cropped up, a petition under
Section 397 and 398 of the Act was filed by the appellant before the
CLB against the present respondents. The same was withdrawn on the
ground that there were some technical errors and after rectifying them,
it was filed again.
3. On 25.01.2010, the company petition came up for hearing before
the CLB and status quo was granted.
4. On 17.02.2011 an application was filed by respondent No.1
before the Regional Director (NR), Ministry of Corporate Affairs,
seeking removal of the statutory auditors M/s. Vinod Sanjeev Bindal &
Co. The application was filed under Section 224(7) of the Act which
says that the statutory auditors may be removed from office, before the
expiry of the term for which they were appointed, by the company in
general meeting after obtaining the previous approval of the Central
Government in that behalf. The statutory auditors were appointed from
the conclusion of the annual general meeting of respondent No.1 held
in the year 2008 till the conclusion of the next annual general meeting
for audit of the books of accounts for the financial year ended
31.03.2009.
5. On 13.12.2012, an order was passed by the Regional Director on
the application for removal of the statutory auditors. This order was
passed after considering the objections of the Chartered Accountants
submitted through their letters and after giving them an opportunity of
personal hearing. After considering the averments in the application
setting out the reasons for seeking removal and the submissions of the
Chartered Accountants the Regional Director arrived at the following
findings: -
"i) The applicant company has filed an application
under section 224(7) of the Companies Act, 1956 online
on 17.02.2011 and physically on 18.02.2011 for removal
of M/s. Vinod Sanjeev Bindal & Co., Chartered
Accountants, Statutory Auditor of the Company for the
audit of financial year 2008-09.
ii) The application for removal of auditors was filed
after filing of petition under section 397/398 before CLB
against the company and others by Shri S.P. Gupta.
iii) It is also confirmed that majority share holders
have expressed their un-willingness for continuance of
the present statutory auditors as they have lost
confidence on the auditors.
iv) The petition under section 397/398 of the
Companies Act, 1956 is pending wherein issue of
removal of Auditor is also under consideration before the
CLB. The CLB has vast power under section 402 to
regulate the affairs of the company including decision on
removal of present auditors of the company."
6. However, the Regional Director did not render any decision on
the question of removal of the auditors, but held as follows: -
"5. Since the subject matter of removal of Auditor is
still under consideration of a superior authority i.e.
Company Law Board which is chaired by Judge (retd.) of
Hon‟ble High Court, the undersigned is of the opinion
that it would not be proper to issue any order by this
office in the matter till matter is under consideration of
the Hon‟ble Company Law Board. Therefore, the
applicant Company may consider to approach the
Hon‟ble Company Law Board for necessary direction, if
so desire. The present application is accordingly
disposed off.
However Company may apply again to this office,
after obtaining necessary directions from the Hon‟ble
Company Law Board in the matter."
7. After the aforesaid order was passed by the Regional Director,
respondent No.3 filed an application before the CLB in Company
Application No.156/2013 [in CO. PET. No.1(ND)/2010]. The prayers
made in this application were (i) for passing directions for removal of
the statutory auditors and for directing that the decision of the CLB
shall be final and binding in this regard and no further approval from
any other authority shall be required; (ii) for passing an order
confirming the appointment of M/s. K.N.A. Associates, Chartered
Accountants, as the statutory auditors of the company for the financial
year 2009-2010 and (iii) for passing such other orders or directions
which the CLB may deem fit and proper. It needs to be noted that
though the application for removal of the statutory auditors was filed
before the Regional Director by the company (respondent No.1), the
application before the CLB in Company Application No.156/2013 was
filed not by the company but by respondent No.3. In the affidavit
accompanying the application before the CLB, respondent No.3
affirmed that she was competent to swear and file the affidavit on her
own behalf and on behalf of the other respondents i.e. the company as
well as Mrs. Rajni Gupta (respondent No.2).
8. On 18.04.2013 the company application was taken up for
hearing for the first time by the CLB and on this date, the following
order was passed: -
"Ld. Counsel for the Petitioner accepts notice on
CA No.156/13 filed by the Respondents and prays for a
short adjournment to seek instructions. The matter is
already listed on 22nd May 2013 at 10.30 A.M.
