Himachal Pradesh High Court
Ram Kishan And Ors. vs Kanwar Papers Private Ltd. on 22 December, 1988
JUDGMENT
V.K. Mehrotra, Actg. C.J.
1. Kanwar Papers P. Ltd. was incorporated under the Companies Act, 1956, on January 14, 1981, as a private company limited by shares. Its registered office is at Kala Amb, District Sirmur, in Himachal Pradesh. The managing director of the company, is one Kanwar Balbir Singh. His daughter is married to one of the sons of Ram Kishan Malik. One Shri H.K.S. Malik was the brother of Ram Kishan. He was once a District and Sessions Judge and after retirement enrolled himself as an advocate. Shri Jagat Narain who was a school teacher retired from service on February 15, 1981. He received some cash amount as part of retiral benefits. Smt. Sumitra Devi is the wife of Shri Jagat Narain.
2. On June 5, 1984, Company Petition No. 2 of 1984 was presented in this court by Ram Kishan, Jagat Narain and Smt. Sumitra Devi. The petition contained a prayer for the winding up of Kanwar Papers P. Ltd. mainly on the ground that the company was indebted to the three petitioners to a huge extent. The amount that was due to the petitioners from the company till April 20, 1984, was Rs. 1,44,000, Rs. 60,000 and Rs. 75,000. The case of the petitioners is that the company stood in need of loan and its managing director, who was very closely related to one of the petitioners, obtained loans of Rs. 1,44,000, Rs. 60,000 and Rs. 75,000 over which interest at the rate of 18% per annum, as orally agreed, was due. The loans were given by the petitioners between February, 1981, and May, 1981. The first petitioner gave it since the managing director of the company was closely related to him. Smt. Sumitra Devi was treated as a dharam behan by the managing director. On the insistence of the managing director and on being induced and persuaded by him, Sumitra Devi borrowed money on the security of a plot of land which she possessed at Delhi, and gave it by way of loan to Kanwar Balbir Singh who had given out that he was in great financial difficulties as the loan granted to the company by the financial institutions was not forthcoming, considering it to be her sacred duty as a dharam behan.
3. The case of the petitioners also is that Smt. Sumitra Devi had lent a sum of Rs. 75,000 to Kanwar Balbir Singh in the month of May, 1981, after borrowing it from a bank on compound interest at 18% per annum with quarterly rests. Jagat Narain says that he was promised a job in the company by Balbir Singh. He lent a total sum of Rs. 60,000 to Balbir Singh. Ram Kishan says that he lent a sum of Rs. 1,44,000 to Balbir Singh between January and May, 1981. For this amount, he had borrowed a sum of Rs. 92,100 from a bank at compound interest of 18% per annum with quarterly rests. He did so on account of his close relationship with Balbir Singh who had, along with his wife, requested Ram Kishan to help them financially and promised to repay the amount of loan with compound interest of 18% per annum and also to provide Ram Kishan and one of his sons nice jobs in the company.
4. The three petitioners served a notice dated April 20, 1984, under Section 434 of the Companies Act on the respondent-company at its registered office. In reply, what was said by the respondent-company was that the amount had been brought by H.K.S. Malik, who was an additional director of the company, between November 22, 1981, and May 2, 1983, on his behalf and on behalf of the three petitioners for purchase of shares. Shares had, in fact, been allotted to the petitioners, as requested by them through H.K.S. Malik. The petitioners were. thus shareholders of the company and the story about the amount having been given on loan to the company by them was incorrect.
