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Wednesday, January 7, 2015

CIVIL APPEAL NO. 2481 OF 2014 Darius Rutton Kavasmaneck …Appellant Versus Gharda Chemicals Limited & Others …Respondents

                                                                  REPORTABLE

                        IN THE SUPREME COURT OF INDIA
                        CIVIL APPELLATE JURISDICTION

                       CIVIL APPEAL NO.  2481 OF 2014


Darius Rutton Kavasmaneck                    …Appellant

                                  Versus

Gharda Chemicals Limited & Others            …Respondents









                               J U D G M E N T



Chelameswar, J.


1.    The first respondent is  a  company  under  the  Companies  Act,  1956
(hereinafter referred to as “the  Act”).   Two  appellants  herein  who  are
mother (since deceased)  and  son  respectively  are  minority  shareholders
holding or otherwise controlling 17 per cent of  the  equity  in  the  first
respondent company.



HISTORY OF THE COMPANY

2.    First respondent company is  carrying  on  the  business  of  “selling
chemical process, knowhow and of manufacturing dyes, chemicals  and  textile
auxiliaries” etc.    It all started as a family firm in the year 1962  known
as M/s. Gardha Chemicals Industries.  The  above-mentioned  partnership  was
created by (1) the mother of the first appellant, (2)  the  husband  of  the
first appellant, (3)  a  sister  of  the  first  appellant  and  the  second
respondent - the brother of  the  first  appellant.   The  partnership  deed
contained a clause that none of the partners could sell  his/her  respective
share in the firm without offering it first to the other partners.

3.    On 6th March, 1967, a private limited company  was  incorporated  with
the principal object of taking over the assets and liabilities of the above-
mentioned partnership as a going concern.   Article 57 of  the  Articles  of
Association contained restrictions on the rights of all the shareholders  to
transfer their shares.  Any shareholder desiring to  sell  his  shares  must
offer his shares to the other shareholders of the company pro  rata  to  the
holding of each of such other members respectively at a fair value.[1]

4.    With effect from 17th  August,  1988,  the  first  respondent  company
became a public company (under Section 43A (1A) of the Act) as its  turnover
exceeded the limit prescribed thereunder:
“43A.        ******          ******     ******
             ******          ******     ******

(1A)  Without prejudice to the provisions  of  sub-section  (1),  where  the
average annual turnover of a private company, whether in  existence  at  the
commencement  of  the  Companies  (Amendment)  Act,  1974,  or  incorporated
thereafter, is not, during the relevant period, less than rupees one  crore,
the private company  shall,  irrespective  of  its  paid-up  share  capital,
become, on and from the expiry of a period of three  months  from  the  last
day of the relevant period during which the private  company  had  the  said
average annual turnover, a public company by virtue of this sub-section;

Provided that even  after  the  private  company  has  so  become  a  public
company, its articles of association may include provisions relating to  the
matters specified in clause (iii) of sub-section (1) of Section  3  and  the
number of its members may be, or may at any time be reduced, below seven.”


5.    One important development in  the  history  of  the  first  respondent
company relevant for the decision of the  instant  appeal  is  that  on  2nd
April, 2001 a notice was issued calling for  extraordinary  general  meeting
of the first respondent company  scheduled to be  held  on  5th  May,  2001.
The purpose of the said meeting was to adopt a resolution for  amending  the
Articles of Association of the first respondent by inserting clause  (d)  to
Article 3 thereof.  The substance of the said  clause  is  to  prohibit  any
invitation or acceptance of deposits from persons other  than  the  members,
directors or the relatives of the members or the directors of  the  company.
According  to  the  respondents,  such  a   proposal   for   amendment   was
necessitated to comply with the requirements  of  the  newly  inserted  sub-
section (d) of Section 3(1)(iii)[2] which came to be inserted by Act  53  of
2000  w.e.f.  13.12.2000.   The  appellant  opposed  the  amendment  of  the
Articles of Association and the  amendment  could  not  be  carried  as  the
proposal failed to muster the requisite majority.

HISTORY OF THE LITIGATION:

6.    In the month of May, 2009, certain reports appeared in the media  that
the second respondent  was  proposing  to  sell  his  shares  in  the  first
respondent company which were at that  time  valued  at  approximately  1600
crores.  The appellant, therefore, filed a  Company  Petition  No.  132/397-
98/CLB/MB/2009 (hereinafter referred to  as  the  Company  Petition  132  of
2009)  before  the  Company  Law  Board,  inter  alia,  seeking  prohibitory
orders[3] against the 2nd and 3rd respondents from committing breach of  the
pre-emption  agreement  contained  in  Article  57  of   the   Articles   of
Association  referred  to  supra.   On  11th  December,   2009,   ad-interim
injunction order was passed by the Company Law Board restraining the  second
respondent from alienating his share without permission of the  Company  Law
Board.    However, the Company Petition No. 132 of 2009  was  heard  finally
and dismissed by an order dated 14th May, 2010.

7.    Aggrieved by  the  same,  the  appellants  preferred   Company  Appeal
No.24/2010 before the High Court of Bombay on 26th  June,  2010.   The  High
Court summarized the decision of the Company Law Board as under:
“75.  It is on this material that the company  petition  was  placed  before
CLB and heard accordingly.  The CLB firstly held that the  first  respondent
is a public company.  Once it is held to be  a  public  company,  then,  its
shares are freely transferable and the issue was to whether  any  preemption
clause/article restraining transferability of shares in  public  company  is
valid.  The Board held that the Article 57  does  contain  such  restriction
but, the Board relying upon a judgment of this Court in the case of  Western
Maharashtra Development Corporation Ltd. Vs. Bajaj reported  in  (2010)  154
Company Cases 593 (Bom)  held  that  such  an  clause  in  the  Articles  of
Association will not be applicable to 1st respondent company.   Once  it  is
held to be a public company, its shares  are  freely  transferable  and  the
Articles would not hold good as they are contrary to the  statute.   Holding
that violation of  such  an  clause  in  the  Articles  is  not  an  act  of
oppression, the petition came to be dismissed.”

The said appeal was finally heard and dismissed  by  the  impugned  judgment
dated 14th June, 2011.
      According to the appellants, the High Court held that –
“an agreement between shareholders of an unlisted public company  conferring
a right of preemption which is embodied  in  its  Articles  is  invalid  and
unenforceable.”              - SLP

8.    Elaborate submissions were  made  on  either  side  dealing  with  the
various provisions of the Companies Act as amended from time to  time.   The
learned counsel appearing on either side also submitted written briefs.

9.    According  to  the  written  brief  submitted  by  the  appellant  the
question that arises for  consideration  of  this  Court  is  summarized  as
follows: -
Whether on and after the bringing into force of  the  Companies  (Amendment)
Act,  2000,  the  status  and  character  of  Gharda  Chemicals  Ltd.  (R-1)
continued to be as that of a “hybrid  company”  (Section  43A  company)  and
whether this company and its members are bound by the terms of a  preemption
clause contained in Article 57 of the Articles of Association?

In our opinion, the REAL QUESTION is not whether after the Amendment Act  53
of 2000, the first respondent continued to be a private company or became  a
public company, But whether the amendment made by the  Act  53  of  2000  to
Sections 3 and 43A destroys the rights and obligations  created  by  Article
57 of the Articles of Association of the first respondent company.

10.   The case of the appellants all through has been  that  notwithstanding
the amendment of the Act by the Amendment Act 53 of 2000, Article 57 of  the
Articles of Association still governs the  rights  of  the  members  of  the
first respondent Company.

11.   On the other hand, the case of the respondents has always been and  is
that the first respondent company is a public company having had  become  so
by the operation of law i.e., Section 43A(1) and  it  cannot  now  become  a
private company.  There is nothing in the Amendment Act  53  of  2000  which
automatically renders a public company created under Section 43A  to  become
a private company.  It is also the case of the respondents that the  failure
to amend the Articles of Association to give effect to Section  3(1)(iii)(d)
ipso facto make the first respondent  a  public  company  thereby  rendering
Article 57 inoperable.

12.   We shall deal with those arguments  later  in  the  judgment.   Before
dealing with these various arguments, we deem it appropriate to examine  the
relevant provisions of the Companies Act, and the  various  amendments  made
to the Act from time to time.

SCHEME OF THE RELEVANT PROVISIONS OF THE COMPANIES ACT:

13.   The Companies Act, 1956, (hereinafter referred to as ‘the Act’) as  it
was  originally  enacted,  contained  only  the  definition  of  a  ‘private
company’  under  Section  3(1)(iii)[4]  to  mean  a  company[5]  [a  defined
expression under Section 3(1)(i)] which, by its articles (a)  restricts  the
right to transfer its shares, if  any[6],  (b)  limits  the  number  of  its
members to fifty and (c) prohibits any invitation  to  public  to  subscribe
for any shares or debentures for the company.

14.   Section 27(3) of the Act stipulates:

“In the case of a private company  having  a  share  capital,  the  articles
shall contain provisions relating to the matters  specified  in  sub-clauses
(a), (b) and (c) of clause (iii) of sub-section (1) of  section  3;  and  in
the  case  of  any  other  private  company,  the  articles  shall   contain
provisions relating to the matters specified in  the  said  sub-clauses  (b)
and (c).”