Shri U.K. Chaudhary, Ld. Sr. Counsel for the
applicants states that this board may hold that it has no
jurisdiction to adjudicate on the removal of the Statutory
Auditor which lies solely in the domain of the delegatee
of the Central Govt., i.e. the Regional Director and
dispose off CA 156/13 with a direction to the
Respondents to take appropriate steps before the
Regional Director.
List on 26th April 2013 at 10.30 A.M. as Item No.1.
Sd/-
[Justice D.R. Deshmukh]
Chairman"
9. It is noteworthy that in the application before the CLB praying
for orders for removal of the statutory auditors M/s. Vinod Sanjeev
Bindal & Co. and for the appointment of M/s. K.N.A. Associates as
statutory auditors for the financial year 2009-2010, a request was made
on behalf of the applicant before the CLB that the CLB may hold that
it has no jurisdiction to adjudicate on the removal of the statutory
auditor which power remains with the Central Government under
Section 224(7) of the Act.
10. The application was taken up for final hearing on 26.04.2013 by
the CLB. After setting out the facts and the decision of the Regional
Director, the application was disposed of by the CLB in the following
manner: -
"5. The sole repository of the power conferred u/s.
224(7) is the Regional Director being the delegatee of the
Central Govt. If the Regional Director being the sole
repository of the power conferred u/s. 224(7) of the
Companies Act has declined to exercise jurisdiction
vested in him by law for the reasons stated by him, it is
open to R-1 to take appropriate remedial measures as
provided in law against such order. It is clarified that
pendency of CP No.1(ND) of 2010 before this Board
should in no manner be a ground for the Regional
Director to decline to exercise jurisdiction vested in him
by law under section 224(7) of the Companies Act 1956.
Exercising liberty given by the Regional Director the
Company may also choose to move a fresh application
before the Regional Director under section 224(7) for the
said purpose.
6. It is also seen that the present application CA
No.156/2013 has not been moved by R-1 company but
only by R-3 who is not shown to be the authorized by R-1
to file such application. Even the affidavit of R-3 does
not reveal that she has been authorized by the company
to file the application on behalf of R-1 company.
7. With the aforesaid clarification, the application
CA No.156/2013 is disposed off.
8. The matter is already listed on 22nd May 2013 at
10.30 A.M.
Sd/-
[Justice D.R. Deshmukh]
Chairman"
11. The present appeal has been filed against the aforesaid order
passed by the CLB on 26.04.2013 in Company Application
No.156/2013.
12. The contention of the appellant mainly is that the appeal raises
the question of the power of the CLB to pass orders under Section 402
of the Act and whether, having regard to the pendency of Co. Pet.
No.1(ND)/2010, the CLB was justified in law in not exercising the said
powers and in directing the applicant to move a fresh application
before the Regional Director under Section 224(7). It is further
submitted that having held that respondent No.3 did not have the
authority from respondent No.1 to file the application, whether the
CLB was right in law in proceeding to entertain and dispose of the
application. It is contended that these are important questions of law
which arise for consideration and my attention in this behalf was drawn
to para 2(a) of the present appeal. It is further contended on behalf of
the appellant that the question of removal or continuance of the
statutory auditors M/s. Vinod Sanjeev Bindal & Co. was inextricably
inter-twined with the proceedings pending before the CLB under
Sections 397 and 398 of the Act, a position which was accepted even
by the Regional Director and, therefore, it was only the CLB which
had the power to deal with the application filed by respondent No.1
before the Regional Director, as rightly held by him. My attention was
drawn to the findings of the Regional Director, particularly sub-
paragraph (iv) of para 4 of his order in which he has observed that the
issue of removal of the auditors is under consideration before the CLB
in the pending petition under Sections 397 and 398 and, therefore, it
was the CLB, with its vast powers under Section 402, which can
regulate the affairs of the company including the question of removal
of the statutory auditors. It is pointed out that no steps were taken by
the company (respondent No.1), which filed the application before the
Regional Director, against the order passed by the Regional Director
on 13.12.2012. The application filed before the CLB in Company
Application No.156/2013 was not filed by the company, but was filed
by a person (respondent No.3) who was admittedly not authorised by
the company to do so.