5. Three applications under Section 155 of the Companies Act were then presented by the three petitioners in this court on July 13, 1984. After reciting the facts relating to them including the serving of a notice under Section 434 of the Companies Act on the respondent-company, the three petitioners prayed that the register of the members of the respondent-company be rectified so as to remove the names of the petitioners therefrom and damages be also allowed to them against the respondent-company. These three applications, which were made in Company Petition No. 2 of 1984, were registered as Company Applications Nos. 9 (Sumitra Devi v. The Company), 10 (Jagat Ram v. The Company) and 11 (Ram Kishan v. The Company) of 1984. To each of these three applications, a reply has been filed separately by the respondent-company, which is supported by an affidavit of Balbir Singh. In Company Petition No. 2 of 1984 also, a written statement has been filed by the respondent-company. In addition, the parties have exchanged some affidavits as well. They have also filed some documents. On September 13, 1988, counsel for the parties made a statement before the court that evidence of the parties in the form of documents and affidavits is to be found on the record of Company Petition No. 2 of 1984 and that the said evidence may be taken into consideration as evidence of the parties also for purposes of the disposal of the three company applications. Counsel were heard on various dates before orders were reserved in the case on October 5, 1988.
6. Section 155 of the Companies Act (for short "the Act") was omitted by the Companies (Amendment) Act, 1988. Prior to its omission, this provision read as under:
"155. Power of court to rectify register of members. -- (1) If
(a) the name of any person -
(i) is without sufficient cause, entered in the register of members of a company ; or
(ii) after having been entered in the register is, without sufficient cause, omitted therefrom ; or
(b) default is made, or unnecessary delay takes place, in entering on the register the fact of any person having become, or ceased to be, a member ;
the person aggrieved, or any member of the company, or the company, may apply to the court, for rectification of the register, (2) The court may either reject the application or order rectification of the register; and in the latter case, may direct the company to pay damages, if any, sustained by any party aggrieved.
In either case, the court in its discretion may make such order as to costs as it thinks fit (3) On an application under this section, the court--
(a) may decide any question relating to the title of any person who is a party to the application to have his name entered in or omitted from the register, whether the question arises between members or alleged members, or between members or alleged members on the one hand and the company on the other hand; and
(b) generally, may decide any question which it is necessary or expedient to decide in connection with the application for rectification.
(4) From any order passed by the court on the application, or on any issue raised therein and tried separately, an appeal shall lie on the grounds mentioned in Section 100 Of the Code of Civil Procedure, 1908 (5 of 1908),--
(a) if the order be passed by a District Court, to the High Court;
(b) if the orders be passed by a single judge of a High Court consisting of three or more judges, to a Bench of that High Court.
(5) The provisions of Sub-sections (1) to (4) shall apply in relation to the rectification of the register of debenture-holders as they apply in relation to the rectification of the register of members."
7. In the present cases, what has been urged on behalf of the three petitioners is that their names have been entered in the register of members by the respondent-company without sufficient cause. They are seeking the rectification of the register by exclusion of their names and also praying for a direction to the respondent-company to pay damages to them.
8. A member of a company is defined in Section 41 of the Act in the following terms :
"41. Definition of 'member'. -- (1) The subscribers of the memorandum of a company shall be deemed to have agreed to become members of a company, and on its registration, shall be entered as members in its register of members.
(2) Every other person who (agrees in writing) to become a member of a company and whose name is entered in its register of members, shall be a member of the company."
9. The words "agrees in writing" mentioned in Sub-section (2) were substituted for the word "agrees" by Parliamentary Act 65 of 1960. The Companies (Amendment) Bill, 1959, contained a note on Clause (14) which says that "the proposed amendment is intended to avoid the improper fastening of liability as contributories on person who never applied for shares", and refers to paragraph 38 of the report of the Companies Act Amendment Committee. The report, in paragraph 38, said that:
"It has been brought to our notice that in some cases, on the verge of liquidation, entries are made in the register of members of the names of persons who never applied for shares, in order to fasten liability on these persons "as contributories. To avoid this contingency, we suggest the addition of the words 'in writing' after the word 'agrees' in Section 41(2)."
10. It is not in dispute that the three applicants did not make any application in writing for purchase and allotment of shares to them. The case of the respondent-company is that the three applicants had asked for the allotment of shares orally through H.K.S. Malik and shares were, in fact, allotted to them. The case of the three applicants, as put forward by their counsel, Shri Dev Raj, is that, in the absence of an application in writing for being allotted shares, the conduct of the applicants in giving money, which was, admittedly, received by the respondent-company, was consistent with the plea taken by them that they had given loans to the respondent-company. The statement that counsel for the applicants made during the hearing of the case was that there is no direct evidence or circumstantial evidence to show that money had been given either to H.K.S. Malik or to Balbir Singh by way of loan or for purchase of shares. Also, that no demand, in writing, was ever made for payment of interest or refund of the amount by the applicants to the respondent-company or to Balbir Singh prior to the serving of the statutory notice under Section 434 of the Act. It is said that the demand was orally made from time to time.