This sub-section makes it clear that to be a private company either with  or
without share capital the Articles  of  Association  of  such  company  must
necessarily provide for the matters specified in Section  3(1)(iii)  of  the
Act. In the case of a private company  limited  by  share  capital  all  the
three requirements specified in clauses (a), (b) and (c) of clause (iii)  of
sub-section (1) are to be provided.  In the case of a private company  other
than a company having share capital only matters specified  in  clauses  (b)
and (c) of the above sub-section are to be stipulated.

15.   Part-II of the Act deals with incorporation  of  company  and  matters
incidental thereto.  A brief survey of  the  said  Part  insofar  as  it  is
relevant for the purpose of this case is necessary.

16.   Section 12 deals with the  mode  of  forming  incorporated  companies,
either public or private.  It stipulates that an  incorporated  company  may
be formed by two or more persons in the case of a private company and  seven
or more persons in the case of a public company by subscribing  their  names
to a memorandum of association and complying with other requirements of  the
Act in respect of registration.

17.   Section 26 of the Act mandates inter  alia  that  in  the  case  of  a
private company limited by shares, there shall  be  registered  (along  with
the memorandum),
Articles of Association signed by the subscribers of the  memorandum.   Such
Articles of Association must prescribe the regulations for the company.
“Section 26. Articles prescribing regulations.—There may in the  case  of  a
public company limited by  shares,  and  there  shall  in  the  case  of  an
unlimited company or a company limited by guarantee  or  a  private  company
limited  by  shares,  be  registered  with  the  memorandum,   articles   of
association  signed  by  the  subscribers  of  the  memorandum,  prescribing
regulations for the company.”


18.   The Act came  to  be  amended  by  Act  65  of  1960.    By  the  said
amendment, Section 43A came to be inserted in the said Act.   It  originally
contained eight sub-sections. Sub-Section  (1)  declared  that  any  private
company which has a share capital, of which  twenty-five  per  cent  of  the
paid-up share capital is held by “one or more bodies corporate”[7] become  a
public company.

19.   The relevant part of sub-Section (1) reads as under:

“43A. Private company to become public company in certain cases -  (1)  Save
as otherwise provided in this section, where not less than  twenty-five  per
cent of the paid-up share capital  of  a  private  company  having  a  share
capital is held by one or more bodies corporate, the private company shall,-


      *****            *****            *****
      *****            *****            *****
become by virtue of this section a public company.”

20.   Such companies popularly came to be  called  DEEMED  PUBLIC  COMPANIES
(they are referred to by the learned counsel for the  appellant  as  “HYBRID
Companies”) though Section  43A  does  not  use  that  expression.   In  our
opinion,  Section  43A  only  creates  a  new  class  of  PUBLIC   companies
-answering the description  contained  therein  though  they  have  and  can
retain all the attributes of a PRIVATE  COMPANY  as  defined  under  Section
3(i)(iii).  These  companies  are  hereinafter  referred   to   as   “HYBRID
Companies” for the sake of convenience.

21.   Obviously, the question of private  companies  without  share  capital
becoming public companies does not arise. Bodies corporate cannot hold  non-
existent  shares  in  such  private  companies.   Sub-Section  (1)  has  two
provisos.  An examination of the contents of the first proviso  is  relevant
and necessary for the purpose of this case. We  shall  deal  with  the  same
separately.

22.   Sub-section (2) mandates that within three months  from  the  date  on
which a private company becomes  a  public  company  by  virtue  of  Section
43A(1), the company shall inform the Registrar that it has become  a  public
company.    It  also  mandates  that  the  Registrar  shall  make  necessary
consequential alterations of the records.

23.   The language and implication  of  sub-section  (2)  will  be  examined
later in the judgment.

24.    We  are  not  concerned  with  sub-Section  (3).    Sub-Section   (4)
contemplates the possibility of  a  private  company  which  becomes  public
company by virtue of the operation of Section  43A  once  again  becoming  a
private company.  It stipulates that any private  company  which  becomes  a
public company by virtue of Section 43A(1) shall continue  to  be  a  public
company, until such time it becomes a public company in accordance with  the
provisions of the Act.  Such a re-conversion requires the  approval  of  the
Central Government.
“(4) A private company which has become a public company by virtue  of  this
section shall continue to be  a  public  company  until  it  has,  with  the
approval of the Central Government and in accordance with the provisions  of
this Act, again become a private company.”

25.   Sub-section (5) provides for penalties for defaults in complying  with
the mandate of sub-Section (2).   Sub-Sections (6) and (7) were  omitted  by
the  Amending  Act  31  of  1988.   Sub-Section   (8)   prescribes   certain
obligations attached to such public companies, the details of which may  not
be necessary.

26.   By the Amendment Act 41 of 1974, sub-Sections (1A) and  (1B)  came  to
be inserted in Section  43A.    By  the  newly  inserted  sub-sections,  the
legislature declared that two  more  classes  of  private  companies  become
public companies on the happening of the events specified  in  each  of  the
newly introduced sub-sections.

27.   Sub-section (1A)  declares  that  a  private  company  whose  “average
annual turnover” “during the relevant period” is not less  than  Rs.1  crore
becomes public company.
 “(1A) Without prejudice to the provisions of  sub-section  (1),  where  the
average annual turnover of a private company, whether in  existence  at  the
commencement  of  the  Companies  (Amendment)  Act,  1974,  or  incorporated
thereafter, is not, during the relevant period, less  than  such  amount  as
may be provided, the private company  shall,  irrespective  of  its  paid-up
share capital, become, on and from the expiry of a period  of  three  months
from the last day of the relevant period during which  the  private  company
had the said average annual turnover, a public company  by  virtue  of  this
sub-section :

Provided that even  after  the  private  company  has  so  become  a  public
company, its articles of association may include provisions relating to  the
matters specified in clause (iii) of sub-section (1) of section  3  and  the
number of its members may be, or may at any time be reduced, below seven.”


28.   The amount of Rs.1 crore mentioned originally in the  sub-section  (1)
is substituted by the Act 31 of 1988 with the words “such amount as  may  be
provided”.

29.   Sub-section (1B) declares that any private company  holding  not  less
than 25 per cent of the paid up share capital  of  a  public  company  shall
become a public company.   Both the sub-sections  contain  a  proviso  each,
which are ipsissima verba.  The implications of  such  provisos  along  with
the implication of the proviso to sub-Section (1) shall be  examined  later.

“(1B) Where not less than twenty-five per cent of the paid-up share  capital
of a public company, having share capital, is held  by  a  private  company,
the private company shall,-

on and from the date on which the aforesaid percentage is first held  by  it
after the commencement of the Companies (Amendment) Act, 1974, or

where  the  aforesaid  percentage  has  been  first  so  held   before   the
commencement of the Companies (Amendment) Act, 1974 on and from  the  expiry
of the period of three months from the date  of  such  commencement,  unless
within that period the aforesaid percentage  is  reduced  below  twenty-five
per cent of the paid-up share capital of the public company,

become, by virtue of this sub-section, a public company, and  thereupon  all
other provisions of this section shall apply thereto :

Provided that even  after  the  private  company  has  so  become  a  public
company, its articles of association may include provisions relating to  the
matters specified in clause (iii) of sub-section (1) of section  3  and  the
number of its members may be, or may at any time be reduced, below seven.”


30.   Sub-sections (9) to (11)  of  Section  43A  came  to  be  inserted  by
various amending acts.   The complete details of the contents of  all  these
sections and their legislative history is not necessary  for  us  except  to
note that in the explanation appended to sub-section  (9),  the  expressions
“relevant period” and “turnover” occurring in sub-Section (1) and  (1A)  are
defined as follows:-
Explanation – For the purposes of this section, -

“relevant period” means the period of three consecutive financial years, -
Immediately preceding the commencement of  the  Companies  (Amendment)  Act,
1974 ,or
A part of which immediately preceded such commencement and  the  other  part
of which immediately, followed such commencement, or
Immediately following such commencement or at any time thereafter;

(b)    “turnover”,  of  a  company,  means  the  aggregate  value   of   the
realization made from the sale,  supply  or  distribution  of  goods  or  on
account of services rendered, or both, by the  company  during  a  financial
year;


31.   Act 31 of 1988 inserted  sub-section  (1C)  which  declares  that  any
private company accepting deposits from “the public other than its  members,
directors or their relatives” (hereinafter referred to as “PUBLIC”  for  the
sake of convenience) pursuant to such invitation made  by  an  advertisement
after the commencement of the Amendment Act  i.e.  15.6.1988  or  renews  an
existing deposit becomes a public company.   Even  sub-section  (1C)  has  a
proviso in terms which are identical with the provisos to Section  (1A)  and
(1B).
“(1C) Where, after the commencement of the Companies (Amendment)  Act,  1988
a private company accepts, after an invitation is made by an  advertisement,
or renews, deposits from the public, other than its  members,  directors  or
their relatives, such private company shall, on and from the date  on  which
such acceptance or renewal as the case may be,  is  first  made  after  such
commencement, become a public company and thereupon all  the  provisions  of
this section shall apply thereto:

      Provided that even after the private company has so  become  a  public
company, its articles of association may include provisions relating to  the
matters specified in clause (iii) of sub-section (1) of section  3  and  the
number of its members may be, or may at any time be, reduced below seven.”


32.   Thus, it can be seen that by the date of amendment of Section  43A  by
the Act 53 of 2000 under Section 43A, there  are  four  classes  of  private
companies which are declared by the said section to become public  companies
on the happening of an event mentioned in each of the sub-sections.