13. On behalf of the respondent, its learned counsel who appeard on
advance notice, submitted that respondent No.3 as one of the majority
shareholders was aggrieved by the order of the Regional Director
passed on 13.12.2012 and therefore could validly move an application
before the CLB and for this purpose there was no need to obtain any
authorisation from the company. It was submitted that the statutory
auditors are removed only by the majority shareholder in the annual
general meeting and not by the company and, therefore, if there is any
impediment in such removal, the majority shareholders is the person
who is aggrieved and who is entitled to agitate the matter before the
higher forum. It was submitted in this behalf that though Section
224(7) refers to the removal of the statutory auditors by the company,
the company acts only through human agency, which in this case is the
majority shareholders, of which respondent No.3 is one and if this right
to remove the statutory auditors is affected in any manner, it is open to
the individual shareholder, as part of the majority shareholders, to seek
the removal of the statutory auditors before the CLB, even if the
company does not take any step in this behalf. It is also argued that the
appellant herein cannot be said to be aggrieved by the order passed by
the CLB and that whatever objections he has, can be ventilated before
the Regional Director who stands seized of the matter, pursuant to the
directions given in the impugned order.
14. In the rejoinder, the learned counsel for the appellant drew my
attention to paragraph 24 of the application filed before the CLB by
respondent No.3 in which it was stated that since the Regional Director
had waived his power to grant approval, it was not for the company
(respondent No.1) to approach the office of the Regional Director
again. Respondent No.3 further stated in the said paragraph that it is
open to the CLB to decide the matter and in fact requested the CLB to
decide the matter, which decision would be final and binding. The
submission is that having exhorted the CLB into rendering a decision,
respondent No.3 later changed her mind and requested the CLB not to
exercise the jurisdiction but to restore the matter for fresh decision by
the Regional Director, on steps being taken by the applicant. It was
further pointed out that even though it is true that it is only the
shareholders who exercise the right of removing the statutory auditors,
that is only an act of the company since a company has to necessarily
act through human agency; it is submitted that this principle, however,
cannot obliterate the corporate personality conferred upon the company
and the act of removal of the statutory auditors is an act of the
company, and not that of the majority shareholders.
15. As regards the question as to how the appellant is aggrieved by
the impugned order, it is submitted on behalf of the appellant that
during the financial year 2008-09 the appellant was undisputedly a
director of respondent No.1 and any attempt to remove the statutory
auditors of the accounts for the said financial year would act to the
prejudice of the rights of the appellant and, therefore, the appellant was
rightly aggrieved by the impugned order. It was also pointed out that it
was on 24.08.2009 that the respondents and their relatives were
allotted 73,170 equity shares which is an act of oppression. It is
claimed that there are no minutes of the Board meeting showing this
allotment.
16. The first question that falls for decision is whether there was a
valid application before the CLB so as to enable it to pass the
impugned order. Section 224(7) of the Act enables the company to
approach the Central Government for obtaining the previous approval
for removal of the auditors. Since it is the company which appoints the
auditors, it is the company which can remove them, subject to the prior
approval of the Central Government. In the present case, it was the
company which made an application to the Central Government (and
rightly so) for removal of M/s. Vinod Sanjeev Bindal and Co.,
Chartered Accountants. The Central Government acting through the
Regional Director (NR), Ministry of Corporate Affairs, opined that it
would not be proper to issue any order on the application of the
company since the petition under Section 397 and 398 was pending
consideration before the CLB. Accordingly no decision was taken on
the application of the company. However, it was observed by him that
the applicant-company may consider approaching the CLB for
necessary directions, if it so desired. The company‟s application
before the RD was not kept pending, but was disposed of. The
company was advised to apply again, after obtaining the directions
from the CLB in the matter. Thus it was the company which was given
the liberty to approach the CLB. What, however, happened was that
the company did not move any application before the CLB; it was
respondent No.3 who filed the application before the CLB in Company
Application No.156/2013. She was not authorised by the company to
file the application and this fact is not disputed by the respondents.
The CLB was also aware of the same and has said so in paragraph 6 of
the impugned order. Nevertheless it chose to dispose of the application
in the manner it did.