11. The first question that may be examined is about the effect of there being no request or agreement, in writing, by or on behalf of the three applicants for becoming members of the respondent-company or, in other words, the absence of a request, in writing, by them for allotment of shares in the respondent-company.
12. The principal submission which has been made on behalf of the respondent-company by Shri K.D. Sood, on this aspect of the case, is that the requirement in Section 41(2) that a person is to "agree in writing" to become a member of the company, was for the benefit of a shareholder and could, therefore, be waived by him, as was done in the instant case. Absence of a request, in writing, by the three applicants for being allotted shares or their names being entered in the register of the respondent-company, would not, as such, invalidate the action of the respondent-company in entering their names on the register. It could not, therefore, be said that the names of the three applicants had been entered in the register of members of the respondent-company without sufficient cause so as to enable them to seek rectification under Section 165 as it stood at the relevant time. The amendment was not brought about in Section 41(2), according to the submission of Shri Sood, as a matter of public policy so as to make its waiver by the person concerned contrary to law and render the inclusion of the names of the three applicants in the register of members, without a request by them, in writing, per se illegal.
13. In Gherulal Parakh v. Mahadeodas Maiya, AIR 1969 SC 781, the Supreme Court was called upon to answer the question whether in India a definite principle of public policy has been evolved or recognized invalidating wager. The question regarding public policy was considered by the Supreme Court, which spoke through Subba Rao J., in some detail in paragraphs 21 to 23 of the report. After referring to a number of text books on the Law of Contract Halsbury's Laws of England and several decisions of the English and Indian courts, the doctrine of public policy was summarised thus (at page 795) :
"... Public policy or the policy of the law is an illusive concept; it has been described as 'untrustworthy guide', 'variable quality', 'uncertain one', 'unruly horse', etc.; the primary duty of a court of law is to enforce a promise which the parties have made and to uphold the sanctity of contracts which form the basis of society, but in certain cases, the court may relieve them of their duty on a rule founded on what is called the public policy; for want of better words, Lord Atkin describes that something done contrary to public policy is a harmful thing, but the doctrine is extended not only to harmful cases but also to harmful tendencies ; this doctrine of public policy is only a branch of common law, and, just like any other branch of common law, it is governed by precedents ; the principles have been crystallized under different heads and though it is permissible for courts to expound and apply them to different situations, it should only be invoked in clear and incontestable cases of harm to the public ; though the heads are not closed and though theoretically it may be permissible to evolve a new head under exceptional circumstances of a changing world, it is advisable in the interest of stability of society not to make any attempt to discover new heads in these days."
14. The Supreme Court had occasion to consider the question of public policy again in Murlidhar Agarwal v. State of Uttar Pradesh, AIR 1974 SC 1924. The court was examining the question whether Section 3(1) of the U. P. (Temporary) Control of Rent and Eviction Act, 1947, was based on public policy. That section provided for restrictions on eviction of tenants from any accommodation and said that:
"Subject to any order passed under Sub-section (3) no suit shall, without the permission of the District Magistrate, be filed in any civil court against a tenant for his eviction from any accommodation except on one or more of the following grounds :"
15. Mathew J. spoke for the court. After observing, in paragraph 27 of the report, that there could be no doubt about the policy of the law, namely, the protection of the weaker class of society from harassment by frivolous suits, the learned judge proceeded to examine the question whether there was a public policy behind it which precluded a tenant from waiving it. He referred to various pronouncements, opinions of some authors like W. S. M. Knight, Percy H. Winfield, Dennis Lloyd and Cardozo and said that (at page 1930) :
"Public policy does not remain static in any given community. It may vary from generation to generation and even in the same generation. Public policy would be almost useless if it were to remain in fixed moulds for all time."