 33.  It is also necessary to note that each  of  the  above-mentioned  four
sub-sections contained a proviso.  The tenor of all  the  four  provisos  is
identical.
“Provided that even after  the  private  company  has  so  become  a  public
company, its articles of association may include provisions relating to  the
matters specified in clause (iii) of sub-section (1) of section  3  and  the
number of its members may be, or may at any time be reduced, below seven.”

34.   Each one of these provisos declare that even after a  private  company
becomes a public company by virtue of the operation of any one of  the  four
sub-Sections i.e. (1), (1A), (1B) and (1C) of Section 43A; the  Articles  of
Association of such company may include provisions relating to  the  matters
specified in Section 3(1)(iii).   The  provisos  further  declare  that  the
number of members of such company “may be or may at  any  time  be  reduced,
below seven”.  The implications of the provisos require an examination.

35.   The provisos permit the continuance of stipulations  in  the  Articles
of Association  of  such  public  companies  which  relate  to  the  matters
specified in Section 3(1)(iii).    In  other  words,  though  the  companies
whose Articles of Association  provide  for  matters  specified  in  Section
3(1)(iii) are private companies, and under the scheme of the  Companies  Act
a public company  cannot  have  such  stipulations,  Section  43A  expressly
permit the four classes of public  companies  to  retain  such  Articles  of
Association.

36.   Secondly, the relaxation under the proviso  regarding  the  membership
of such companies getting reduced  below  seven  is  meant  to  obviate  the
conflict with the requirement of Section 12  which  requires  a  minimum  of
such seven persons to constitute a public company.

37.   The employment of the expression “may” in the  clause,  “its  Articles
of  Association  may  include  provisions  relating  to  the  matters”  only
indicates that a private company which becomes a public  company  by  virtue
of the operation of any one of the four  sub-sections  of  Section  43A  has
choice  either to retain those stipulations in its Articles  of  Association
relating to the matters specified under Section 3(1)(iii) or  to  amend  its
Articles of Association either deleting all  or  some  of  the  stipulations
relating to matters specified in Section  3(1)(iii)  from  its  Articles  of
Association. The reason is that a private  company  has  certain  privileges
and exemptions under the Companies Act in the sense that a  private  company
is subject to a lesser degree of regulation  under  the  provisions  of  the
Companies Act, than a public company.   The moment private  company  becomes
a public company, either by operation of law or the volition of its  member,
such  company  becomes  subject  to  a  more  rigorous  regulation  of   its
activities by the various provisions of the  Companies  Act.   At  the  same
time, a public company has certain advantages under law.  Therefore,  it  is
for the company and its members  to  decide  whether  the  restrictions  and
limitations contained in the Articles of Association  referable  to  matters
specified in Section 3(1)(iii) should still continue even after the  company
lost the exemptions and privileges attached to a private company.

38.   Section 43 of the Companies  Act  recognizes  the  existence  of  such
privileges  and  exemptions  by  declaring  that  a  private  company  which
defaults in complying with any one of the stipulations made in its  Articles
of Association relating to the matters specified  under  Section  3(1)(iii),
such Company “shall cease to be entitled to the  privileges  and  exemptions
conferred on private companies by or under  this  Act  and  this  Act  shall
apply to the Company as if it were not a private company.[8]

39.   Therefore, these four provisos give an option to  the  company  either
to retain the original Articles of Association or alter them, but  there  is
no statutory compulsion to alter the Articles of Association.   Our view  is
fortified by the language of sub-Section (2) of Section 43A.
“(2) Within three months from the date on which a private company becomes  a
public company by virtue of this  section,  the  company  shall  inform  the
Registrar that it has become a public company as  aforesaid,  and  thereupon
the Registrar shall delete the word "Private" become the word  "Limited"  in
the name of the company upon the register and shall also make the  necessary
alterations in the certificate of incorporation issued to  the  company  and
in its memorandum of association.”


40.   It only obligates a private company which becomes a public company  by
virtue of the operation of Section 43A to inform the Registrar within  three
months from the date on which the private company becomes a public  company,
regarding the change in its status from ‘private’ to ‘public’.

41.   On receipt of such intimation, the Registrar is  required  to  make  a
change in the name of the company in his register and is  also  required  to
make necessary alterations in the ‘certificate of incorporation’  issued  to
the company and its ‘Memorandum of Association’.

42.   Sub-section (2) does not obligate either the company or the  Registrar
to make any changes in the Articles of Association.   No other provision  of
the Companies Act is brought to my notice which creates such an obligation.

43.   Sub-section (11) was inserted by Act 53 of 2000 which is the  bone  of
contention in the instant appeal and reads as follows:-

“(11) Nothing contained in this  section,  except  sub-section  (2A),  shall
apply on and after  the  commencement  of  the  Companies  (Amendment)  Act,
2000.”


The implication of the same requires  a  detailed  examination  at  a  later
stage of this judgment.


DECISION OF THE HIGH COURT:

44.   The High Court noted the history of Sections 3(1)(iii) and 43A of  the
Act and recorded a finding that in view  of  the  insertion  of  sub-section
(2A) in Section 43A by the Companies Amendment Act (Act 53 of 2000)–
“……… the concept of deemed public company under section 43A  and  introduced
by the Companies (Amendment)  Act  has  now  been  abolished  based  on  the
recommendation of the working group of Companies Act, 1956.”


45.   The High Court also recorded  a  finding  that  the  first  respondent
company is a public company[9].  The High Court  then  went  on  to  examine
whether there can be any restriction on the shareholder’s right to  transfer
shares in a public company.  The High Court reached  a  conclusion  that  in
view of the subsequent statutory amendments made in 1988  and  2000  to  the
Companies Act, Article 57 of  the  Articles  of  Association  of  the  first
respondent company would no longer govern the rights of its shareholders  to
transfer their shares.
“After 17th August 1988 and in any event after  dated  13th  December  2000,
the position has  undergone  a  change  and  Article  57  appearing  in  the
Articles of Association would no longer be the  governing  article.   It  is
not necessary to then consider the argument as to whether the  said  article
is void or not.  That article must give way to the statutory provision.   If
the shares of public company are freely transferable,  then,  the  statutory
provisions in that behalf will take such effect notwithstanding anything  to
the contrary contained in the Articles of Association of such company.   The
over-riding effect given to the Act by  section  9  cannot  be  ignored  and
brushed aside as desired by the appellants.”

46.   An alternative argument of the appellants that in  view  of  the  fact
the shares of the first respondent company are not listed shares, there  can
be a right of preemption, is rejected by the High Court.
“Their alternate argument that assuming that  GCL  is  public  company,  its
shares being nonlisted, there can be  a  right  of  preemption,  is  equally
unsound and not tenable.  There is no distinction made in the  Act  of  this
nature.   That argument is canvassed only by relying on  the  definition  of
the term  ‘listed  public  companies’  appearing  in  section  2(23A).   The
definition itself clarifies that a public  company  which  has  any  of  its
securities listed in any of the recognized stock exchange will be termed  as
listed public company. Nonetheless it remains a public  company  and  merely
because its shares are not listed in any recognized stock exchange does  not
mean that there  is  any  restriction  on  their  transfer.   They  are  and
continue to be freely transferable as they are shares of a  public  company.
The broad distinction as noticed  above,  between  the  term  ‘Private’  and
“Public” company, is enough to turn down this alternate argument.”

47.   The High Court also rejected the other submission  of  oppression  and
mismanagement pleaded by  the  appellants  as  the  basis  of  the  plea  of
oppression and mismanagement is the existence of  legally  valid  preemption
clause.  The High Court held–
“127.       Once all these arguments and contentions are dealt  with,  then,
other part of submissions of Mr. Samdani  on  oppression  of  minority  also
fail.  They are raised on the basis that the preemptive  right  is  defeated
by respondent Nos.2 to 5 by their several acts of omission  and  commission.
Once the preemptive right itself is  not  in  existence  by  virtue  of  the
statutory provisions in the field, then, there is no act of oppression.   As
held above, the plea of mis-management has been given up and  has  not  been
pursued.”

48.   The reasons which led to the above extracted conclusions of  the  High
Court are as follows:

    A)      Section 43A prior to its amendment by Amendment Act 53  of  2000
only provided for various situations in which a private  company  becomes  a
public company by operation of law but not vice-versa.
“112. …     In other words, this section  permitted  a  private  company  to
become a public company in certain  cases  and  once  the  word  private  is
deleted it becomes a public  company.   However,  there  was  nothing  which
permitted such public company to again become private company  and  that  is
achieved by insertion of section 43(2A).


    B)           The High Court also opined that in view of the  declaration
contained under sub-section (11) of section 43A, which was inserted  by  the
Amendment Act 53 of 2000, the entire Section 43A becomes inoperative  w.e.f.
13.12.2000 (the day on which the Amendment Act came into force)  except  for
sub-section (2A).  Thereby “the  concept  of  deemed  public  company  under
Section 43A” has “been abolished”.