17. The consequence of the company not approaching the CLB and
not taking any steps against the decision of the Regional Director can
only be that the order of the Regional Director passed on 13.12.2012
became final. Since respondent No.3 was not authorised by the
company to file any application on its behalf before the CLB pursuant
to the order passed by the Regional Director, there was no valid
application by the company before the CLB. There was nothing for the
CLB to deal with or dispose of. However, as observed by the Regional
Director in paragraph 4(iv) of his order, the petition under Section 397
and 398 was pending before the CLB in which the issue of removal of
the auditor was also under consideration. This is also borne out by the
pleadings before the CLB in the said petition. If that is so, it would
have been open to the CLB, while disposing of the petition under
Section 397/ 398, to also deal with the question of the removal of the
auditor by virtue of its powers under Section 402 of the Act. The same
result, that is, that it was for the CLB which was seized of the petition
under Section 397/398 of the Companies Act to decide the question of
removal of the auditors would ensue even if it is assumed that there
was a valid application before the CLB seeking permission for the
removal of the auditors. Therefore, in both situations, that is to say,
where it is assumed that there was a valid application before the CLB
or where it is held that there was no valid application by the company
before the CLB, the consequence would be the same, viz., that the
CLB in exercise of its powers under Section 402 can take a decision in
the pending petition under Section 397-398, regarding the removal of
the auditors.
18. But then the learned counsel for the respondent submitted that it
is the shareholders of a company who appoint the auditors and under
Section 224(7) of the Act it is they who are entitled to remove him and
not the company. The contention is opposed to the language of the
provision which says that subject to the proviso to sub-section (5), any
auditor appointed under the Section may be removed from office
before the expiry of his term "only by the company in general
meeting", after obtaining the previous approval of the Central
Government in that behalf. The auditors can be removed only by the
company but the power has to be exercised in the general meeting of
the shareholders. There is always a distinction between the company
and its shareholders and this is the effect of registration of a company,
under Section 34 of the Act. Upon registration the company is
constituted as a distinct and independent person in law and is endowed
with special rights and privileges. It is in point of law a person distinct
from its members. This well-settled principle emanates from the
judgment of the House of Lords in the case of Salomon vs. Salomon &
Co. Ltd., (1897) Appeal Cases 22. There it was observed that a
company is at law a different person altogether from the subscribers to
the memorandum; it is not in law the agent of the subscribers or trustee
for them. In Tata Engineering and Locomotive Company Ltd. vs.
State of Bihar, AIR 1965 SC 40, it was held that a company being
distinct from its board of directors, they cannot seek to enforce a right
in their individual capacity which belongs to the company. Therefore,
appointment of the auditors or their removal is an act of the company
as a distinct and separate entity and cannot be said to be an act of the
shareholders merely because the company exercises such a right in the
general meeting. Counsel for the respondent would, however, contend
that such a distinction between the company and its shareholders
cannot be made in the present case since the order of the Regional
Director passed on 13.12.2012 affected the rights of the shareholder as
shareholder and, therefore, respondent No.3 was entitled to file an
application before the CLB, even though the company did not do so.
This contention runs counter to the settled principle. If regard is had to
the basic principle that the company is distinct from its shareholders, it
should follow that the cause of the company cannot be canvassed by a
shareholder acting individually and not on behalf of the company. It
has been found as a fact, which is not disputed before me, that
respondent No.3 was not authorised by the company to file the
application before the CLB; if she had been specifically authorised to
do so, then perhaps it would have been possible to argue that such
filing was an act of the company. The principle that a company, even
though a distinct corporate personality, can act only through human
agency is applicable where the company professes to act itself and this
principle cannot be pressed into service to support an argument that all
acts done by an individual shareholder are those of the company. The
principle of piercing the corporate veil cannot also be invoked since
that principle is normally invoked only to reveal the true identity of a
company and to expose those persons who seek to use the cloak of
corporate personality to hide and shun such exposure. Traditionally,
right from the days of the United States vs. Milwaukee Refrigerator
Transit Company, (1905) 142 F, where it was observed by Sanborn, J.