and that (at page 1930) :
"If it is variable, if it depends on the welfare of the community at any given time, how are the courts to ascertain it ? The judges are more to be trusted as interpreters of the law than as expounders of public policy. However, there is no alternative under our system but to vest this power with judges .... The judges must look beyond the narrow field of past precedents, though this still leaves open the question, in which direction he must cast his gaze .... The judges must consider the social consequences of the rule propounded, especially in the light of the factual evidence available as to its probable results .... Our law relies on the implied insight of the judges on such matters. It is the judges themselves, assisted by the Bar, who here represent the highest common factor of public sentiment and intelligence .... No doubt, there is no assurance that judges will interpret the mores of their day more wisely and truly than other men. But this is beside the point. The point is rather that this power must be lodged somewhere and under our Constitution and laws, it has been lodged in the judges and if they have to fulfil their function as judges, it could hardly be lodged elsewhere."
16. The court then held that Section 3 was based on public policy as it was intended to protect the weaker sections of the community with a view to ultimately protecting the interest of the community in general by creating equality of bargaining power. The court said that although the section was primarily intended for the protection of tenants only, that protection was based on public policy and could not have been waived by the tenant.
17. Recently, in Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly [1986] 60 Comp Cas 797, the Supreme Court dealt with the question of public policy again. In paragraph 93 of the report, it observed, inter alia, that (at page 859 of 60 Comp Cas) :
"The Indian Contract Act does not define the expression 'public policy' or 'opposed to public policy'. From the very nature of things, the expressions 'public policy', 'opposed to public policy' or 'contrary to public policy' are incapable of precise definition. Public policy, however, is not the policy of a particular Government. It connotes some matter which concerns the public good and public interest. The concept of what is for the public good or in the public interest or what would be injurious or harmful to the public good or public interest has varied from time to time. As new concepts take the place of old, transactions which were Once considered against public policy are now being upheld by the courts and, similarly, where there has been a well-recognized head of public policy, the courts have not shirked from extending it to new transactions and changed circumstances and have at times not even flinched from inventing a new head of public policy .... the principles governing public policy must be and are capable, on a proper occasion, of expansion or modification. Practices which were considered perfectly normal at one time have today become obnoxious and oppressive to public conscience. If there is no head of public policy which covers a case, then the court must in consonance with public conscience and in keeping with public good and public interest declare such practice to be opposed to public policy,..."
18. It is clear from these ponouncements that the question whether a statutory provision lays down a rule of public policy or not is to be determined having regard to the considerations with which the provision, in the opinion of the court, came to be enacted. The intention with which the Legislature enacted it has to be discovered by the court. There is no scope for saying that in doing so, the court should confine itself to some pre-recognized heads of public policy.
19. The object with which the words "in writing" were introduced in Section 41(2) of the Act, after the word "agrees" is more than clear from paragraph 38 of the Report of the Companies Act Amendment Committee. It was found that in some cases entries were made in the register of members, of the names of persons who had never applied for a share, when the companies were on the verge of liquidation, with a view to fasten liability on these persons as contributories. The object of the introduction of these words was to avoid improper fastening of liability on such persons. It is clear that Parliament recognized the inequity of the situation, resulting from the unscrupulous acts on the part of some of the companies, on the verge of liquidation, of trying to fasten liability, as contributories, upon persons who never were its members and whose names were entered in the register of members without any desire on the part of such persons to be made members of the company. The surreptitious inclusion of the names of such persons in the register of members of a company, only with a view to fasten upon them liability as contributories, where the company was on the verge of liquidation, was, undoubtedly, injurious or harmful to public good and public interest. The intention of the Legislature in incorporating the requirement that before the name of a person is entered in the register of members of the company, he should agree "in writing" for it to be done clearly was to ensure fairness in the matter with a view to avoid detrimental effect upon the interest of those who were sought to be made liable as contributories in a company facing liquidation, where their names were brought on the roll of the members even in the absence of their desire to become members of the company at any time. It was manifestly done by the Legislature with a view to protect the interest of unsuspecting persons by protecting them from the ulterior designs of those who were in charge of the affairs of the company. The element of protection of the public good is predominant in the enactment of the provision. The only reasonable conclusion at which one can arrive about the requirement of there being an agreement "in writing", on the part of a person for inclusion of his name in the register of members, is that the provision was based on considerations of public policy.