“112. …….. Sub-section 43A(11) which also was inserted by  Act  53  of  2000
from 13th December 2000, clarified that nothing contained  in  section  43A,
save and except sub-section 2A shall apply on and after the commencement  of
Companies (Amendment) Act 2000.   In  other  words,  whole  of  section  43A
except for one sub-section viz., sub-section 2A ceases to  apply  after  the
commencement of Companies (Amendment) Act,  2000.   ……………….   Thus,  section
43A itself became inapplicable by virtue of sub-section 11.  The  effect  of
all this is that the concept of deemed public company under section 43A  and
introduced by the Companies (Amendment) Act has now been abolished based  on
the recommendation of the working group the Companies Act, 1956.”


      C)    The High Court held that though  the  first  respondent  company
was initially incorporated as a private company, it became a public  company
(in the language of the High Court ‘a DEEMED public company’) by  virtue  of
the operation of Section 43A (1A)  but  ceased  to  be  a  private  company.
Since its Articles of Association could not be amended  to  give  effect  to
the newly inserted clause (d) of Section 3(1)(iii) (introduced by Act 53  of
2000 w.e.f. 13.12.2000),  therefore, its status as ‘DEEMED  public  company’
itself lapsed w.e.f. 13.12.2000 and thereafter the first respondent  company
would only be a public company but not either a private company or a  DEEMED
public company whose Articles of Association could contain  restrictions  on
the transfer of shares of its members.

“115. It is clear from the factual position that the attempt  to  amend  the
Memorandum  and  Articles  of  Association  of  the  first  respondent   was
unsuccessful.  The said resolution proposed in the meeting held on  5th  May
2001 was not carried but in fact defeated. Once it was defeated,  then,  the
first respondent which had become a  public  company  on  17th  August  1988
continued with that status.  It would be  of  relevance  to  note  that  the
resolution was moved in the meeting held on 5th May 2001.   That  resolution
was defeated on that day. However, the  Companies  Amendment  Act  2000  had
come into effect already and to be precise  from  13th  December  2000.   On
13th December 2000, GCL was  not  a  deemed  public  company  but  a  public
company. Once it was a public company, then, the argument of the  appellants
that it continued to  retain  its  fundamental  and  basic  character  as  a
private company cannot be accepted.  The status is conferred  by  law.   The
status was sought to be changed or amended by moving an amendment to  insert
an additional clause (d) was defeated, then, there is no scope to alter  the
status of the respondent No.1 company by  either  terming  it  as  a  deemed
public company or a public  company  retaining  the  fundamental  and  basic
character of a private company.  Both these concepts are unknown to law.”



49.   SUBMISSIONS BY THE APPELLANTS:
(i)   On a plain reading of sub-Section (11), it is clear that  Section  43A
is  retained  on  the  statute  book  and  not  deleted  by  the   Companies
(Amendment) Act, 2000.  Had the Parliament  intended  to  completely  efface
all Section 43A companies, the surest  manner  would  have  been  to  delete
Section 43A from the statute.  The retention of Section 43A is an  extremely
strong indicator of the legislative intention  to  continue  recognition  of
existing “hybrid companies” even after 13.12.2001.

(ii)  This legislative intention is made clear by the  insertion  of  clause
(11) in Section 43A by the Companies (Amendment) Act, 2000 which reads:
“(11). Nothing contained in this section,  except  sub-section  (2A),  shall
apply on and after  the  commencement  of  the  Companies  (Amendment)  Act,
2000.”


The expression “nothing contained in this section  ..  shall  apply  on  and
after”, coupled with the retention of  Section  43A  on  the  statute  book,
clearly indicates that the legislature did not want  the  regime  of  hybrid
companies to lapse w.e.f. 13.12.2000.

(iii) Apart from retaining Section 43A on the statute book, Section  111(14)
of the companies Act, 1956 also remained in the statute after the  Companies
(Amendment) Act, 2000.  Section 111(14) reads:
“In this section “company” means a private company and  includes  a  private
company which had become a public company by virtue of Section 43A  of  this
Act.”

The justification for retaining a  specific  reference  to  Section  43A  in
Section 111 is that the status of deemed public companies  continued  to  be
recognized even after the 2000 amendment.  Had  the  Parliament’s  intention
been otherwise, Section 43A itself and all references in the Companies  Act,
1956 to Section 43A would have been deleted by the legislature.

(iv)  The insertion of sub-section (2A) into Section  43A  was  required  to
provide an exit route  on  and  after  13.12.2000  for  an  existing  hybrid
company which ceased to attract the operation  of  Section  43A(1)  -  (1C).
Prior to the 2000 amendment, where a hybrid company ceased  to  attract  the
operation of the relevant sub-section of Section 43A which had  rendered  it
a hybrid company with approval of the Central Government  was  mandatory  in
terms of sub-section 43A(4).  The 2000  amendment  removed  the  requirement
for Central Government approval.

(v)    Each  of  the  sub-sections  of  Section  43A  contained  a  specific
clarificatory proviso which preserved the essential character and status  of
a private  company.   Therefore,  to  construe  Section  43A  subsequent  to
13.12.2000 to destroy the essential character and status  of  the  companies
covered by Section 43A would be illogical.

(vi)  A “Company” is a legal vehicle for more than one person/collection  of
persons to come together and form an enterprise. The basic  terms  on  which
such persons would join together would be  contained  in  the  Memorandum  &
Articles of Association of such a company, creating rights  and  obligations
including the conditions subject to which shares are to  be  held.   When  a
person becomes a member of a company he agrees to be bound by the  covenants
in the Articles of Association  (Section  36[10]).   The  Articles  are  the
foundation on the basis of which shareholders of the company deal with  each
other.  In  the  case  of  a  company  such  as  the  Respondent  No.1,  the
application of Section 43A did  not  in  any  manner  disturb  the  existing
arrangements  among  the  shareholders  but  added  on  certain   regulatory
requirements. Assuming (whilst denying) that Section 43A  stood  effectively
“repealed” on and after 13.12.2000, there is nothing  to  suggest  that  the
intention of the legislature was  to  completely  disrupt  the  foundational
arrangement amongst shareholders across the country in tens of thousands  of
private limited companies.  In other words, assuming  there  was  a  repeal,
the status of every deemed public company reverts back to a private  company
and not a public company.    Should  the  status  of  every  hybrid  company
subsequent to the 2000 amendment be regarded as “public” that would  mean  a
destruction of various Articles  which  thought  permissible  in  a  private
company are illegal with regard to a public company.

(vii) It is settled position that unless the contrary intention appears,  an
enactment is presumed not to be intended to have a retrospective  operation.
 The amendment to the definition of a “private company” affects  its  status
and would affect  substantive  vested  rights  acquired  over  decades.   An
amendment which affects alteration in status/substantive  vested  rights  is
always presumed to be prospective in operation.

(viii)      By the Amendment Act  of  2000,  two  prospective  changes  were
introduced in the definition of a “private company” – first  regarding  such
a company having a minimum paid up capital of one Lakh and second that  such
a company in its  Articles  must  also  include  a  fourth  prohibition  (d)
regarding invitation or acceptance of deposits from persons other  than  its
members, directors or  their  relatives.    Consequently,  whilst  no  fresh
private company could be incorporated  after  the  Amendment  Act  of  2000,
unless it  met  with  the  new  amended  definition,  for  existing  private
companies, the 2000 Amendment made a provision by  introducing  sub-sections
(3) and (5)[11] thereby pre-existing  private  companies  were  required  to
increase their paid up capital within a period of two  years  to  meet  with
the minimum threshold of Rupees One Lakh now  introduced  by  the  Amendment
Act of 2000, no provision was contained for pre-existing  private  companies
to amend their Articles of Association to introduce the new  sub-clause  (d)
in its Articles.  Thus, the existing private companies were not required  to
amend their articles by introducing the fourth clause (d)  in  its  Articles
to retain their character of a private company.

50.   SUBMISSIONS BY THE RESPONDENTS:

(i)   With the introduction of the Amendment Act of 2000  on  13th  December
2000, an existing private company that does  not  have  clause  (d)  in  its
articles becomes a public company.  Any other construction of the  amendment
would result in the creation of two classes of private companies leading  to
discriminatory results.

(ii)  Neither the definition in Section 3(1) nor the other  sub-sections  of
Section 3 carve out an  exception  from  the  operation  of  clause  (d)  to
companies existing on 13.12.2000; and do not  prescribe  a  time  limit  for
insertion of the provisions to give effect to clause (d) in the Articles  of
Association. Therefore, such non-inclusion necessarily  led  to  the  result
(by operation of law) that all such private  companies  become  full-fledged
public companies on 13.12.2000 until they amended their articles to  include
the provisions of clause (d).

(iii) Section 43A (1C) was introduced to regulate the unhealthy practice  of
accepting deposits from the public by private  companies.   The  only  legal
consequence of Section 43A(1C) was to treat such  private  companies  to  be
public companies but that did not stop them from being  ‘private  companies’
who accepted deposits from the public.   Parliament  wanted  to  remedy  the
malpractice or ‘mischief’ of collecting deposits by  private  companies  and
it did so by the addition of clause (d) to Section 3(1)(iii)  on  13.12.2000
so as to mandatorily prohibit acceptance of deposits from the  public.    If
they did not incorporate the provisions of clause (d) in their articles  and
stop accepting  deposits  from  the  public  they  were  to  become  ‘public
companies’.

(iv)  The appellant voted against the resolution to  introduce  (d)  on  5th
May 2001 and issued his letter dated 6th  June  2001.   Therefore,  estopped
from arguing that the first respondent is a private company.

