AI Structured Summary
Not yet generated for this judgment
Judgment
S.K. Gangele, J.—Plaintiffs/appellants have filed this appeal against the order dt. 2.11.2007 passed by the trial Court in Civil Suit NO. 16A/2006. By the aforesaid order, the trial court has decided the issue No. 5, 8(A) and 8(B) as preliminary issues in regard to maintainability of the suit and the court has held that the suit is not maintainable and consequently dismissed the suit.
The plaintiffs/appellants field a suit for declaration and injunction that the sale deeds No. 1741 (kha) and 1742 (kha) dt. 4.10.1995 executed in favour of defendants No. 9 to 14 be declared null and void. The plaintiffs further sought a decree of permanent injunction.
Plaintiffs pleaded that the suit land was granted on lease by late Sadashivrao Shastri to the defendant No. 1 Gwalior Dairy Limited a private company incorporated under the Companies Act, on a rent of Rs. 108/- per year. Defendant No. 1 was in possession over the suit land upto the year 1995. Naib Tehsildar granted Bhumiswami rights in favour of defendant No. 1 of the aforesaid suit land. The Collector also held that defendant No. 1 acquired Bhumiswami rights of the suit property vide order dt. 10.11.1987. Thereafter, a writ petition was filed by one Ompraksh Sharma before the High Court. High Court dismissed the writ petition and held that the land is of the ownership of the defendant No. 1. Against the aforesaid order, an SLP was filed before the Hon''ble Supreme Court, which was registered as SLP No. 16052/1988. Hon''ble Supreme Court vide order dt. 16.8.1995 dismissed the aforesaid SLP. Plaintiffs further pleaded that the Company Law Board also passed an order of injunction against the company not to alienate the aforesaid land. In spite of this, the Board of Directors of the Company passed a resolution on 22.3.1994 and decided to return the suit land in favour of defendants No. 4 to 8, who are the legal heirs of deceased Sadashivrao Shastri. Thereafter, defendants No. 4 to 8 sold the land in favour of defendants No. 9 to 14 by registered sale deeds Nos. 1741 (kha) and 1742 (kha) dated 4.10.1995. The plaintiffs pleaded that the resolution of the company dated 22.3.1994 in regard to return the land in favour of the defendants No. 4 to 8 is null and void and thereafter execution of sale deeds Nos. 1741 (kha) and 1742 (kha) dated 4.10.1995 are also null and void. The plaintiffs also pleaded that they are the share holders of the defendant No. 1 Company, hence, they have interest in the affairs of the company. Since the Board of Directors passed the resolution in regard to return of the land of the Company without calling the meeting of share holders of the company, hence, the resolution is void ab initio and the Board of Directors had no power and authority to return back the land, which was declared by the competent authority of ownership of the company.
Defendant No. 1 in its written statement accepted the fact that the plaintiffs are the share holders of the company. It has been pleaded in the written statement that Board of Directors of the Company had taken a decision regarding return of the land in the interest of company. Defendant No. 1 further pleaded that it has no objection in regard to admissibility of the suit and jurisdiction of the civil court. Defendants No. 9 to 11 and 13 filed their separate written statements. Similarly, defendant No. 14 and legal heirs of defendants No. 10 also filed their separate written statement. They had taken a preliminary objection in regard to maintainability of the suit on the ground that the plaintiffs/appellants have no right to file the civil suit.
Trial Court framed seven issues and issue No. 5 was that whether the plaintiffs have right to file the suit and also whether they have a right to get the relief as claimed in the plaint.