20. It cannot be doubted that if a provision lays down a rule of public policy, there can be no waiver thereof. The principle of waiver does not apply to the statutory provision based on public policy. The legal position in this regard is not in doubt. However, reference may be made to some decisions.
21. In M. and S.M. Rly v. Rupchand Jitaji, AIR 1950 Bom 155, the question was whether it was open to a servant of a railway company to waive the benefit conferred upon him under Section 60(1), Civil Procedure Code, under which his salary was exempt from attachment to the extent of Rs. 100. A Division Bench, after noticing the decision of another Division Bench in an earlier case, ruled that a public servant whose salary was exempt from attachment under Section 60(1), Civil Procedure Code, could not contract himself out of the statutory provision because such a contract was opposed to public policy. Likewise, in Associated Cement Companies Ltd. v. State of Rajasthan, AIR 1981 Raj 133, it was observed by a Division Bench of that court that where a statutory provision laid down a rule of public policy, neither party to an agreement can contract out of it. It relied upon the dictum of their lordships of the Privy Council in Equitable Life Assurance Society of the United States v. Reed [1914] AC 587. In fact, the rule in this regard was stated by the Supreme Court in Murlidhar Agarwal, AIR 1974 SC 1924, in unmistakable terms when it said (at page 1930) :
"Although the section is primarily intended for the protection of tenants only, that protection is based on public policy. The respondent could not have waived the benefit of the provision,"
22. If, as I have held, the requirement of there being an agreement, "in writing" in Section 41 (2) of the Act is founded upon the principles of public policy, the applicants could not have waived it. The argument of Shri K.D. Sood, on behalf of the respondent-company, that they could have done so as the provision was primarily intended for the benefit of investors like them cannot be countenanced in law.
23. Section 155 of the Act provided that the court could rectify the register of members of the company if it found that the name of any person had been entered without sufficient cause. It was urged with some emphasis by Shri Sood that in the instant case, it could not be said, having regard to the circumstances appearing on the record, that the names of Smt. Sumitra Devi, Shri Jagat Narain and Shri Ram Kishan were entered in the register of members of the respondent-company without sufficient cause. As such, rectification by deletion of their names from the register was not called for. It is unnecessary to examine the question on facts. The incorporation of the names of these persons in the register of members of the company, without there being any agreement on their part "in writing", was contrary to the statutory requirements of Section 41(2). These requirements could not be waived by the three applicants. Quite clearly, therefore, their names cannot be permitted to remain included in the register of members of the respondent-company. They are directed to be removed therefrom.
24. The next question which arises is about the prayer made by these three applicants for being awarded damages on account of the wrong inclusion of their names in the register of members. It has been urged, with reference to the provision contained in Section 155(2) of the Act, that the respondent-company be directed to pay damages to the three applicants. When one looks at Section 155(2), one finds that the court may direct the company to pay damages, if any, sustained by any party aggrieved, where it directs rectification of the register of members of the company. The language is suggestive of the fact that there should be a claim of sustenance of some damages by the party, in whose favour an order of rectification has been made, and actual proof of sustenance of such damages. In the present case, the three applicants have made a claim for award of damages in general terms. They have neither specified nor quantified the extent of damages, said to have been suffered by them, on account of the inclusion of their names in the register of members of the respondent-company. They have not brought any evidence about it on the record either. The claim for award of damages has, therefore, to be rejected.
25. The conclusion is that the three Company Applications Nos. 9 of 1984, 10 of 1984 and 11 of 1984, merit success in part. They are allowed to the extent that the register of members of the respondent-company shall be rectified by excluding the names of Smt. Sumitra Devi, Shri Jagat Narain and Shri Ram Kishan from it, The claim for damages made by the three applicants, in these applications, is, however, rejected. The applicants shall be entitled to their costs in these proceedings which is fixed at Rs. 500 in each of the three applications. The amount of costs shall be payable by the respondent-company.