(v)   The fact that the first respondent is a public company and Article  57
is invalid has been conclusively held by  the  Bombay  High  Court  vide  an
earlier Order dated 14th November 2008 – which is a judgment in rem and  has
attained finality.

(vi)  The appellant applied for transfer of 5 shares  –  which  resulted  in
the total members exceeding 50.   The  fact  that  the  total  members  have
exceeded 50 is admitted.  Thus, the first respondent cannot claim  to  be  a
private company.

(vii) After the Amendment Act of 2000, S. 43A stands abolished;  Sub-section
2A is merely ministerial and  a  surplus;  As  first  respondent  is  not  a
private company after 13th  December  2000,it  cannot  be  a  deemed  public
company.

(viii)      Article 57 offends the principle of free  transferability  under
S. 111A(2) which was recognized under S. 22A of the SCRA and  is  recognized
by this Hon’ble Court in the case of Vodafone  International  Holdings  B.V.
v. Union of India, (2012) 6 SCC 613.


EXAMINATION OF THE CORRECTNESS OF THE CONCLUSIONS OF THE HIGH COURT:

(A)
51.   When the High Court recorded that “there was nothing  which  permitted
such  public  company  (companies  covered  under  Section   43A,   emphasis
supplied) to again become private company’,  obviously,  Section  43A,  sub-
section (4) escaped the attention of the High Court.  Sub-section (4) is  on
the statute book since the  inception  of  Section  43A.   At  the  cost  of
repetition, I reproduce it.
“(4)  A private company which has become a public company by virtue of  this
section shall continue to be  a  public  company  until  it  has,  with  the
approval of the Central Government and in accordance with the provisions  of
this Act, again become a private company.”


52.   Parliament always recognized the  possibility  of  a  private  company
(which becomes a public company by virtue of operation of Section 43A)  once
again reverting back to its status of a private company.

53.   The reasons are obvious. Each  one  of  the  events  stipulated  under
Section 43A sub-sections (1), (1A), (1B) and (1C) which have the  effect  of
converting a public company  into  a  private  company  is  transient.   For
example, if we take a case falling under sub-section  (1)  of  Section  43A,
i.e. a private company becoming a public company by virtue of the fact  that
25% of its shares are held by one or more bodies  corporate;  it  is  always
possible that at  some  point  of  time  such  bodies  corporate  decide  to
disinvest either completely or partially (thereby reducing their holding  to
less than 25%) their shares of such private company.  In such  a  case,  the
event or the condition which is essential to convert a private company  into
a public company under Section 43A (1) ceases  to  exist.   Similarly,  take
the case falling  under Section 43A(1B), i.e. a private company  becoming  a
public company by virtue of the fact that such a private company  holds  not
less than 25% of paid-up  shares  of  a  public  company;   If  the  private
company (becoming a public company, by virtue of operation  of  Section  43A
sub-section  (1B),  disinvest  its  shares  either  entirely  or   partially
(thereby reducing the  holding to less than 25%) in  the  share  capital  of
that public company, once again  the  condition/event  which  converted  the
private company into a public company ceases to exist.    Such  company  can
always revert back to its original status of a  private  company.   However,
sub-section (4) stipulates that such a reversion to the original  status  is
subject to the prior approval of the Central Government.

(B)
54.   The High Court recorded a finding that  after  the  amendment  to  the
Companies Act by Act 53 of 2000, only two  classes  of  companies  remained,
i.e. private and public companies and the third class  of  public  companies
under Section 43A (HYBRID companies) ceased to exist.   The  correctness  of
this conclusion is required to be examined.

55.   Obviously, from 1960 to  2000,  innumerable  private  companies  would
have become public companies (HYBRID) by virtue  of  the  operation  of  the
various sub-sections of Section 43A.  If the Parliament really wanted to  do
away with HYBRID companies, the best way would have been to  repeal  Section
43A. Because it is a settled principle of statutory interpretation that  the
repeal of an enactment effaces the repealed statute from  the  statute  book
ab initio thereby creating a fiction  in  law  that  such  a  statute  never
existed, and never created in any legal consequences except for  rights  and
obligations which emanated from various acts and omissions  covered  by  the
statute and are saved by the express provisions under the  repealed  act  or
by virtue of the provisions of  the  General  Clauses  Act.   Therefore,  by
repealing Section 43A, Parliament could have put an end to the existence  of
all HYBRID companies.  We are aware that there  can  be  other  technics  by
which the same result can be achieved.  Therefore,  it  is  required  to  be
examined whether the Act 53 of 2000 refers to achieve the same  result.   It
does not repeal Section 43A.  Sub-section (11) which came to be inserted  by
the said amendment in Section 43A only declares:-
“(11).      Nothing contained in  this  section,  except  sub-section  (2A),
shall apply on and after the commencement of the Companies (Amendment)  Act,
2000.”


56.   What exactly is the meaning of sub-section (11) is to be examined?

57.   There must be innumerable private companies in this country.  For  the
purpose of our analysis, they can be classified  into  two  categories,  (i)
private companies which came into existence prior to the  Amendment  Act  53
of 2000 (w.e.f. 31.12.2000); and (ii)  private  companies  which  came  into
existence after the abovementioned date.

58.    Insofar  as  the  first  of  the  abovementioned  two  categories  is
concerned they can further be categorized into (i) private  companies  which
remained as such, and (ii) private companies which became  public  companies
by virtue of operation of Section 43A.

59.   Insofar as private  companies  which  came  into  existence  prior  to
13.12.2000 and remained as such without falling into the net of Section  43A
and private companies which  came  into  existence  after  13.12.2000,  sub-
section (11) of Section 43A would have no application.

60.   The legal consequences emanating from insertion  of  sub-section  (11)
in Section 43A only visit the second category mentioned above  i.e.  private
companies which came into existence prior to 13.12.2000  but  became  public
companies by virtue of operation of Section 43A.

61.   Of them, we are only concerned  with  those  private  companies  which
became public companies by virtue of operation of Section 43A(1C), that  is,
those private companies which  had  accepted  deposits  from  PUBLIC.   Mere
acceptance  of  the  deposits  from  PUBLIC  prior  to  13.12.2000  did  not
contravene any law.   Such  acceptance  was  only  regulated  by  virtue  of
Section  58A.   Though  such  private  companies  were  treated  as   public
companies by virtue of Section 43A(1C) they were entitled to continue  those
stipulations   dealing   with   the   matters   specified   under    Section
3(1)(iii)(a)(b)&(c).  It is only w.e.f.  13.12.2000,  Section  3(1)(iii)  of
the Act came to be amended by inserting sub-clause  (d)  which  obligates  a
private  company  to  contain  a  prohibition  against  any  invitation   or
acceptance  of  deposits  from  PUBLIC  in  such   company’s   Articles   of
Association.

62.   What happens to those  private  companies  (obviously  there  must  be
innumerable) which existed prior to 13.12.2000  and  had  also  invited  and
collected deposits from PUBLIC as they were legitimately entitled to  do  so
prior to the amendment?  If the  conclusion  of  the  High  Court  that  the
concept of DEEMED public company is abolished is correct, all those  private
companies  should  become  public  companies   (not   HYBRID/DEEMED   public
companies) overnight until their Articles of Association are amended.  As  a
consequence thereof, their  respective  shareholders  lose  a  vested  right
flowing out of the Articles of Association (created  by  a  contract)  which
they  collectively  enjoyed  till  13.12.2000  to  restrict  the  right   of
individual shareholders to freely transfer their shares.  Such a  collective
right by definition inheres in the shareholders of  a  private  company  and
protected by virtue of proviso to Section 43A(1C) notwithstanding  the  fact
that such companies were treated as public companies  prior  to  13.12.2000.
To deprive the shareholders of HYBRID  companies  such  a  collective  right
would be too drastic a change overnight without giving any  option  or  time
to the HYBRID company and its members to retain the basic character  of  the
company as a private company.

63.   Though, in theory, it is open to the  legislature  to  create  such  a
situation, whether the Parliament intended such a drastic course  of  action
is the question. It must be remembered  that  in  the  ultimate  analysis  a
company is a voluntary association of its members  who  have  a  fundamental
right to form associations under Article 19(1)(c)  of  the  Constitution  of
India, the inference which is obvious from the text of the Constitution  and
also on cumulative reading of  the  decisions  of  this  Court  in  Damyanti
Naranga v. The Union of India & Others, (1971) 1 SCC  678,  Rustom  Cavasjee
Cooper v. Union of India, (1970) 1 SCC 248, Bennett Coleman & Co.  &  Others
v. Union of India & Others, (1972) 2 SCC 788. The fundamental right to  form
an association implies the right to form the association on such  terms  and
conditions agreed upon by its members, so long as such terms and  conditions
are not in conflict with any law or public  policy.   No  doubt,  the  State
can, by law, impose  restrictions  on  such  rights  on  the  basis  of  the
considerations mentioned in Article 19(4), but  such  restrictions  must  be
reasonable.

64.   The destruction of  the  collective  rights  of  the  members  of  the
companies mentioned in para 62, in our view, would require,  at  the  least,
an express provision of law and such  a  provision  must  be  a  ‘reasonable
restriction’ within the meaning of  that  expression  occurring  in  Article
19(4).  In the absence  of  any  express  provision  which  takes  away  the
fundamental right of the shareholders of a private company, we are  inclined
to read a restriction on the collective  right  of  the  shareholders  of  a
private company to restrict the right  of  the  individual  shareholders  to
freely transfer their shares.