that "where the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud or defend crime, the law will
disregard the corporate entity and treat it as an association of
persons", the principle has been invoked only by the law to expose a
fraud or a wrong. According to Gower, piercing or lifting the
corporate veil is adopted when it is found that the principle of
corporate personality is too flagrantly opposed to justice, convenience
or the interests of the Revenue. No such situation arises in the present
case. It appears that the rule has never been invoked in any case
where a shareholder seeks to justify his act by saying that he and the
company are one and the same and when he acted, it amounted to the
company itself acting. It would be dangerous to accept such a
sweeping proposition. In other words where the law requires a
company to act or do a particular thing, it would be no answer for a
shareholder, who acts independently of the company, to invoke the
doctrine of piercing the corporate veil and contend that his act was
actually the act of the company. This position was recognised and
invoked by Badar Durrez Ahmed, J. (as he then was) of this court in
Prem Lata Bhatia vs. Union of India & Ors., (2004) 58 CL 217 =
(2003) 108 DLT 346, and the following observations are pertinent: -
"12. The question therefore is - can the corporate veil
be lifted in the present case to reveal the identity of the
person or persons behind it? In all cases where courts
have permitted the lifting of the corporate veil, it has
been so done to reveal the "true" identity of the company
and to expose those persons who sought to use the cloak
of corporate personality to hide and shun such exposure
with a view to "defeat public convenience, justify wrong,
protect fraud, or defend crime". I have not come across
any case where a shareholder himself seeks to remove
the veil and say to the court - "look, it is me, the
company is only a facade!" But, this is what the
petitioner wants this court to do to enable her to wriggle
out of her liability under clause 8. As observed by the
Supreme Court in Tata Engineering and Locomotive Co.
Ltd. (supra), it would not be possible to evolve a rational,
consistent and inflexible principle which can be invoked
in determining the question as to whether the veil of the
corporation should be lifted or not. Yet, the common
thread running through cases where lifting of the veil has
been permitted is that such lifting has always been sought
by persons outside the company and it has never
proceeded from those within and who hide behind the
veil. Essentially, lifting of the veil has been permitted to
prevent persons from taking refuge behind the veil and
thereby take advantage of the separate juristic identity of
the company. The doctrine has therefore been employed
by the courts to prevent persons from taking advantage of
their wrongs using the corporate entity as a shield. It
cannot, therefore, be employed for permitting the
petitioner to take advantage of her wrong in not taking
written consent of the Government before permitting the
said company to use the said shop. If the corporate veil
canot be lifted, the inevitable conclusion is that the
petitioner and the said company are separate and distinct
persons. Consequently, user by the said company of the
said shop in the facts narrated above would be in
violation of the terms and conditions of the license and,
in particular, of clause 8 thereof. Clearly, then, the
cancellation of the license would be in order. The
„domino effect‟ would be that the order of the estate
officer and ultimately the judgment of the Additional
District Judge upholding the eviction of the petitioner
would all be unassailable."
In the light of the above, I am unable to look at the act of respondent
No.3 in filing an application before the CLB as an act of the company
itself under any principle or authority.
19. It is true that the Regional Director, being the delegatee of the
Central Government, is empowered to accord previous approval under
Section 224(7) for the removal of the auditors on an application being
made to him by the company. However, clause (g) of Section 402 of
the Act which deals with the powers of the CLB vis-a-vis an
application under Section 397 or 398, confers wide powers upon the
CLB while dealing with the application. It states that the CLB may
pass any order under Section 397 or 398 providing for any matter,
other than those specified in clauses (a) to (f), for which in its opinion
it is just and equitable that provision should be made. The powers
under clause (g) are very wide and while exercising them the only
condition that needs to be satisfied is that there should be a nexus
between the order that may be passed under the aforesaid clause and
the object sought to be achieved by Sections 397 and 398. In Shanti
Prasad Jain vs. Union of India, 1978 Bom. LR 778, Tulzapurkar, J.