26. Coming now to Company Petition No. 2 of 1984, which seeks an order for the winding up of the company.
27. The pleadings of the parties, as also the evidence brought on the record by them, clearly show that there is serious dispute between the parties on each essential fact. The case set up by the applicant in Company Petition No. 2 of 1984 is founded upon the fact that they had advanced various sums of money as loan to the company on the request made by Balbir Singh. It also is stated that they had done so on account of the assurances held out by Balbir Singh and on account of the close relationship which the applicant, Ram Kishan, had with him. It is unnecessary to recount the facts in detail. The basic facts have been mentioned in the opening part of this order.
28. The case set up by the respondent-company, in essence, is that R.K.S. Malik, a brother of Ram Kishan, wanted to acquire 40 per cent. of the equity capital of the company in order to provide himself with work after his retirement which was to take place on October 31, 1981. He began to take active interest in the affairs of the company although he was still in service. Since he had no money to purchase the equity shares to the extent that he desired, he brought in his brother, Ram Kishan, his friend Jagat Narain and the wife of Jagat Narain, Smt. Sumitra Devi, as shareholders by persuading them to invest money in the shares of the company. The company did not borrow any amount by way of loan nor did it invite from the three applicants any amount by way of deposit. The three petitioners never demanded any interest on the amount said to have been advanced by them by way of loan to the respondent-company nor asked for its refund. The affairs of the company were being conducted in a proper manner. There was no occasion, in the circumstances, of directing its winding up, either on the ground that it was indebted to the applicants and had failed to discharge its debts to them, after being required to do so through a notice, or on the ground that it was just and equitable to pass an order of winding up in respect of the respondent-company.
29. The proceedings for the winding up of the company, under Section 439 of the Act read with Sections 433 and 434, are summary in nature. The order of winding up is normally not to be passed under these provisions where the court finds that there is serious dispute on questions of fact, which can better be resolved by relegating the parties to the normal remedy of a civil suit or that there is bona fide dispute between the parties, about the so called indebtedness of the company.
30. As observed by the Supreme Court in Amalgamated Commercial Traders (P.) Ltd. v. A.C.K. Krishnaswami [1965] 35 Comp Cas 456 (at pages 463, 464) :
"It is well-settled that a winding up petition is not a legitimate means of seeking to enforce payment of a debt which is bona fide disputed by the company. A petition presented ostensibly for a winding-up order but really to exercise pressure will be dismissed, and under circumstances may be stigmatized as a scandalous abuse of the process of the court.. . . The modern practice has been to dismiss such petitions. But, of course, if the debt is not disputed on some substantial ground, the court may decide it on the petition and make the order (vide Buckley on the Companies Acts, 13th edition, page 451). . . . If the debt was bona fide disputed, as we hold it was, there cannot be 'neglect to pay' within Section 434(1)(a) of the Companies Act. If there is no neglect, the deeming provision does not come into play and the ground of winding up, namely, that the company is unable to pay its debts, is not substantiated."
31. The rival versions which the three applicants and the respondent-company have given in respect of the amounts said to have been given by way of loan by the applicants to the respondent-company and the failure of the company to discharge the debt, when asked to do so, necessitate that parties should go to trial about it in appropriate civil proceedings. The version of the respondent-company, summarized earlier, makes it clear that the dispute raised by it about its so called liability to refund the amount with interest claimed by the applicants, is of a bona fide nature. It would not be a sound exercise of discretion, in this situation, to pass an order for the winding up of the respondent-company. I may add that I have refrained from expressing any opinion about the correctness or otherwise of the version of the contesting parties, on the basis of the evidence produced in these proceedings, lest those observations may prejudice the case of either party when the matter is agitated before the appropriate forum.
32. In conclusion, Company Petition No. 2 of 1984 deserves to fail. I direct, accordingly, though parties are left to bear their own costs themselves. Company Applications Nos. 9, 10 and 11 of 1984 shall stand partly allowed with costs as said earlier.