65.   Our view is supported by the parliamentary  practice  and  history  of
the amendments made to the Companies Act itself.

66.   Under the Act 53 of 2000 when the definition  of  private  company  is
amended by inserting a clause by which  requirement  of  having  a  “minimum
paid up share capital of one lakh rupees or such higher paid up  capital  as
may be prescribed by  its  articles”  is  introduced  for  the  first  time,
Parliament also gave a window of 2 years for the private companies  existing
on the date of the commencement of the Amendment Act i.e.  13.12.2000.    By
Section 3(5)[12] it is declared that companies failing to  comply  with  the
newly introduced obligation “shall be deemed to be  defunct”  companies  and
their names “shall be struck off from the register”.   Parliament  not  only
gave a window period to the existing companies to take steps to comply  with
the amended law but also provided expressly for the consequences  to  follow
on the failure to comply with the law.

67.   One more reason for our inability to accept the  theory  of  abolition
of HYBRID companies is that – if accepted, the  Amendment  Act  53  of  2000
would  have  the  effect  of  retrospectively   taking   away   the   rights
collectively enjoyed by the shareholders (of private companies which  became
HYBRID  companies)  from  1956  onwards.   In  this  context,  it  is  worth
remembering the words of this Court in K.C. Arora  &  Another  v.  State  of
Haryana & Others, (1984) 3 SCC 281 at 294:
“The legislation is pure and simple, self-deceptive, if we may use  such  an
expression with reference to a  legislature-made  law.  The  legislature  is
undoubtedly competent to legislate with retrospective effect  to  take  away
or impair any vested right acquired under existing laws but since  the  laws
are made under a written Constitution, and have to conform to  the  dos  and
don’ts of the Constitution, neither prospective nor retrospective  laws  can
be made so as to contravene fundamental rights. The  law  must  satisfy  the
requirements of the Constitution today taking into account  the  accrued  or
acquired rights of the parties today. The law cannot say, 20 years  ago  the
parties had no rights, therefore, the requirements of the Constitution  will
be satisfied if the law is dated back by 20 years.  We  are  concerned  with
today’s rights and not yesterday’s. A  legislature  cannot  legislate  today
with reference to a situation that obtained 20  years  ago  and  ignore  the
march of events and the constitutional rights accrued in the course  of  the
20 years. That would be most  arbitrary,  unreasonable  and  a  negation  of
history. ... Today’s equals cannot be made unequal by saying that they  were
unequal 20 years ago and we will restore  that  position  by  making  a  law
today and making it  retrospective.  Constitutional  rights,  constitutional
obligations and constitutional consequences cannot  be  tampered  with  that
way. A law which if  made  today  would  be  plainly  invalid  as  offending
constitutional provisions in the context of the  existing  situation  cannot
become valid by  being  made  retrospective.  Past  virtue  (constitutional)
cannot  be  made  to  wipe  out  present  vice  (constitutional)  by  making
retrospective laws.”


68.   Apart from that, it is rightly pointed  out  by  the  appellant  –  if
Parliament really wanted to put an end to the existence of  all  the  HYBRID
Companies, Parliament should  have  deleted  all  reference  to  the  HYBRID
(Section 43A) companies in the Act.  But Section 111(14) still continues  to
make reference to Section 43A.

69.   Therefore, we are of the opinion that the concept of  HYBRID  (Section
43A) companies  is  not  altogether  abolished.  At  least  insofar  as  the
Companies  falling  under  Section  43A(1C)  are  concerned  which  were  in
existence on 13.12.2000 would continue as HYBRID Companies.

(C)
70.   The other conclusion of the High Court that the failure of  the  first
respondent company to amend its Articles of Association to  give  effect  to
clause (d) of Section 3(1)(iii) rendered the  first  respondent  company  to
cease to be a private  company,  in  our  opinion,  is  irrelevant  for  the
decision on the REAL question in this case.

71.   The REAL question is not whether the failure to amend the Articles  of
Association by the first respondent company rendered  the  first  respondent
company (which is  otherwise  a  private  company)  a  public  company,  but
whether such a failure destroyed the collective right of the members of  the
first respondent company to have shares whose transferability is subject  to
limitations and restrictions contained in Article  57  of  its  Articles  of
Association.

72.   Originally, Section 3(1)(iii) stipulated - to be a private  company  a
company’s  Articles  of  Association  are  required   to   contain   certain
stipulations with regard to the matters specified in  clause  (a),  (b)  and
(c).  By virtue of the Act 53 of 2000 w.e.f. 13.12.2000 a private  company’s
Articles of Association are  required  to  contain  additional  stipulations
relating to the matter  contained  in  clause  (d)  also.  The  question  is
whether the newly introduced requirement is applicable to  existing  private
companies also or only to those which come into existence subsequent to  the
commencement of the Act 53 of 2000?

73.   Section 27(3) mandates that the articles of a private  company  having
share capital (such as the  one  on  hand)  shall  only  contain  provisions
relating to matters specified  in  clauses  (a),  (b)  and  (c)  of  Section
3(1)(iii) but not matters relating to clause (d).  In  other  words,  though
the Parliament chose to introduce clause (d) in  Section  3(1)(iii)  (by  an
amendment in  the  year  2000),  did  not  think  it  necessary  to  make  a
corresponding amendment to Section  27(3).   Whether  such  an  omission  is
accidental or by a design is required to be examined?  If it is by a  design
what is the purpose sought to be achieved  of  such  a  design  requires  an
examination?

74.   The Companies Act never prohibited the acceptance of deposits.   Prior
to the Amendment Act of 2000, there  has  never  been  a  provision  in  the
Companies  Act  which  altogether  prohibited  companies  either  public  or
private from inviting or accepting  deposits.   Section  58A(1)[13]  of  the
Act, (which was introduced by Act 41 of 1974) for  the  first  time  made  a
provision enabling the Central Government to prescribe  “the  limits  up  to
which, the manner in which and the conditions subject to which deposits  may
be invited or accepted by a company either  from  the  public  or  from  its
members”.   The  remaining  sub-sections  of  Section   58A   make   various
stipulations regarding the method  and  manner  of  inviting  and  accepting
(after the insertion of the Section) deposits or  the  renewal  of  deposits
taken prior to introduction  of  the  Section  and  the  penalties  for  the
failure to comply with the stipulations contained in the said Section -  the
details of which are not  necessary  for  the  present  purpose.   But  even
Section 58A did not prohibit the acceptance of  deposits.   Irrespective  of
the fact whether a company accepting deposits is  a  private  company  or  a
public company, the invitation or acceptance of such deposits is  only  made
to strict regime of regulations under Section 58A.

75.   Then came, in 1988,  Section  43A(1C),  which  only  declared  that  a
private  company  either  accepting  deposits  from  or  renewing   existing
deposits (made either after or prior to  15.6.1988  respectively)  collected
from  “persons  other  than  its  members,  directors  or  their  relatives”
(hereinafter for the sake of convenience  referred  to  as  “PUBLIC”)  shall
become a public company.  But under the proviso to  sub-section  (1C),  even
after  becoming  a  public  company,  such  a  Company  can  retain   either
restrictions or limitations contemplated under Section 3(1)(iii).

76.   Therefore, the question is-what is the  effect  of  the  insertion  of
clause (d) in Section 3(1)(iii)?

Prior to 1988:
77.   Whether a Company should accept deposits  from  PUBLIC  or  not  is  a
policy choice only of the company  and  its  members.   Even  prior  to  the
introduction of Section 3(1)(iii)(d) & Section 43A (1C), the  members  of  a
private company could have either permitted or prohibited the  company  from
accepting deposits from PUBLIC or stipulated  conditions  subject  to  which
deposits could be taken. If  a  company’s  internal  policy  prohibited  the
acceptance of deposits from PUBLIC and  contrary  to  such  internal  policy
deposits are collected from PUBLIC it was always open to the members of  the
company to deal with the situation and the persons violating  the  company’s
policy.


78.   In 1988, the Parliament thought it necessary to  provide  for  a  more
rigorous control and scrutiny of the activities of accepting  deposits  from
PUBLIC by private companies and introduced sub-section (1C) of Section  43A,
thereby enabling the State to have a greater control over such  activity  of
such  private  companies  by  treating  them  as  public   companies.    The
regulations, control and supervision  to  which  the  management  of  public
companies is subjected to under the Act is higher in degree compared to  the
regulations, control and supervision to which the management  of  a  private
companies is subjected to under the  Act.  The  control  contemplated  under
Section 43A(1C) is in addition to the regulations  and  supervision  brought
in by virtue of Section 58A.
Before the amendment Act 53 of 2000:
79.   If a private company chose to incorporate a stipulation not to  accept
deposits from PUBLIC, it is a matter of its  internal  policy.   But  if  it
incorporated such a  stipulation  and  defaulted  in  compliance  with  such
stipulation, the Company only ceased “to be entitled to the  privileges  and
exemptions conferred on a private company by or under the Act” and the  “Act
shall apply to the company as if it were not a private company” – by  virtue
of the operation of Section 43[14]  which  only  creates  a  legal  fiction.
Section 43 does not declare that such companies do become  public  companies
unlike Section 43A.  On the other hand, the proviso to  Section  43  enables
the Central Government to condone the lapse of such private companies.
“Proviso to Section 43:

Provided that the Central Government on being satisfied that the failure  to
comply with the conditions was accidental or due to inadvertence or to  some
other sufficient cause, or that on other grounds it is  just  and  equitable
to grant relief, may, on the application of the company or any other  person
interested and  on  such  terms  and  conditions  as  seem  to  the  Central
Government just and expedient, order that the company be relieved from  such
consequences as aforesaid.”