(as he then was) speaking for the Division Bench of the Bombay High
Court dealt with the powers of the Court under Section 402 of the Act
in extenso. In the opinion of the Division Bench, there are certain
provisions in the Companies Act which deal with corporate
management of a company through directors in normal circumstances,
while Chapter VI of the Act which includes Sections 397 to 409 deals
with emergent situations or extraordinary circumstances where the
normal corporate management has failed and has run into oppression
or mis-management and, therefore, steps are required to be taken to
prevent oppression and mis-management in the conduct of the
company‟s affairs. It was held that the powers of the Court under
Chapter VI cannot be curtailed by reading them subject to the
provisions contained under the other chapters of the Act dealing with
normal corporate management. The Court contrasted the provisions of
Part-A of Chapter VI with those of Part-B. Whereas Part-A dealt with
the powers of the Court (now Company Law Board), Part-B dealt with
the powers of the Central Government to prevent oppression or mis-
management. The Court noticed that while dealing with the similar
emergent situations or extraordinary circumstances, it has placed
restrictions or limitations on the powers of the Government acting
under Sections 408 and 409, but no restrictions or limitations of any
kind have been prescribed on the powers of the Court. It was observed
that if the legislature had desired to place any limitations on the powers
of the Court (now CLB) acting under Section 402, it could have stated
so, but did not. Moreover, the Court held that the topics or subjects
dealt with by Sections 397 and 398 are such that it becomes impossible
to read any restriction or limitation on the powers of the Court acting
under Section 402. The power of the Court under Section 397 is to
make such order as it thinks fit, with a view to bringing an end to the
matters complained of. It was held that having regard to the very wide
nature of the power conferred on the Court and the object which is
sought to be achieved through the exercise of such power, the only
limitation that could be impliedly read on the exercise of that power
would be that a nexus must exist between the order that may be passed
thereunder and the object sought to be achieved by Sections 397 and
398. The Court also noticed from Section 398 read with Section 402
that if the Court is required to provide for the regulation of the conduct
of the company‟s affairs in future because of oppression or mis-
management that has taken place in the course of normal corporate
management, the Court must have the power to supplant the entire
corporate management (or corporate mis-management) by resorting to
non-corporate management which may take the form of appointing an
administrator or special officer or a committee of advisors to be in
charge of the affairs of the company. It was eventually held by the
Division Bench of the Bombay High Court that the powers of the
Court under Section 402 of the Act cannot obviously have any regard
to or be subject to the other provisions dealing with the corporate form
of management.
20. The decision of the Bombay High Court (supra) highlights the
position that Section 402 comes into operation under extraordinary
circumstances and, therefore, the other provisions of the Act, which
apply under normal circumstances, cannot curtail the powers of the
Court exercised under that Section.
21. In Cosmosteel P. Ltd. and Ors. vs. Jai Ram Das Gupta and
Ors., AIR 1978 SC 375 = (1978) 48 COMPANY CASES 312, a three
Judge Bench of the Supreme Court, speaking through D.A. Desai, J.
was confronted with the question whether the direction of the Court
under Section 402 of the Act for purchase of its own shares by a
company, which involves a reduction in share capital, can be
implemented only by following the procedure prescribed by Sections
100 to 104 of the Act. The Supreme Court held that Sections 397 and
402 appear to constitute a code by themselves for granting relief to the
oppressed minority shareholders and for granting appropriate relief, the
Court has been conferred with a power of widest amplitude, including
the lifting of the ban imposed on the company by Section 77 from
purchasing its own shares. When the Court exercised this power under
Section 402 by directing the company to reduce its share capital by
purchasing its own shares, albeit contrary to Section 77 of the Act, it
cannot be expected that the power should be made subject to the
company following the procedure laid down in Sections 100 to 104.
According to the Supreme Court if such a limitation on the Court‟s
power is to be imposed, it would amount to holding that the statutory
power of the Supreme Court depends, for its exercise, upon the vote of
the members of the company. That would lead to an unacceptable
situation where the Court‟s direction could be defeated by the majority
of the shareholders voting against the reduction of the share capital.
This would make a mockery of the entire situation and would defeat
the relief granted by the Court to the minority shareholders against acts
of oppression and mis-management of the majority shareholders. Such
a situation, in the opinion of the Supreme Court, cannot be
countenanced.
22. The power of the Court under Section 402 can even extend to
directing something which is not provided in the Act. For instance it
has been held that the Court can direct the introduction of a clause in
the articles of association which runs contrary to Section 255 of the
Act (Shanti Prasad Jain vs. Union of India) (supra). In Motion
Pictures Association in re, 1984 (55) COMPANY CASES 375, a
Division Bench of this Court directed the alteration of the articles of
association of the company and modified an article capable of
preventing a duly elected representative body from functioning as
such. In Pearson Education INC vs. Prentice Hall India (P) Ltd. and
Ors, 134 (2006) DLT 450, a learned Single Judge of this Court (A.K.