The issue No. 5 was treated as preliminary issue and decided by the trial court vide order under challenge. The trial court held that the suit filed by the plaintiffs is not maintainable because they have no right to file the suit
Learned senior counsel appearing on behalf of the appellants contended that the order passed by the trial court is against the law. He further submitted that the plaintiffs/appellants are the share holders of the company and in accordance with Section 293 of the Companies Act 1956, the Board of Directors of a Public Company has no power to sell the land or otherwise dispose of the property of the company except with the approval of the general body in its meeting. Learned Senior counsel further submitted that the Memorandum of Association of the company does not override the provisions of the Companies Act, 1956. In support of his contentions, learned Senior Counsel relied on the judgment of the Hon''ble Supreme Court in the case of The Godhra Electricity Co. Ltd. and Another Vs. The State of Gujarat and Another,
Contrary to this, learned counsel for respondent No. 14 submitted that the trial court has rightly held that the appellants/plaintiffs have no authority and power to file civil suit. He further submitted that the appellants have remedy to file appropriate application under Sections 397 and 398 of the Companies Act, 1956. He further submitted that the appellants/plaintiffs could not seek the declaration that the sale deeds executed in favour of respondents No. 9 to 14 be declared null and void. Same arguments have been contended by Shri Anil Mishra, learned counsel for respondents No. 10, 11, 12 and 15. Learned counsel for the respondents in support of the contentions, relied on the following judgments:-
(i) Anil Gupta and Others Vs. J.K. Gupta and Others,
(ii) K.R.S. Narayana Iyengar and Others Vs. T.A. Mani and Others,
(iii) J.P. Srivastava and Sons Pvt. Ltd. and Others Vs. Gwalior Sugar Co. Ltd. and Others,
(iv) Roshan Lal Agarwal Vs. Sheoram Bubna and Others
It is an admitted fact that appellants/plaintiffs are the share holders of the company. As submitted by the learned counsel for the respondent No. 14, the total share capital of the company was of Rs. 10 lac at the relevant time of 20,000 shares of Rs. 50 each. The appellant No. 1 is having 8 shares of Rs. 50/- each and appellant No. 2 is having 10 shares of Rs. 50/- each of the company. It is also a fact as narrated above that the suit land was granted to the company on lease by Sadashivrao Shastri. Thereafter, the company was declared as Bhumiswami of the land by the Naib Tehsildar. The Collector also held that defendant No. 1 acquired Bhumiswami rights of the suit property vide order dt. 10.11.1987. Against the aforesaid order, one Ompraksh Sharma filed a writ petition before the High Court, which was dismissed and against the said order, an SLP was filed before the Hon''ble Supreme Court, which was registered as SLP No. 16052/1988. Hon''ble Supreme Court vide order dt. 16.8.1995 dismissed the aforesaid SLP. Company passed a resolution dt. 22.3.1994 for return of the land in favour of respondents No. 4 to 8, who are the legal heirs of Sadashivrao Shastri. The reason mentioned was that the Company was not in a position to manage the land neither it was in a position to pay the lease of Rs. 108/-. Memorandum of Association of the company, which is incorporated under the Companies Act, authorises the company to sell, develop, mortgage, dispose of the property of the company. The relevant Article 26 of the Memorandum of Association is as under:-
(26) To sell, improve, manage, develop, lease, mortgage, dispose of, turn to account or otherwise deal with all or any of the rights, property and undertakings of the Company.
Article 14 of the Article of Association of the company prescribes liability of the members, which is as under:-
Every member or his heirs, executors or administrators or other representative shall pay to the Company the portion of the Capital represented by his share or shares which may for the time being, remain unpaid therein, in such amounts at such time or times and in such manner as the Directors shall, from time to time, in accordance with the Company''s regulations, require or fix for the payment thereof.
Section 293 of the Companies Act prescribes certain restrictions on powers of the Board. The relevant Section is as under:-
Restrictions on powers of Board.-
(1) The Board of directors of a public company, or of a private company which is a subsidiary of a public company, shall not, except with the consent of such public company or subsidiary in general meeting,-
(a) sell, lease or otherwise dispose of the whole, or substantially the whole, of the undertaking of the company, or where the company owns more than one undertaking, of the whole, or substantially the whole, of any such undertaking;
(b) remit, or give time for the re-payment of, any debt due by a director [except in the case of renewal or continuance of an advance made by a banking company to its director in the ordinary course of business];
(c) invest, otherwise than in trust securities, [ the amount of compensation received by the company in respect of the compulsory acquisition, after the commencement of this Act], of any such undertaking as is referred to in clause (a), or of any premises or properties used for any such undertaking and without which it cannot be carried on or can be carried on only with difficulty or any after a considerable time;
(d) borrow moneys after the commencement of this Act, where the moneys to be borrowed, together with the moneys already borrowed by the company (apart from temporary loans obtained from the company''s bankers in the ordinary course of business), will exceed the aggregate of the paid-up capital of the company and its free reserves, that is to say, reserves not set apart for any specific purpose; or.
(e) contribute after the commencement of this Act, to charitable and other funds not directly relating to the business of the company or the welfare of its employees, any amounts the aggregate of which will, in any financial year, exceed [fifty thousand rupees], or five per cent, of its average net profits as determined in accordance with the provisions of sections 349 and 350 during the three financial years immediately preceding whichever is greater.
[Explanation I. - Every resolution passed by the company in general meeting in relation to the exercise of the power referred to in clause(d) or in clause (e) shall specify the total amount up to which moneys may be borrowed by the Board of directors under clause (d) or as the case may be, the total amount which may be contributed to charitable and other funds in any financial year under clause (e).
Explanation II.- The expression "temporary loans" in clause (d) means loan repayable on demand or within six months from the date of the loan such as short term, cash credit arrangements, the discounting of bills and the issue of other short-term loans of a seasonal character, but does not include loans raised for the purpose of financing expenditure of a capital nature.]