80.   Notwithstanding the fact that the Parliament thought it necessary  for
the State to impose a higher degree of  control  over  the  affairs  of  the
management of such private companies inviting and  accepting  deposits  from
PUBLIC, Parliament did not think it necessary  to  restrict  the  collective
right of the members of a private company  to  impose  restrictions  on  the
right  of  individual  shareholders  to  freely  transfer  their  respective
shares.  Therefore, the proviso to sub-section (1C)  of  Section  43A.   For
that matter, in none of the four contingencies  contemplated  under  Section
43A(1), (1A), (1B) and (1C), Parliament thought  it  necessary  to  restrict
such collective right of  the  shareholders  of  a  private  company.   Such
private companies  are  to  be  treated  as  public  companies  for  certain
purposes.

81.   If a private company chooses not to incorporate the prohibition,  such
as the one contemplated under Section  3(1)(iii)(d),  and  accepts  deposits
from the public then such collection of deposits  is  regulated  by  Section
58A.  If it chooses to incorporate a stipulation but fails  to  comply  with
the same, it would attract the consequences mentioned in  Section  43  which
consequences are also avoidable under the proviso to Section 43.

82.   It must be remembered that the kind of control  which  the  Parliament
sought to impose on private companies which earlier  attracted  sub-sections
(1) to (1B) of Section 43A is now  thought  clearly  not  necessary  by  the
Parliament.  An inference obvious  from  Section  43A(11)  whatever  be  the
other implications of those sub-sections.

83.   Even during the period  when  Section  43A  operated,  the  Parliament
never thought of curtailing the collective  right  of  the  members  of  the
private  companies  to  have  restriction  on  the  rights   of   individual
shareholder to freely transfer shares.   Therefore,  to  believe  that  such
restriction is now sought to be imposed only in the case  of  those  private
companies in existence on 13.12.2000, which had  earlier  attracted  Section
43A(1C), but not in the case of private companies, which  earlier  attracted
sub-sections (1), (1A) and (1B), would be illogical.

84.   The insertion of clause (d) in Section 3(1)(iii)  is  admittedly  only
prospective.  Therefore, on and after 13.12.2000, if any  body  proposes  to
create a private company, the Articles of Association of such  company  must
contain a clause prohibiting the invitation and acceptance of deposits  from
PUBLIC.

85.   For all the abovementioned reasons, we are unable to  agree  with  the
submission of the respondents that by the Amendment Act 53 of 2000 and  more
particularly sub-section (11) of Section 43A,  the  Parliament  intended  to
curtail or destroy the collective right of  the  shareholders  of  a  HYBRID
company to impose restrictions on the rights of the individual  shareholders
to have unfettered right of transfer of their shares.   Such  a  restriction
which, in our view, constitutes a  restriction  on  the  fundamental  rights
under Article 19(1)(c), requires a more express legal authority  and  cannot
be brought in by inference.

86.   The effect of the amendment to Section 3(1)(iii) is:  insofar  as  the
private companies in  existence  on  13.12.2000,  if  they  choose  to  make
provisions in their Articles of Association to give effect  to  the  mandate
of Section 3(1)(iii)(d), they become  private  companies  w.e.f.  such  date
they make such provision by virtue of Section 43(2A) of the  Act.   If  they
do not make such an amendment,  they  would  still  continue  to  be  public
companies governed by Section 43A(1C) [HYBRID Companies]  and  can  continue
to have provisions in their Articles of  Association  referable  to  Section
3(1)(iii)(a), (b) & (c).

87.   Here, an argument of the respondent that  such  an  interpretation  of
sub-section (11) creates “two classes of private companies  and  would  have
discriminatory results” is required  to  be  answered.   In  our  view,  the
argument is based on a wrong premise.  It proceeds on the basis that  HYBRID
companies created prior  to  13.12.2000  are  private  companies.   We  have
already held that HYBRID companies are public companies  which  in  law  are
entitled  to  retain  some  features  of  the  private  companies   if   the
shareholders  choose  to  retain   them.    Therefore,   the   question   of
discrimination does not arise.

88.   Therefore, in  our  opinion,  the  failure  of  the  first  respondent
company to amend its Articles of Association to give effect  to  clause  (d)
of Section 3(1)(iii) does not effect the operation of its Article 57.

89.   That leaves us with two  more  questions  raised  by  the  respondents
herein.  They are contained in submissions (iv), (v) and (vi) noted  earlier
in the judgment.  In fact, submissions  (iv)  and  (v)  are  interconnected.
The substance is that in  view  of  the  fact  that  the  appellants  herein
opposed the resolution to amend the articles of  association  of  the  first
respondent company to bring them in tune with the newly inserted clause  (d)
of Section  3(1)(iii),  they  are  estopped  from  arguing  that  the  first
respondent company is not a public company  and  secondly  in  view  of  the
judgment of the Bombay High  Court  dated  14.11.2008  in  Company  Petition
No.77 of 1990 “to which the appellants herein were  originally  the  parties
but withdrew from the said company petition later”  where  the  Bombay  High
Court held as follows:
“Insofar as the present Petitioners are concerned as a matter of  fact  they
are free to deal with the shares held by them.  In that, the shares are  now
freely transferable.   Indeed,  when  the  Petition  was  presented  at  the
relevant time, the Respondent No.1 Company was a  Private  Limited  Company.
As a result, there was restriction in the transfer of shares.   However,  it
is common ground that now the Respondent No.1 Company has  become  a  Public
Limited Company as a  result  of  Special  Resolution  moved  in  the  Extra
Ordinary General Meeting dated 5th May 2001 having  been  defeated.   Having
acquired the status of a Public Limited  Company,  the  restriction  on  the
right to transfer  the  shares  which  was  applicable  to  Private  Limited
Company, would naturally get diluted.

The appellants are precluded to argue that the first respondent  Company  is
not a public company.

90.   Both the submissions are required  to  be  rejected.   The  submission
based on the principle of estoppel is required to be rejected in view of  my
conclusion that the HYBRID companies  contemplated  under  Section  43A(1C),
which were in existence on 13.12.2000 would continue to be in existence.

91.   It is already concluded earlier in this judgment that the  requirement
of amending the Articles of Association pursuant to the Amendment Act 53  of
2000, insofar as such companies are concerned, is only optional on the  part
of the shareholders.  The fact that the shareholders  of  a  HYBRID  company
exercised  option  not  to  amend  the  Articles  of   Association   thereby
converting a HYBRID company into a private company  does  not  prevent  such
shareholders from advancing an argument that the  first  respondent  company
is not a public company but still a HBRID company.

92.   The second submission is that the judgment in Company  Petition  No.77
of 1990 is binding upon the appellants on the ground that they were  parties
to  the  said  company  petition  earlier  and  withdrew   from   the   same
unconditionally and, therefore, they are  precluded  from  arguing  anything
contrary to the conclusion recorded therein.

93.   The principles of law which preclude a party  to  a  civil  litigation
from agitating certain issues are contained in Section 11 and Order II  Rule
2 of the  Code  of  Civil  Procedure,  1908.   Section  11  deals  with  the
principle of res judicata and it prohibits a Court from trying any  suit  or
issue in which the matter directly and substantially in issue  in  a  former
suit has been heard and finally decided.

94.   The question whether the first respondent Company is a public  company
or  a  HYBRID  company  or  a  private  company  was  never   directly   and
substantially in issue in Company Petition No.77 of 1990.   The  parties  to
the said company petition proceeded on the basis that in view  of  the  fact
that an amendment to the Articles of  Association  to  give  effect  to  the
newly inserted clause (d) of Section 3(1)(iii) could not be carried on,  the
first respondent company became a  public  company.   Therefore,  the  Court
never examined that question of law.  Hence, it  cannot  be  said  that  the
appellants are precluded from raising such a question of law in the  instant
appeal.

95.   We therefore, do not propose to examine the question  as  to  what  is
the effect of the appellant’s withdrawal  from  the  abovementioned  company
petition.

96.   The only other submission of  the  respondent  which  requires  to  be
dealt with is regarding the transfer of five shares of the appellant  which,
according to the respondents,  resulted  in  the  membership  of  the  first
respondent company exceeding fifty thereby rendering the first respondent  a
public company.  Unfortunately, though the High Court noted  the  submission
at para 9, it did not record any finding in  this  regard.   We,  therefore,
decline to examine this question.  This Court cannot  be  converted  into  a
Court which enquires into the questions of fact for the first time.

97.   In view of the fact the High Court, though noted  the  contentions  of
the respondent herein, failed to record any conclusion thereon, we  deem  it
appropriate to remit the matter to the High Court only for  the  purpose  of
considering the  abovementioned  submissions  of  the  respondent  and  take
appropriate decision.   We order accordingly.