Sikri, J., as he then was) held that the jurisdiction of the CLB under
Sections 397/398 and 402 is much wider and a direction can be given
even contrary to the provisions of the articles of association; it even
has the right to terminate, set-aside or modify any contractual
arrangement between the company and any person. It was further
observed that the just and equitable principle embodied in clause (g) of
Section 402 is an equitable supplement to the common law of the
company which is to be found in its memorandum and articles of
association. This judgment has been approvingly cited by the Supreme
Court in M.S.D.C. Radha Ramanan vs. M.S.D. Chandrasekara and
Anr., (2008) 6 SCC 750.
23. In Sangramsingh P. Gaekwad vs. Shantadevi P. Gaekwad,
(2005) 11 SCC 314 the Supreme Court held that the Court while
exercising its discretion is not bound by the terms contained in Section
402 of the Companies Act if in a particular fact situation any further
relief or reliefs, as the Court may deem fit and proper, are warranted.
24. Having regard to the settled legal position as above, I have no
hesitation in holding that notwithstanding that Section 224(7) of the
Act names the Central Government as the authority competent to
accord previous approval for the removal of the auditors on the
application of the company, it would still be open to the Company Law
Board, to accord or refuse such approval while dealing with a petition
under Section 397/398 of the Act provided the exercise of such a
power has a nexus with the object sought to be achieved by the
ultimate order passed under Section 402. In the case before me the
pleadings before the Company Law Board show that the removal of the
auditors was specifically raised. The relief claimed in paragraph 35(h)
of the petition before the CLB is as follows: -
"(h) Removal of the Auditors of the company if they
have been changed by the respondent No.2 & 3 and to
reappoint the previous Auditors who have been
reappointed in the AGM held on 29.9.2009."
25. The argument on behalf of the respondent that it is open to the
appellant to appear before the Regional Director and raise all
objections to the change of the auditors appears to me to be no
solution; it is only an argument of convenience. The argument is
without merit for two reasons. First, it is a question of exercise of the
wide powers under Section 402 by the Company Law Board. If the
CLB could examine the question of change of auditors - whether it is
an act of oppression or mis-management - while dealing with the
petition under Section 397 and 398, I do not think it would be proper to
relegate the appellant to the Regional Director; if the CLB can validly
exercise a power, it should be permitted, - nay, it is bound - to do so.
Secondly, it would be wholly inappropriate to permit two different
authorities to deal with what essentially is a single grievance. If, as
held by the CLB, the Regional Director is to deal with the question of
removal of the auditors, it would result in this situation, namely, that a
part of the grievance in the petition under Section 397-398 would be
dealt with by the RD, while the other parts of the same grievance
would be dealt with by the CLB. This would result in a very
anomalous situation. It is well-settled that oppression and mis-
management, within the meaning of Sections 397-398, are not
constituted by distinct and separate acts, but are constituted by a single
continuous act and it is not permissible to dissect the conduct of the
alleged oppressor into separate acts of oppression or mis-management.
In Shanti Prasad Jain vs. Kalinga Tubes Ltd., (1965) 35 Company
Cases 351, the Supreme Court, after a review of leading authorities
expressed the opinion that in a petition under Section 397, in addition
to showing that there is just and equitable cause for winding-up the
company, the petitioner must further show "that the conduct of the
majority shareholders was oppressive to the minority as members and
this requires that events have to be considered not in isolation but as
part of a consecutive story. There must be continuous acts on the
part of the majority shareholders, continuing up to the date of
petition, showing that the affairs of the company were being
conducted in a manner oppressive to some part of the members".
This is also the view in Halsbury's Laws of England, 4th Edition,
Volume 7, Para 1011. Logically it would be proper that the entire
petition under Sections 397 and 398 is dealt with by the CLB.
26. For the aforesaid reasons the impugned order passed by the CLB
is set-aside and the appeal is allowed. The CLB will now deal with the
question of removal of the auditors while disposing of the appellant‟s
petition under Sections 397 and 398 of the Companies Act.
(R.V. EASWAR)
JUDGE
AUGUST 26, 2013
hs