Explanation [III]. - Where a portion of a financial year of the company falls before the commencement of this Act, and a portion falls after such commencement, the latter portion shall be deemed to be a financial year within the meaning, and for the purposes, of clause (e).
(2) Nothing contained in clause (a) of sub-section (1) shall affect-
(a) the title of a buyer or other persons who buys or takes a lease of any such undertaking as is referred to in that clause, in good faith and after exercising due care and caution; or
(b) the selling or leasing of any property of the company where the ordinary business of the company consists of, or comprises, such selling or leasing.
(3) Any resolution passed by the company permitting any transaction such as is referred to in clause (a) of sub-section (1) may attach such conditions to be permission as may be specified in the resolution, including conditions regarding the use, disposal or investment of the sale proceeds which may result from the transaction:
Provided that this sub-section shall not be deemed to authorise the company to effect any reduction in its capital except in accordance with the provisions contained in that behalf in this Act.
(4) The acceptance by a banking company, in the ordinary course of its business, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise, shall not be deemed to be a borrowing of moneys by the banking company within the meaning of clause(d) of sub-section(1).
(5) No debt incurred by the company in excess of the limit imposed by clause (d) of subsection (1) shall be valid or effectual, unless the lender proves that he advanced the loan in good faith and without knowledge that the limit imposed by that clause had been exceeded.
The aforesaid section prescribes that a Public Limited Company shall not with the consent in general meeting sell, lease or otherwise dispose of the whole, or substantially the whole, of the undertaking of the company. In the present case, 24 bighas of suit land was returned back by the Board of Directors of the Company without the consent of general body meeting. Admittedly, the plaintiffs/appellants have a right to participate in the general body meeting of the company being the share holders of the company. They can raise an objection in the general body meeting of the company about the resolution regarding return of the land passed by the Board of Directors in view of the fact that the company was declared Bhumiswami of the land. However, the consent of the general body had not been taken by the Board of Directors. Plaintiffs made a request in this regard, which was turned down on the ground that the Board of Directors had the power. In such circumstances, substantial rights of the appellants/plaintiffs were affected due to the act of the Board of Directors. Section 293 of the Companies Act, 1956 has not been considered by the trial court. The trial court has only held that in accordance with clause 28, 125 and 126 of the bye laws, the Board of Directors have power to dispose of the property of the company and share holders have no such power. In our opinion, the trial court has committed an error of law in not considering the fact that every share holder of the company has a right to participate in the meeting of general body and in the aforesaid meeting, the share holder has a right to object about the decision of the Board of Directors of the company in regard to disposal of the property of the company because in accordance with Section 293 of the Companies Act without approval of the General Body, the substantial portion of the property of the Company could not be disposed of by the Board of Directors. The statutory provisions of Section 293 of the Companies Act override the provisions of Memorandum of Association of the company.
Hon''ble Supreme Court in the case of Rustom Cavasjee Cooper Vs. Union of India (UOI), has held as under in regard to jurisdiction of the court to grant relief if the rights of the individual civil holders are impaired:-
Jurisdiction of the Court to grant relief cannot be denied, when by State action the rights of the individual share-holder are impaired, if that action impairs the rights of the Company as well. The test in determining whether the share holder''s right is impaired is not formal; it is essentially qualitative: if the State action impairs the right of the shareholders as well as to the Company, the Court will not, concentrating merely upon the technical, operation of the action, deny itself jurisdiction to grant relief.
The argument advanced by the learned counsel for the respondents that in view of Sections 397, 398 and 399 of the Companies Act, 1956 in regard to management and oppression, the suit filed by the appellants is not maintainable, could not be accepted because Sections 397 and 398 of the Companies Act, 1956 are in regard to oppression and management of the company. The aforesaid remedy is subject to the limitations prescribed u/s 399 of the Companies Act, 1956 and if the member is not having proper number of shares and support of share holders, it can not move the application. The remedy under Sections 397 and 398 of the Companies Act, 1956 is quite exhaustive, but in the present case rights of the plaintiffs/appellants, who are the share holders of the Company, have been impaired because the meeting of the general body was not called and the resolution passed by the Board of Directors was not approved in the meeting of general body. In such circumstances, in our opinion, in accordance with the judgment of the Hon''ble Supreme Court in the case of R.C. Cooper (supra), the civil suit is maintainable. Consequently, the appeal is allowed. The impugned order passed by the trial court is hereby set aside. It is held that the civil suit filed by the appellants/plaintiffs is maintainable. The issue No. 5 is answered accordingly. The parties shall bear their own costs. The observations made in this order be treated preliminary in nature. The trial court has liberty to decide the suit on merits in accordance with law.