98.   This appeal stands allowed.

                                                               ………………………….J.
                                                          (J. Chelameswar)


                                                               ………………………….J.
                                                 (A.K. Sikri)

New Delhi;
October 28, 2014












                        IN THE SUPREME COURT OF INDIA
                        CIVIL APPELLATE JURISDICTION

                       CIVIL APPEAL NO.  2481 OF 2014


Darius Rutton Kavasmaneck                    …Appellant

                                  Versus

Gharda Chemicals Limited & Others            …Respondents




                                  O R D E R

      In view of the order remitting the matter to the High Court,  we  deem
it appropriate that the interim order passed earlier on  22.7.2011  by  this
Court will continue till the disposal of the matter by the High Court.
      The High Court is requested to dispose of the matter expeditiously  in
view of the long pendency of the matter.


....................................J.
                                        (J. CHELAMESWAR)



....................................J.
                                        (A.K. SIKRI)
NEW DELHI
OCTOBER 28, 2014.

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[1]    57.   Save as aforesaid the following provisions shall apply  to  the
transfer of shares –

       A  member  of  the  company  may  transfer  a  share  to  his  lineal
descendent, but save as aforesaid no share shall be transferred to a  person
who is not a member of the company so long  as  any  member  is  willing  to
purchase the same at the fair value as hereinafter provided.

      The member proposing to transfer any shares  (hereinafter  called  the
proposing transferor) shall give notice in  writing  (hereinafter  called  a
transfer notice) to the Company that he desires to transfer the same;

      Within the period of seven days from the receipt of a transfer  notice
as aforesaid the Company shall offer to each of the existing members of  the
company respectively such number of the  shares  included  in  the  transfer
notice as a pro rata or as nearly as may be to the holding  of  each  member
respectively on the footing that if he desires to purchase  any  or  all  of
such members of the said shares at the fair value he  shall  within  fifteen
days of the offer be entitled to apply for the purchase and transfer of  the
same and the company shall be bound, upon payment to the transferor  of  the
fair value of such shares, to transfer the shares of member applying;

      In case any member or members shall not have applied for the  purchase
and transfer of any or all of the  shares  to  which  he  is  entitled,  the
company shall within seven days of the  date  at  which  the  offer  closed,
offer the untaken shares to such of the members  as  have  applied  for  the
purchase and transfer of all the shares to which they were entitled  by  the
terms of the original offer in proportion as the holding  of  each  of  such
members bears to the total number of shares held by them and they  shall  be
entitled within fifteen days of the offer to  apply  for  the  purchase  and
transfer of a pro rata number of the said untaken  shares  and  the  company
shall be bound, upon payment to the transfer  of  the  fair  value  of  such
shares, to transfer the shares to the member applying;

      The promising transferor shall be  bound  to  execute  a  transfer  in
respect of any shares so sold and in  default  thereof  be  deemed  to  have
executed such a transfer.   The company shall thereupon cause the  names  of
the members who have purchased the shares to be entered in the  Register  as
the holders of such shares and thereafter the validity  of  the  proceedings
shall not be questioned by any person;

      In case no member shall apply for any of the shares  included  in  the
transfer notice or in case any are untaken after  the  compliance  with  the
foregoing provisions of this Article the  intending  transferor  shall  have
the right (which right shall endure for the period  of  one  year  from  the
date of transfer notice) to sell and dispose of hi shares to any person  and
at any price and to apply for registration of the transfer of the  same  and
the company shall be bound to give effect to the  transfer  of  such  shares
accordingly.

      For the purpose of this clause the fair value of the  share  shall  be
such sum, if any, as the auditors for the time being of  the  Company  shall
certify as the fair value thereof provided that it expressly  declared  that
the fair value shall be (1) the amount of capital  paid  upon  thereon  plus
(2) a sum bearing the same proportion to  the  value  as  appearing  in  the
company’s last balance sheet of any  reserve  fund  or  other  fund  of  the
company as the capital paid up on all the shares  of  the  company  for  the
time being issued plus or minus as the case may be, (3) a  sum  bearing  the
same proportion to the value as appearing in the  profit  and  loss  account
consisting of or representing undivided profits or  losses  as  the  capital
paid up on such share bears to the total capital paid up on all  the  shares
of the company for the time being issued.”
[2]    3.(1)(iii)  - ‘private company’ means a company which has a minimum
paid-up capital of one lakh rupees or such higher paid-up capital as may be
prescribed, and by its articles,-- …………
           (d)  prohibits any invitation or acceptance of deposits from
persons other than its members, directors or their relatives.
[3]     That this Hon’ble Bench be pleased to grant a  permanent  order  and
injunction restraining the 2nd/3rd  respondents  by  themselves  or  through
their  servants  and  or  agents,  directly  or  indirectly,  from  selling,
transferring, alienating, dealing or disposing the shares held, directly  or
indirectly, by the 2nd/3rd Respondents in the 1st Respondent to  any  person
without first offering the  same  to  the  Petitioners  at  the  fair  value
quantified in accordance with Article 57(g) of the Articles  of  Association
of the 1st Respondent.
[4]     3.(1)(iii)  - ‘private company’ means a company which, by its
articles, -
      (a)  restricts the right to transfer its shares, if any;
      (b) limits the number of its members to fifty not including –
            xxx  xxx   xxx   xxx

[5]     3.  Definition of ‘company’, ‘existing company’,  ‘private  company’
and ‘public company’ –  (1)  In  this  Act,  unless  the  context  otherwise
requires, the expressions ‘company’, ‘existing  company’, ‘private  company’
and ‘public company’ shall, subject to the provisions  of  sub-section  (2),
have the meanings specified below –
      (i)  ‘company’ means a company formed and registered  under  this  Act
or an existing company as defined in clause (ii);
[6]    Section 12 of the Companies Act recognizes  the  possibility  of  the
formation of two clauses of Companies, companies  “limited  by  shares”  and
companies “ limited by guarantee”.
[7]     “Explanation  –  For  the  purposes  of  this  sub-section,  “bodies
corporate” means public companies, or private  companies  which  had  become
public companies by virtue of this section.”
            but such an explanation was not there originally, but  added  by
Act 31 of 1988.

[8]     43.  Consequences  of   default   in   complying   with   conditions
constituting a company a private  company    -   Where  the  articles  of  a
company include the provisions which, under clause (iii) of sub-section  (1)
of section 3, are required to be included in the articles of  a  company  in
order to constitute it a private company, but default is made  in  complying
with any of those provisions, the company shall cease to be entitled to  the
privileges and exemptions conferred on private companies by  or  under  this
Act, and this Act shall apply to the company as if it  were  not  a  private
company :

      Provided that the Central Government,  on  being  satisfied  that  the
failure to comply with the conditions was accidental or due to  inadvertence
or to some other sufficient cause, or that on other grounds it is  just  and
equitable to grant relief, may, on the application of  the  company  or  any
other person interested and on such terms and  conditions  as  seem  to  the
Central Government just and expedient, order that the  company  be  relieved
from such consequences as aforesaid.

[9]      117.  Therefore, in my view, once the first respondent is a  public
company as evidenced by the certificate referred to above, with effect  from
17th August 1988, then, the amendment made in 2000 would be  applicable  and
section 43A ceases to apply to it.  That the words “On and After”, are  used
makes no difference as far as present case4 is concerned.   In  the  present
case, the status of the first respondent as a public company remains and  it
is now academic to find out whether it was a deemed public  company  earlier
as contended.  Once the law makes only a  broad  categorization  as  noticed
above, then, it is not necessary to deal with this contention any more.
[10]   Section 36. Effect of memorandum and  articles.—(1)  Subject  to  the
provisions of this Act, the memorandum and articles shall, when  registered,
bind the company and the members thereof to  the  same  extent  as  if  they
respectively had been  signed  by  the  company  and  by  each  member,  and
contained covenants on its and his part to observe  all  the  provisions  of
the memorandum and of the articles.

      (2)  All  money payable  by  any  member  to  the  company  under  the
memorandum or articles shall be a debt due from him to the company.
[11]   “(3) Every private company,  existing  on  the  commencement  of  the
Companies (Amendment) Act, 2000, with a paid-up capital  of  less  than  one
lakh rupees, shall within a period of  two  years  from  such  commencement,
enhance its paid-up capital to one lakh rupees.

      (5)   Where a private company … fails to enhance its paid  up  capital
in the manner specified in  sub-section  (3)  …..,  such  company  shall  be
deemed to be a defunct company within the meaning of  section  560  and  its
name shall be struck off from the register by the Registrar.”

[12]   Section 3(5) – Where a private company or a public company  fails  to
enhance its paid-up capital in the manner specified in  sub-section  (3)  or
sub-section (4), such company shall  be  deemed  to  be  a  defunct  company
within the meaning of section 560 and its name shall be struck off from  the
register by the Registrar.
[13]    Section  58A.  Deposits  not  to  be  invited  without  issuing   an
advertisement.—(1)  The Central Government may,  in  consultation  with  the
Reserve Bank of India, prescribe the limits  up  to  which,  the  manner  in
which and the conditions  subject  to  which  deposits  may  be  invited  or
accepted by a company either from the public or from its members.
[14]   Section 43. Consequences of  default  in  complying  with  conditions
constituting a company a private company.—Where the articles  of  a  company
include the provisions which, under  clause  (iii)  of  sub-section  (1)  of
section 3, are required to be included in  the  articles  of  a  company  in
order to constitute if a private company, but default is made  in  complying
with any of those provisions, the company shall cease to be entitled to  the
privileges and exemptions conferred on private companies by  or  under  this
Act, and this Act shall apply to the company as if it  were  not  a  private
company.

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